Problems with Undergroung Oil Storage Tanks

November 28, 2011

Problems with Underground Oil Storage Tanks

Many homes in the Greater Vancouver area built before 1957 were originally heated with

furnace oil. When natural gas became available, the oil storage tanks, which were

normally located underground in backyards, were filled with sand or capped. However, as

these unused tanks start to corrode and rust, the remaining oil can leak out and flow onto

the rest of the owner’s property, the neighbour’s property, storm sumps and waterways,

resulting in contamination of soil and water. Apart from the negative financial impact on

the market value of the property, the owner can face substantial legal liability under

various statutes and bylaws for such contamination.

The BC Fire Code and by-laws of twelve municipalities (including the City of

Vancouver) all essentially require that out of service underground oil storage tanks

(“UST”) be removed and that all contaminated soil must be removed and replaced with

clean fill.

A very limited exception may be granted by the fire authority where the removal of the

UST is impractical because it is located under a permanent structure or its removal would

endanger the structural integrity of nearby buildings. In that case, the owner would still

have to render the UST “inert” in accordance with “good engineering practices” which

would include arranging, at their own expense, for the remaining oil to be pumped out,

for the tank to be filled with sand and all piping to be capped as well as arrange for the

removal of contaminated soil and replacing it with clean fill. In addition, written

verification of such work must be provided by a licenced contractor to the fire authority.

The responsibility for the removal of the UST and remediating any contamination falls on

the current property owner. The costs of such removal can be expensive depending on

how much remediation work is involved. However, if the UST is ignored and not dealt

with promptly and correctly, the costs can be exponentially more. In one case that was

reported in 2008, an owner of a West Vancouver home, who bought the home in 2000 not

apparently aware that there was a buried UST, had to spend close to $160,000 to remove

5,000 liters of contaminated fuel from a leaky home-heating UST that had not been used

in 25 years! Such cases are rare but it does highlight the need to conduct due diligence

when buying a home that may have an unused UST.

In addition to the BC Fire Code and municipal by-law requirements, the owner may also

be subject to the Environmental Management Act of BC if the concentration of the

contaminants present in the soil or groundwater exceeds the allowable limits prescribed

for residential properties and therefore meets the definition of a “contaminated site”. In

that event, the owner can be ordered to undertake remediation of the property and

neighbouring properties if the contamination has spread. It may be possible for the owner

to recover some of the costs incurred from more culpable previous owners through a

“cost recovery action” pursuant to the Environmental Management Act but only if they

can be found and have the resources to pay. An owner or former owner may also be

found liable under common law nuisance for failing to take steps to prevent seepage of

oil to neighbouring properties.

What are the Seller’s obligations?

The Seller normally will provide a prospective buyer with the Property Disclosure

Statement (“PDS”) that requires disclosure of a number of potential defects, including the

presence of an UST. If the Seller declares that the property does not to their knowledge

contain an UST and/or is not contaminated, which later proves incorrect, the Seller can be

liable for negligent misstatement. Moreover, if the PDS is expressly stated to form part of

the Contract and there is an unqualified statement that there is no UST then this becomes

an actual warranty so that if an UST is discovered on the property the Seller will be liable

for breach of contract. Similarly, if the Seller states expressly in the Contract that there is

no contamination at the property, the Seller will be contractually liable to the Buyer if

contamination is discovered. As well the courts have held that Sellers have a duty to

disclose a latent defect that could be dangerous or a hazard to human health and failure to

do so may well make them liable to the Buyer for damages sustained as a result of their

failure to warn.

In summary, if there is an UST, then the Seller should be advised to disclose this fact to

the Buyer and ensure their representations are accurate. The Seller can then go ahead and

arrange for a qualified tank removal contractor to remove the UST and clean up any

contamination in accordance with all permits and applicable statutes, bylaws and BC Fire

Code and provide sufficient written proof to the Buyer prior to completion. Alternatively,

if the Seller does not have the money to do this, they could try and negotiate a price

reduction in exchange for a release and indemnity from the Buyer with respect to the

UST and remediation of any contamination. However, the Seller can still remain liable

under the EMA and the Buyer may not be able to agree to this because of the

requirements of their insurer and lender, who will want the UST and any resultant

contamination issues dealt with prior to completion before funds are committed.

What can Buyers do to protect themselves?

If there is a suspicion that there may be an UST and the Seller will not or can not confirm

either way, the Buyer should be advised to make the offer subject to a satisfactory

inspection that satisfies the Buyer there is no UST and that the property is not a

contaminated site. It would be prudent to engage the services of a specialized UST

inspector to conduct a magnetic survey to detect an UST and then, if located, the integrity

of the tank can be examined and surrounding oil can be checked for the presence of

contaminants. The Buyer should also put in another condition precedent into the

Contract that, if there is an UST, the offer is subject to the Seller arranging, at their own

expense, for the UST to be drained and removed and for the soil and groundwater to be

assessed for contamination and, if so contaminated, the Seller will ensure the soil and

groundwater is fully remediated in compliance with all applicable statute, bylaw and BC

Fire Code requirements. The contract should also provide that it is a fundamental term of

the contract that all the work will be done by a qualified tank removal contractor and that

the Seller shall provide to the Buyer on or before the completion date all necessary

written certificates and reports from the tank removal contractor and the fire authority

that all work was completed in compliance with the applicable statutes, bylaws and BC

Fire Code.

A Buyer should be strongly advised, even in the face of competing offers for a property,

to not remove any conditions without the UST and remediation work having been

completed properly by the Seller. Similarly, the Buyer should not agree to take on the

responsibility of the removal of the UST and the remediation of any contamination in

exchange for a price reduction without fully realizing the potential liability that would

ensue upon becoming the new owner.

Insurance issues

As insurance companies are worried about the potential impact and expense of any

environmental contamination caused by a leaking corroded oil tank, it is very hard to

obtain home insurance for homes which have an exterior oil tank older than 15 years.

Even if home insurance is obtained, there will undoubtedly be a leakage/pollution

exclusion which would make the property owner bear the full costs of such an event.

Another scenario may be that as a condition of providing insurance the owner must

remove the oil tank within 30 days of the policy been issued which again will result in a

big cost for the owner to pay.

Also, an owner will not be able to obtain financial protection from a residential title

insurance policy as the policy will have exclusion for any environmental damage,

including that caused by a leaking oil tank even if the owner had no idea the oil tank was

there.

Financing issues

For commercial real estate, lenders are much more focused on environmental issues,

depending on the history and the previous uses of the land, and sometimes will require

special environmental reports to be obtained before they will commit to funding a

transaction. However, even for residential transactions concerning a known UST, the

lender will normally insist, before approving any funding commitment, that the UST to

be removed in accordance with the applicable statutes, bylaws and BC Fire Code and for

the soil to be tested for contamination and remediated as necessary. In such a situation, a

prospective buyer should not remove any financing condition until they receive written

confirmation that the lender has approved of the UST removal and remediation process,

is satisfied with all required reports issued by the tank removal contractor and is still

prepared to provide mortgage financing for the purchase.

Underground Oil Tank Removal Process

Property owners should always hire an experienced and qualified contractor in tank

removal. If an UST is found and has to be removed, then, upon obtaining a tank removal

permit from the applicable municipal fire authority:

1. the remaining oil has to be pumped out and taken to an approved

recycling/disposal facility;

2. the UST must be removed;

3. the soil must be assessed for contamination. If contamination is present, soil and

groundwater must be properly remediated, which may include complete removal;

and

4. the property owner must obtain a report, and photos, from the tank removal

company, detailing the removal process, what was pumped out of the UST, a

receipt from the facility where the UST was taken to and the amount of soil

brought in. The report should confirm that the UST was removed in accordance

with all applicable statutes, bylaws and the BC Fire Code and, in the event of

contamination, that the soil and groundwater have been remediated in accordance

with the standards prescribed in the EMA and further testing is not necessary.

This report can then be provided to prospective buyers in the future as evidence

that the UST has been dealt with.

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