NOTE: I am not providing legal advice with this article. Please consult with a lawyer to determine the actions you may wish to take.
This past week the Supreme Court of Canada heard arguments in what is called the Redwater case. It’s expected that the Court will render its decision over the summer. At the heart of the court case is the question of bankruptcy and creditor priority versus the environment and environmental clean up.
Redwater was an insolvent oil company with approximately 70 wells operating throughout the province of Alberta. The primary lender to the company, ATB Financial, and the trustee argued that under Federal bankruptcy law the trustee in bankruptcy could sell the profitable assets and disclaim the well leases that were unproductive. This left the unproductive wells to the Orphan Well Association (OWA), an association funded by the oil industry and charged with decommissioning and cleaning up abandoned wells in Alberta. Part of their argument was Federal bankruptcy laws trump provincial environmental regulations. The lower courts appeared to agree on that point.
On the other side of the table, the provincial government argued that Redwater must clean up environmental hazards and any monies derived from the sale of assets should first and foremost go to the underfunded OWA to expedite the decommissioning of the abandoned wells.
As background to the case it should be noted that these wells are located on third-party agricultural land and the oil company had the right to install these wells so long as they paid a royalty or rental fee to the landowner. In this complicated case the lower courts ruled in favour of the trustee in bankruptcy meaning they could to pay the primary creditor (ATB) first and leave the abandon wells to the OWA to clean up.
Unfortunately, in Alberta there are approximately 1600 abandon wells and another 1500 underperforming wells. This means it could be decades before all the abandoned Redwater wells are decommissioned. This, according to the province and affected farmers, poses environmental, financial and health risks.
There is the argument that the lower courts decisions would give oil companies an ability to organize their affairs so they do not have to take responsibility for their drilling.
It is believed that the Alberta Energy Regulator erred by not requiring oil companies to post bonds or insurance to cover the decommissioning of abandoned wells.
So what does this have to do with commercial real estate?
If the Supreme Court upholds the two Alberta provincial courts decisions then it could have implications beyond the oil patch, and affect any premises or land where pollutants could be deposited.
Therefore, I believe it would be prudent for landowners to ensure their tenants post a bond, or obtain insurance in some form, to pay for the clean up of their operations if the tenant becomes bankrupt. Otherwise, a trustee in bankruptcy could simply disclaim the lease and the landlord would face the costs of cleanup themselves.
All the leases I’ve personally seen assume the environmental obligations pertain to a tenant that is viable and ongoing. They do not foresee what happens if the tenant is bankrupt.