• Canadian Market and Drivers
• Property Valuation
• Conduct Research (due diligence)
• Legal Framework
• Financial Barriers
• Lenders' Concerns
• The Advantages
• What the Lender Needs to Know
• Typical Provisions in Loan Agreements
• Risk Evaluation and Management
• Develop a Business Case

Financial Barriers

• What is the bank’s exit strategy?
• Is there a potential for liability apart from the loss of the business?
• How is risk of liability mitigated or controlled?

• The new legislation has little to add to the “value” side of the equation.
• A brownfields project must be seen to be viable, attractive and profitable before a lender will agree to get involved.

• The new legislation has a lot to offer to lenders in the area of certainty, predictability and protection in order to right the balance between value and risk.
• Risk of indeterminate liability has traditionally been a significant impediment for lenders in dealing with contaminated lands.
• Risk is mitigated where there is certainty and predictability in the information that is provided and the path forward.
• Traditionally, there has been a lack of certainty and predictability in transactions dealing with contaminated lands.
• Risk is also mitigated where the lender has protection against the worst-case scenario, a default by the borrower. In such cases, lenders have a fear of direct liability as the “deep pockets” when the borrower is insolvent.

  The Advantages of the Brownfields Act

1. The Record of Site Condition (RSC) Exemption = an Endpoint to Liability
   
   • A recurrent complaint from parties dealing with contaminated lands, is that it is impossible to know when “clean is clean”. If a remediation is performed to today’s standards, how are parties protected if the standards change? When does the “tail” of liability end?
     
   • The Record of Site Condition (RSC) exemption under the Brownfields Act offers an answer to such concerns. While it may have been preferable to adopt a process for a “no-action letter” or other form of regulatory sign-off, as is the case in many U.S. jurisdictions, the RSC mechanism is designed to achieve the same objective. If the RSC process is followed to today’s standards, liability protection from clean-up and other orders is earned, and that protection extends into the future. Even if the standards change in the future, the party who obtains the exemption (as well as a range of other parties, as noted below) is protected.
     
   • The RSC exemption extends not only to the party that obtains it (generally the developer and/or other owner of the property), but also to that party’s lender and to any future owner.
     
   • The RSC exemption provides an endpoint to the remediation process and a protection against ongoing and unlimited regulatory liability.
     
   • This translates into greater certainty and may even result in greater acceptance of the project within the marketplace.
     
2. Regulatory Criteria = Greater Certainty
   
   • The RSC “mechanics” also make for greater certainty for everyone involved with contaminated lands, including lenders. Most of these mechanics are found in the RSC regulation. In order for the RSC process to work, it was necessary to define Phase I and II Environmental Site Assessment (ESA) standards, to define the qualifications for qualified persons and to incorporate into regulations the specific remediation criteria that were previously found in the Guideline for Use at Contaminated Sites in Ontario.
     
   • It was the Canadian Bankers Association that drove the development of the first ESA standards in Canada (CSA Standard Z768 – A Standard for Phase I Environmental Site Assessments), as lenders were looking for certainty. They wanted reliable tools to assess environmental risk, to enhance the degree to which they could understand, synthesize and rely upon the information that they were being provided by their borrowers.
     
   • Those who have been working in the field for the past decade know that there has been increasing standardization in all of these areas; however none of this was incorporated into the law.
     
   • The fact that Ontario legislation now provides for standards for Phase I and II ESAs, for the criteria of qualified persons and for remediation criteria by regulation is important for lenders as well as other participants in the process, who need more certain tools to evaluate environmental risk.
     
3. Secured Lender Exemption
   
   • Another important development is the inclusion for the first time in Ontario law of a secured lender exemption from regulatory environmental liability.
     
   • Lenders who take action to investigate, preserve or protect property in response to environmental risk will not thereby become persons in control and subject to regulatory action. Lenders can effectively realize security on their investment without attracting liability.
     
   • Protection for secured lenders has been a part of the U.S. Superfund legislation since its passage in 1980. The Canadian Bankers Association lobbied the provincial government for a secured lender exemption. Instead, the MOE created a standard form agreement that permitted the investigation and protection of a borrower’s property (known as the “Global Agreement”), and from time to time they entered into additional site-specific agreements with lenders, permitting the realization against their security in exchange for various covenants, including in most cases the creation of an environmental reserve fund from the proceeds of sale.
     
   • It is correct to say that the exemption that appears in the brownfields legislation is simply an incorporation of what existed under the Global Agreement, but it is certainly preferable to have this as part of our written law. Although informed lenders and their counsel worked under the Global Agreement regime and negotiated numerous site-specific agreements over the years with MOE representatives, there was always something arbitrary or discretionary about the process. There was always the sense that lenders had no real bargaining power, with such agreements negotiated against a backdrop that assumed that lenders were liable for what they were doing with their debtors’ property unless they had the protection of these agreements.
     
   • The secured lender exemption by contrast starts from the point of departure that lenders who take action in relation to their borrowers’ property are not liable. This is a significant protection for lenders that they did not previously enjoy in any formal or non-revocable way.
     
   • There is an additional option for lenders as well that was not really available in the past. Lenders are now able to foreclose on, and to become the owner of a borrower’s contaminated property without attracting liability. Although there are frequently other reasons why lenders choose to proceed by way of power of sale and not by foreclosure, the inclusion of this option can only be regarded as positive and underlines the protection to be given to lenders. Even if lenders foreclose and become the owners of their borrowers’ lands, they are protected for a period of five or more years. This is a very important protection for lenders in brownfields projects. If the unthinkable happens and the developer defaults the lender can acquire the property and has up to five years to find another buyer to take it over.
     
4. Acceptance of Risk-Based Remediation
   • Another very significant achievement of the Brownfields Act is the legislative approval of risk-based remediation strategies.
     
   • In the past several years, new investigative, remedial and risk assessment technologies and techniques have been developed. In many cases, remediation to Guideline criteria is impossible or prohibitively expensive, and a remediation to site-specific risk based criteria is not only scientifically defensible but the only viable option.
     
   • Under the Brownfields Act, a remediation that is performed using an accepted risk assessment can result in the same RSC exemption as a remediation to generic criteria.
     
   • Further, the new legislation provides for a process to be followed, which includes MOE review and approval of risk based remediation (which should provide comfort to lenders), as well as deadlines for each stage of the process in which the MOE is involved.
     
   • This is an area that was marked by tremendous uncertainty, and an air of overwhelming MOE discretion leading to unpredictable outcomes.
     
   • The legislation has caught up with the fact that the trend in remediation strategies is increasingly risk-based.
     

• Type of contamination and prior use of the property
  Some types of contamination are easier to deal with than others. For example, is the site a former gas station with hydrocarbon contamination or is it a manufacturing site with a history of spills of solvents, PCBs and buried waste?
  
• Work done to identify and delineate the contamination in soil and groundwater and any indication of off-site impacts
  Off-site impacts could require more extensive remediation or lead to liability.
  
• The choice of consultant
  Does the consultant have a strong reputation and related experience? Is the consultant on the lender’s “approved” list of consultants? Does the consultant have a proven track record in dealing with similar sites?
  
• Remedial technologies the consultant proposes to employ
  Few lenders would want to take a gamble on a new technology or a new application of an existing technology.
  
• Timing
  The remedial plan needs to be realistic and include target dates for completion of various stages of the work, with contingencies. For example, is there a “plan b” if bioremediation fails to reduce contamination to acceptable levels? What is the additional timing and cost likely to be?
  
• The remedial objective
  Will there be a risk assessment element and will the site require ongoing monitoring or the operation of a vapour recovery system for example? Will this entail a registration on title that may deter prospective purchasers?
  
• Regulatory action or third party claims
  If the site is subject to these claims, it can be a fatal barrier, as no lender wants to become involved in a site where there is already enforcement or other proceedings underway.

• Full Disclosure:
  Disclosure of all known information, including production of all ESA reports that are in the possession or control of the borrower. There will be a representation and warranty that such disclosure has been provided.
• The Right to Inspect:
  The loan agreement may provide broad rights for the lender to carry out its own investigations at the borrower’s expense, making satisfaction with the condition of the property a pre-condition to advancing the loan.
• Representations and Warranties:
  Warranties from the borrower respecting the environmental condition of the property, as to the accuracy and completeness of the information that has been disclosed, the absence of regulatory orders and other action, and, possibly, the absence of off-site impacts.

• Covenants from the borrower with respect to the remediation:
  This will include identification of the remedial target (which may involve the achievement of a RSC), covenants to implement the remedial plan, to achieve the remedial target and other interim targets within prescribed periods of time, in some cases to use only prescribed qualified persons, and to report on the progress of the work.
• Ongoing rights to inspect and to monitor: 
  The lender may want to monitor the borrower’s progress, again using the lender’s own consultants, at the borrower’s expense.

• Comprehensive indemnities for environmental liability assumed in connection with the loan agreement or secured property.
• Additional security apart from the land in question, perhaps with the guarantees of the principals or affiliates of the borrower, secured by their own property.

• It recognizes site-specific Risk Assessments and provides a statutory process for them. The new legislation offers greater flexibility in remedial options, catching up with science currently is used with respect to risk-based remediation. These tools should enhance the viability of certain projects and provide greater assurance to lenders who might have greeted such projects with scepticism in the past.
• It is clear that statutory protection is not sufficient. If a lender is to be encouraged to lend against contaminated lands it will need comprehensive and reliable information about the property.
• The lender will need to have confidence in the remedial technology and the consultants the borrower has selected.
• Finally the lender will always require contractual protection in the terms and conditions of the loan agreement.