Who will clean up when the tenant walks away?

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

When a residential tenant vacates a farmhouse, they may leave behind personal items; they may leave behind a mess.  The landlord might succeed in requiring the former tenant to clean up, or the landlord himself or herself might have to clean up.  When there’s a change in a farm land tenancy, the landlord or the new tenant may need to apply fertilizers or pesticides, pick stones, or conduct extra tillage to transition from the previous tenant’s cropping practices to new ones.  But what happens when an industrial tenant or occupant of a farm property walks away or goes bankrupt?  What happens when an oil well, a pipeline, or a wind turbine is abandoned in place?

The Supreme Court of Canada very recently addressed this question in the context of orphaned oil wells in Alberta.  An orphan well is one for which the cost of remediation required for abandonment of the well exceeds the actual monetary value of the well.  The Supreme Court was tasked with deciding whether a bankruptcy trustee, in administering the estate of a bankrupt oil and gas company, can renounce or disclaim the company’s interests in orphan oil wells (and walk away from remediation obligations) while at the same time selling off the company’s other valuable wells and assets in order to maximize the recovery by creditors. 

The case involved Redwater Energy Corporation, a publicly traded oil and gas company. In 2015, Redwater's principal secured creditor, the Alberta Treasury Branches ("ATB"), commenced enforcement proceedings after Redwater couldn't meet its financial obligations.  On May 12, 2015, Grant Thornton was appointed Receiver for Redwater under the Bankruptcy and Insolvency Act ("BIA").  In July, 2015, Grant Thornton told the Alberta Energy Regulator (“AER”) that it would be taking control of only 20 of the 127 Redwater oil and gas licences.  The AER responded by issuing orders "for environmental and public safety reasons" requiring the abandonment and remediation of the 107 wells that the Receiver was looking to “disclaim”.  In October, 2015, a bankruptcy order was issued for Redwater.  In November, 2015, Grant Thornton, now trustee in bankruptcy for Redwater, disclaimed the assets it had previously renounced in its capacity as Receiver, and indicated to the AER that it did not intend to comply with the environmental remediation orders.

The AER and the Orphan Well Association ("OWA") brought court applications for declarations that the disclaimer was void.  They also sought an order compelling Grant Thornton, as trustee, to comply with the abandonment and remediation orders issued by the AER.  Grant Thornton brought a cross-application for approval of the sale of certain assets, and a ruling on the constitutionality of the AER's position.  At first instance, the Chambers Judge sided with the trustee in bankruptcy.  On appeal before the Alberta Court of Appeal, two of three judges sided with the Trustee, while one judge would have ruled that a portion of the sale proceeds from the viable wells must be set aside to meet the expected cost of remediating the orphan wells.

The Supreme Court of Canada was also split on the case (5-2), but this time in favour of the AER position.   The majority found that the AER’s use of its regulatory powers to require remediation of the environment was not in conflict with the BIA, so that the doctrine of federal paramountcy (which would resolve the conflict in favour of the federal bankruptcy legislation and against the provincial energy and environmental legislation) was not triggered.  The Court found that the BIA did not empower the bankruptcy trustee to walk away from the environmental liabilities of the estate it was administering.  Also, as the AER was not asserting any claims provable in the bankruptcy, the AER’s exercise of its authority did not upend the priority scheme established by the BIA.  The AER regulatory scheme and the federal bankruptcy scheme co-existed with and applied alongside each other.

As Chief Justice Wagner wrote:

Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy. ... The Abandonment Orders and the LMR requirements are based on valid provincial laws of general application — exactly the kind of valid provincial laws upon which the BIA is built. … End-of-life obligations are imposed by valid provincial laws which define the contours of the bankrupt estate available for distribution.

Leases, easement agreements, and other similar land use agreements can and often do contain clauses requiring the tenant or occupant to remove its facilities and to restore the land to previous conditions once the tenant or occupant ceases operations and vacates the land.  However, the protection afforded to landowners in such clauses is only as good as the tenant or occupant – if operations have ceased, and there is no money left, the promise to clean up and restore the property is an empty one.  Wherever possible, landowners should require additional security to guarantee fulfillment of contractual clean-up and restoration obligations by tenants and occupants.  Landowners should not assume that government funds for orphaned and abandoned facilities will be sufficient or even available.

Read the Supreme Court's decision at: Orphan Well Association v. Grant Thornton Ltd.

Court finds farm lease not signed under duress - owner ordered to pay lost profits

In the fall of 2011, a couple of farmers ("D&S") asked an area landowner ("H") whether she would lease her farmland to them.  After a couple of meetings, H agreed to lease the land for three years at a set rental amount.  However, a few months later in April, 2012, on the day set by D&S to begin field operations on the rented land and a couple of days after D&S had provided H with a draft written lease, H blocked her driveway to prevent D&S from entering the land.  The OPP was called; the parties discussed the situation and made several changes to the draft lease at H's request, and the lease was signed.

In December, 2012, according to D&S, H then unlawfully terminated the lease.  D&S sued her for loss of profits that they would have earned had they been able to farm H's land during the two years remaining on the lease.  In her defence, H pleaded that she had signed the lease (on the day in April, 2012 when the OPP attended at her property) under duress.  In addition, H pleaded that D&S had breached the terms of the lease, which entitled her to terminate it.  At trial, Justice Bale rejected both defences and awarded D&S damages of just over $64,000 for lost profits.

Justice Bale did not accept the plea of duress because the presence of the OPP at the property (although the officers were called by D&S) was for H's benefit as well; H had already agreed to the material terms of the lease even before the written agreement was made in April, 2012; the only changes made to the lease agreement that day were changes that were requested by H; H testified that she though she was only signing a one-year lease that day, which she could put up with, but that demonstrates that she was signing the lease voluntarily (and, in any event, the judge did not accept H's claim that she didn't know the lease was for three years); and, after signing the lease, H allowed D&S to go into possession of the farmland and carry out their farming operations.

H also argued that she was entitled to terminate the lease because D&S had failed to "Supply Application Rates of Fertilizer & chemicals by 3rd party."  While D provided H with a handwritten note advising her of the fertilizer and chemicals applied, H claimed that she was entitled to some sort of formal document from the third party chemical suppliers.  D&S said they couldn't provide that document since they received only a single invoice from their supplier for the several properties they farmed.

Justice Bale ruled that it didn't matter whether the information provided by D&S satisfied the contract or not, at least not in the determination of whether H had a right to terminate the contract.  H would only be able to treat the contract as terminated if there was a fundamental breach of the contract.  Failure to provide the fertilizer and chemical information in the form demanded by H would not constitute a fundamental breach of the contract (as would a failure to pay rent).

Read the decision at: Drew v Huskinson.

Rogers Communications loses cell tower lease over move to sub-lease space to a third party

A Nova Scotia forestry company leased land to Rogers Communications for a cell tower.  The original 1988 lease was renewed several times and provided that renewals would be "upon the same terms and conditions" as the original lease.  In 2012, Rogers asked for the lessor's consent to a "co-location" agreement where Rogers would sub-lease space on the tower to a third party.

Although no agreement was reached and no consent was given, Rogers went ahead with the co-location arrangement.  The lessor sought a declaration from the Court that the lease was terminated as a result of Rogers' failure to obtain consent.  The lessor also sought damages.

In court, there was a dispute between the parties over whether the lease had been renewed in 2012 for a further five-year term.  Rogers argued that it had given notice as required by the lease to renew under the same terms and conditions and, therefore, it was entitled to the renewal of the lease (which would be more or less automatic as long as Rogers exercised its option to renew).  The lessor, on the other hand, contended that Rogers' proposed renewal amounted to a counter-offer (which it rejected).  The proposed renewal lease included the co-location arrangement and additional rent as compensation for the addition of a sub-tenant to the tower.  Rogers took the position that it was its right to include the additional provisions in the renewal.

The Court determined that the lease had not been renewed and ordered Rogers to vacate the lands within 8 months of an order to be issued setting out the terms of the decision.  Also, the lessor was awarded any rent not paid during the period after the lease had terminated.

The Court then proceeded to consider the lessor's request for damages for breach of contract, breach of duty of good faith and trespass.  The Court ruled that Rogers did not have the right under the lease contract to allow a third party to sub-let or co-locate - the lease provided rights to Rogers to erect, maintain and operate its tower, but it did not allow it to host a third party's services.  Also, the Court noted that Rogers had sought consent from the lessor to allow the co-location.  The lessor was awarded the sum of $3,000 in rent for each year in which the third party co-located on the tower.

Read the decision at: Atlantic Star Forestry Ltd. v. Rogers Communications Inc.

No harm, no foul in gravel extraction lease case - Sask Court declines to terminate lease

In a Saskatchewan case decided last fall, the Court of Queen's Bench ruled that the tenant under a gravel extraction lease was not subject to termination of the lease for having missed a deadline to provide proof of insurance coverage.  A common term in commercial leases is that the tenant or lessee must maintain liability insurance in a specified amount and must provide proof of insurance on a periodic basis, often annually.

The contract in question in this case demanded that the lessee have insurance in place and that it provide proof of the insurance on or before December 30 of each year of the contract, failing which the contract would terminate.  In 2012, although the lessee had put the necessary insurance in place prior to December 30, 2012, an oversight resulted in a failure to provide proof of the insurance to the lessors until January 2, 2013.  On December 30, 2012, the lessors instructed their solicitors to send a letter purporting to terminate the contract, and they refused to accept the proof of insurance when delivered to their home on January 2.

The lessors argued to the Court that there was a clear breach of the contract - proof of insurance was due by a certain deadline and that deadline was missed.  The lessee argued that a breach of the contract required two joint failures - both a failure to have the insurance in place and a failure to deliver the proof of insurance.  In its reasoning, the Court assumed (for the purposes of argument) that there was a breach and then turned to consider whether it should grant relief from penalty and forfeiture under the contract pursuant to its equitable power under Section 13 of The Queen's Bench Act: "The court may grant relief against penalties and forfeitures and, in granting that relief, may impose any terms with respect to costs, expenses, damages, compensation and any other issues that the court considers appropriate."

The Court found in favour of the lessee on all three prongs of the test for granting relief: 1) the conduct of the lessee was a mere oversight - there was no suggestion of bad faith, but only "clerical ineptitude"; 2) the breach caused no harm - the insurance was in place; and, 3) the lessee would lose its significant investment in the property while the lessors would suffer no damage (other than to have to continue with their contract with the lessee).  On those bases, the Court granted summary judgment to the lessee and issued a permanent injunction against the lessors preventing them from terminating the gravel extraction lease by reason of the 2012 late delivery of proof of insurance.

Read the decision at: Elchuk v Gulansky.

Small Claims Court dismisses farmer's claim for triticale crop lost after lease expires

The Plaintiff in this case planted soybeans in 2010 on the 30 acres he rented from the Defendant.  After harvesting the soybeans that fall, the Plaintiff planted and fertilized a crop of triticale - a hybrid grain planted in the fall for harvest early the next summer.  However, by 2011 the Defendant had decided to lease his land to a new tenant who was willing to pay higher rent to grow Napa cabbage.  The Defendant authorized the new tenant to plough under the triticale crop.

Having lost the lease and his triticale crop, the Plaintiff sued the Defendant for $25,000 in damages, representing the loss of grain, straw, lost labour, seed and fertilizer.  The Plaintiff based his claim on two arguments: 1) he had a lease for the property for 2011; and, 2) in the alternative, the doctrine of emblements entitled him to harvest his triticale crop after the 2010 lease expired.  The Plaintiff also claimed that the Defendant was unjustly enriched by the ploughed under triticale.

The trial judge found that there was not a single instance in 2010 or 2011 in which the Defendant agreed to lease his land to the Plaintiff in 2011.  There was, therefore, no lease for 2011.  The judge then addressed the doctrine of emblements - "a right given by law to a person who has an estate of uncertain duration that unexpectedly comes to an end through no act or fault, to take growing crops which were sowed or planted".  In the case of a farm lease, a tenant may have a right to harvest or to care for crops where they were planted prior the unexpected termination of the lease. 

The right to emblements depends on "what is known or expected by the tenant at the time he sows his crops".  In this case, the trial judge added that the expectation of the tenant must also be reasonable.  He found that the Plaintiff, at the time he sowed the triticale in the fall of 2010, had only an expired or soon-to-be expired lease for 2010 and a hope that he would be able to outbid the competition for the land in 2011.  The trial judge determined that this was not a reasonable expectation and dismissed the action.

Read the decision at: Vieraitis v Fitzgerald.

National Energy Board surveying pipeline landowners again

The National Energy Board (NEB) is once again conducting a telephone survey of pipeline landowners and tenants to seek their views on "their experiences with companies that operate pipelines which cross their property" and "their experiences with the NEB".  The NEB hopes to compare the 2011 results with those of surveys done in 2001 and 2004 to "determine how key indicators have changed over time".  The choice of landowners is to be random, says the NEB:

Ipsos Reid, a nationally-recognized research firm, will conduct the telephone survey on behalf of the NEB. It is important to note that not all landowners will be contacted for the survey. Ipsos Reid will select a random sample of landowners, using landowner lists provided to it by NEB-regulated pipeline companies. The randomly-selected landowners will be contacted by telephone in late summer 2011.

A letter was sent by the NEB to all of its regulated pipeline companies on May 17, 2011 asking the companies to submit landowner contact information to Ipsos Reid.  The NEB noted in the letter that the Office of Privacy Commissioner indicated that the companies "should obtain" landowner consent before releasing their contact information to the Board for purposes of conducting the survey.  This privacy issue and the need to seek landowner consent in order to conduct the survey would tend to diminish the randomness of the survey group selection.  Any landowner who chooses not to allow the release of his or her personal information would not be eligible to take part in the survey.

Court dismisses tenant farmer's $1.2 million claim over 108 ac. property

Timothy Ehler began renting a 108-acre farm property in Waterdown in 1992 from Salem Christian Mental Health Association Inc.  At the end of August of this year, the Ontario Superior Court of Justice dismissed Elher's claim for:

(a) a declaratory order that he “has the right to remain on the property (a 108 acre farm located at 562 Dundas Street East in Waterdown (the “Salem property”)) until he turns 65 years of age.”

(b) a complementary injunction “prohibiting the defendant from taking any steps to regain possession of the property until the plaintiff turns 65 years of age”; and

(c) in the alternative, damages in the amount of $1,200,000.00.

Elher's position was that in 1992 the defendant’s representative, Reverend Dreise, assured Elher that he would be allowed to remain in possession of the subject property until he turned 65 years of age.  Over the next seven years, the parties entered into two other leases, each for a period of two years and each with two two year renewal clauses.  The last lease was signed in January 1999.  The parties also entered into two additional work agreements, the last of which was also signed in January 1999.  Notably, the last two leases included a provision whereby a sale of the property would trigger early termination of the lease.

In 2004, the Defendant advised Elher that it would need the property within a year and provided notice of termination as of December 31, 2005.  Up to the time of trial, Elher had possession of the subject farm for about 18 years and, since about 1996 or 1997, the house had been a most comfortable, perhaps even elegant, residence for which he paid minimal rental of $700 per month.  Elher volunteered the opinion that the parking rights for his trucking business alone on the Salem property had a market value of about $1,000 per month and the rental value of the property since 1996 is at least $3,000 per month, although admittedly the plaintiff himself created much of the value in the house.  The highest value placed by the Elher's experts on the costs of improving the property incurred by Elher, after having received reimbursements of $400 a month pursuant to the work agreements, was $218,651.80.

The Court found that there was no agreement that Elher could remain in possession until the age of 65:

There is no credible evidence of any oral agreement allowing the plaintiff to remain in possession of the property until he turned 65 years of age.  Apart from the lack of evidence, such an agreement would have been, from the point of view of the defendant, the height of irrationality.  The defendant intended ultimately to develop the land, although there was some uncertainty about the date for beginning the development.  There was no reason for Reverend Dreise to misrepresent that the zoning could not be changed until 2023, and I find as a fact that he did not do so. 

The Court also found that the Defendant had not been unjustly enriched by Elher's work on the property (which was compensated through various work agreements).
Read the decision at: Ehler v. Salem Christian Mental Health.

Vendor liable to tenants for winter wheat revenue lost when rental property sold

The Superior Court has awarded a couple the revenue associated with a wheat crop they lost when their landlord sold a farm out from underneath them. The defendant, Wendy Wilson, was the owner of two farms.  In 2002, she decided, after decades of carrying on a farming operation, to rent out her two farms.  The plaintiffs, Leslie and Tammy Young, were a husband and wife team who own approximately 600 acres of land and rent a further 1,000 acres on which they grow various crops including corn, soybeans and wheat.  They leased the two farms from Wilson and had already planted winter wheat on one of the farms in the fall of 2007 when they discovered that Wilson had listed the property for sale. 

Ms. Wilson sold the farm in question on April 30, 2008, with a closing date of May 2008. There is evidence, which was accepted by the judge in this case, that the purchaser knew that the crop of wheat was as a result of a tenant’s efforts. The judge also accepted that the purchaser was told by the vendor’s agent, that the tenant’s input costs were $9,000.00, which the purchaser agreed to pay. The purchaser did not deal directly with the tenant. This litigation arose because Ms. Wilson sold the purchaser a crop of wheat which she did not own.

The wheat crop was valued at more than $43,000 and the court awarded damages to the plaintiffs in this amount.

Read the decision at: Young v. Wilson.