The Stigma of Potential Contamination (6 minute read)

March 26, 2018

The Stigma of Potential Contamination (6 minute read)

Years ago, there was a dry cleaner in Cook Street Village in Victoria, on the corner of Cook and McKenzie. It may (or may not) have had a big neon sign like the picture above.  Today, the dry cleaner is gone, but the plume of contamination that it left behind is still being cleaned up.

In November 2016, I successfully argued a case in the British Columbia Supreme Court on behalf of two homeowners who purchased a home in Cook Street Village in 2013, about 200 feet away from the old dry cleaner. Unbeknownst to them, environmental engineers had been in the backyard of the home about 6 months before they bought the house, drilling wells and checking for the presence of chemicals connected to the old dry cleaning business.

The previous owner of the house knew about the testing. He had also received two documents from the Ministry of Environment notifying him that his property might be contaminated.  He didn’t disclose this information on the Property Disclosure Statement that was provided to the new buyers. In answer to the question, “Have you received any other notice or claim affecting the Premises from any person or public body?”, the seller answered “No.

A Knock at the Door, and a Lawsuit

About four months after the buyers moved into the house, an environmental engineer knocked on their door, and asked if she could go into the backyard to do some further testing. The buyers were surprised (to say the least!) to learn that there were monitoring wells beneath the grass in their backyard. Eventually, they called me to get some legal advice.

The buyers started a lawsuit against the seller , claiming that his failure to say anything about the notices and the possible contamination was a misrepresentation. They argued that if they had known about the possible contamination, they would not have purchased the property. At trial, they claimed damages for the difference between the price they paid for the property, and the actual value of the property when the possibility of contamination was factored in.

Some of you reading this will ask, “What about the idea of Caveat Emptor, or “Buyer Beware”? Didn’t the purchasers see the wells in the backyard? Didn’t the title search say anything about potential contamination?

The Court Decides

The court found that the doctrine of Caveat Emptor still applied generally, but that in this case, the wells could not be discovered through reasonable inspection.  They had been covered by new sod – so there was nothing to suggest they were even there. Title searches don’t contain information about contamination – so nothing in the regular searches would have given the buyers any information about the possibility of contamination. And since there was no suggestion of contamination in the Property Disclosure Statement

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, a search of the Contaminated Sites Registry wasn’t done (it wouldn’t have made a difference anyway – there was evidence at trial that a subsequent search didn’t come up with any results for this property).

At trial, the court found the seller was liable for negligent misrepresentation. He had to pay the buyers $95,000, plus an additional amount for court costs and legal fees.

How did the court arrive at that number? The buyers hadn’t sold the house or even listed it for sale. So how does anyone know what the “actual” value of the house would have been in the spring of 2013, when the buyers bought it?  If the possibility of contamination created a cloud or “stigma” that reduced the market value, how is that measured?

To determine the value of real estate in these kinds of situations, the court often accepts an appraisal report as expert evidence. This case presented an interesting problem, because the reduction in market value wasn’t connected to any actual clean up costs.  In 2013, when the property was sold, the extent of contamination, and the associated clean up costs (if there were any) was unknown. But that uncertainty is what caused the reduction in market value. That’s the “stigma” of potential contamination.

In other words, an average buyer will pay less for a contaminated property when compared to a property they know is clean.

Damages for Stigma Alone

In this case, the court accepted that there would have been a stigma attached to this property if the possibility of contamination had been disclosed. The court found that the seller had to compensate the buyers, because they had effectively paid too much for the property.  In that respect, this case is one of the few reported cases in BC where damages have been awarded to buyers on the basis of stigma alone, separate and apart from any costs associated with cleaning up the property.

You can find the full text of the court’s decision here:   Ban v. Keleher , 2017 BCSC 1132.

By Salim Hirji Civil Litigation Court Decisions Share:
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Welcome to the Hirji Law Corporation Blog – commentary and information about business disputes and the litigation process.

I will be blogging about dispute resolution, negotiation, recent court decisions, and the impact that disputes can have on your business.

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