Traps for the Unwary – Contaminated Land Caught in an Estate
Legal issues surrounding contaminated sites can arise in a variety of settings.
In civil litigation, for example, the operations of a commercial tenant may release harmful substances into the subject lands, resulting in the landlord filing suit for clean-up costs, and may even migrate on to a neighbouring property leading to further liability. In the regulatory sphere, environmental legislation in Alberta (such as the Environmental Protection and Enhancement Act, R.S.A. 2000, c. E-12 and Remediation Regulation, Alta. Reg. 154/2009) addresses substances which may have an adverse effect on the environment, including reporting and remediation obligations of those responsible, and may lead to penalties, clean-up orders, and other enforcement measures.
Another area of potential liability – and one that may not immediately jump to mind for many of us – arises in the context of estate law, where a contaminated property left behind by the deceased can create a number of difficulties for both the personal representative of the estate (i.e. an executor or administrator) and beneficiaries of the estate.
A common scenario entails when a property owner passes away and devises the land to his or her beneficiaries, along with any other assets owned. The personal representative is responsible for administering the estate and is required to act in best interests of beneficiaries. One of the duties of the personal representative is to inventory and assess the value of all assets and liabilities in the estate. Where the deceased’s assets exceed their liabilities, a distribution may be made to the beneficiaries (in accordance with the terms of the will, if available) once all obligations are satisfied and creditors paid out.
However, the situation can become complicated and challenging where assessing the value of the assets and liabilities is uncertain. Ascribing a value to a contaminated property is often difficult and can be quite uncertain. It is not uncommon to discover in the course of remediation that the extent of the contamination is far greater than what was anticipated based on the prior testing, leading to escalating clean-up costs. Further, the costs associated with hiring environmental consultants to test, analyze, and remediate the lands can be significant, and in some cases exceeds the value of the property. These costs and liabilities may be even greater where the contamination is found to have migrated off-site to a neighbouring property. This can result in a significant liability to the estate, with the clean-up costs treated as a creditor claim in a similar fashion to any other debts of the estate. In those circumstances, disbursement of the estate may be held up, potentially for an indeterminate amount of time.
However, there are options. One approach may be for the contaminated property to be sold out of the estate. This may even be accomplished if there is a beneficiary willing to acquire the property in order to allow the distribution of the estate to proceed. That said, the personal representative would be wise to avoid making any representations as to the environmental condition of the land and, if transferring to a beneficiary, obtain a release from the beneficiary in favour of the estate.
Another approach sometimes used is for the personal representative to implement an “interim distribution” where some of the estate’s assets are released while others are held back to ensure any future liabilities, including remediation costs, can be covered. This option can however be a risky one; by allowing the interim distribution, the personal representative assumes personal liability for any debts of the estate that ultimately go unpaid. A personal representative may attempt to limit the risk by entering into agreements with the beneficiaries that repayment would be required to cover any shortfall discovered later. However, that type of arrangement assumes the beneficiaries will have money at the required time to repay, and will honour the agreement. Adding to the challenges in these situations, the personal representative(s) may be under pressure by beneficiaries, who are often family members, to make an interim distribution, but may have no prior experience dealing with contaminated properties.
If the situation is too contentious or challenging, another option may be for the personal representative to renounce the executorship and not administer the estate. In order to renounce, the personal representative must not have intermeddled with the estate. In cases where the contamination is not discovered until later in the process, it may be too late and the personal representative will instead need to get Court approval to be discharged. In that case, if no other person steps forward to apply to act as personal representative, the estate is essentially held in limbo during which time the beneficiaries receive nothing, and the creditors are left to weigh the pros and cons of pursuing any debts owed by the deceased.
From an estate law perspective, it would be preferable to transfer a contaminated property out of the testator’s personal assets prior to death. This may be accomplished by putting it into a corporation. However, any transaction must be bona fide to ensure other issues are not created by a perception that the sale was an attempt to avoid creditors or clean up obligations. Planning of this nature should be considered when strategizing how to organize one’s estate.
Options are available if a contaminated lease of land is held in an estate. However, the message arising from the discussion above is clear, and one that personal representatives in particular should take notice of – tread carefully when dealing with contaminated property in the estates context, as failure to do so may result in personal liability and hinder distribution of the estate.