Canadian Property Management 2010 Buyers' Guide

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VOL. 24 NO. 8 • January/February 2010

2010 Buyers’ Guide

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editor’snote Modern capacity to provide vast quantities of information in an on-line venue makes the workings of government more accessible. Researchers can find recent and past reports, legislative proceedings, statutes and regulations that previously would have been available only in printed form at central locations like libraries and government offices.

On the flipside, however, governments – federal, provincial and municipal – and public agencies have generally become increasingly controlling in how they convey information and allow their own workforces to share it. Organizational culture varies from place to place and some bureaucracies are more open than others, but they’re invariably fronted with a communications department to shape and guard how information flows from policy crafters and decision makers to the public.

In more receptive scenarios, communications staff often serve a valuable role in helping outside inquirers identify who holds the information they seek. In more rigid examples, communications departments act as gatekeepers and assume the role of explaining the bureaucracy’s work to the outside world – even when they don’t understand the complexity of the work themselves.

In reality, there is no real reason to safeguard most of the information that communications officials have been empowered to oversee – other than to feed a culture of hyper-sensitivity and instill fear in those who operate within it. It’s interesting that employers would value their workers enough to pay them in excess of $100,000 annually – as Ontario’s public sector salary disclosure lists abundantly demonstrate – but not trust them to talk knowledgeably and reasonably about what they do.

Happily, we live in a society where people are predisposed to talk openly and there are always government insiders who have the clout and/or the temerity to overlook communications officials’ control-freak tendencies. And, of course, there are always informed, intelligent people outside government who have the experience, knowledge and insight to decipher policies and laws, explain the implications, identify shortcomings and foresee potential outcomes.

At Canadian Property Management, those are the people we like to talk to.

Accordingly, Regulatory Update looks at government activity and some issues that our expert sources suggest are worth keeping an eye on.

For example, while the official press release from the Ontario government touts the new Brownfields Regulations as a means to redevelop derelict sites more quickly and efficiently, John Willms of Willms & Shier Environmental Lawyers notes that the new rules will define many more properties as contaminated and requiring complicated and costly remediation. Elsewhere, the Saskatchewan government’s press release announces plans to enhance environmental protection, while Mark Winfield of York University reminds us that a similar initiative was abandoned in Ontario due to liability risks.

It’s always best to look beyond the communications department’s message.

Barbara Carss barbc@mediaedge.ca

January 2010

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On the Cover: to come

6 January/February 2010 | Canadian Property Management

VOL. 24 NO. 8

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contents

Focus: Regulatory Update 10 Regulatory Briefs: Energy and environmental legislation in Alberta, Saskatchewan and Ontario.

12 Condominium Law Revamped: New Acts for British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador 16 Local Initiatives to Curtail GHGs: Municipal influence over planning, buildings, transportation and solid waste supports carbon reduction measures.

18 Clarification for Sub-metering: Conversions allowed with conditions in Ontario’s existing rental housing stock.

Articles: 20 Mortgage Loan Market Dynamics: Purchasers lean toward extensive due diligence, but can extract price cuts from sellers in a hurry.

24 Disqualifying Factors for Carpet Warranties: Manufacturers are increasingly specifying standards of care and other conditions of coverage.

28 Lease Interpretation and Obligations: Court discredits contentious actions to avoid rent payment.

30 Contaminated Drywall Concerns: Removal and renovation costs ahead for compromised spaces.

Departments 6 Editor’s note

8 January/February 2010 | Canadian Property Management

regulatorybriefs

HEAT SUB-METERING ON HOLD IN ALBERTA Heat sub-meters have been prohibited in Alberta rental housing until technology certified by Measurement Canada is available. The Energy Marketing and Residential Heat Sub-metering Regulation, which came into force on November 18, 2009, affects a relatively small number of tenants currently paying for heat as a separate charge from their rent, but it retains the flexibility for landlords to implement heat sub-metering in the future.

Sub-meter billing for heat is now invalid for an estimated 3,000 tenants throughout the province since none of the existing heat sub-meters are certified.

However, the Regulation sets out steps to allow landlords to use certified heat submeters if/when they come onto the market. In that case, landlords would be required to disclose sub-meter readings, the amount charged for energy versus administrative and other fees, and the formula for calculating those amounts.

“I think the industry generally recognizes that there is no certified heat meter available, unlike what’s available on the electrical side. So it’s probably something that shouldn’t happen until there is suitable technology available,” says Gerry Baxter, the Executive Director of the Calgary Apartment Association.

“In Calgary, it is not a big issue. Most landlords who adopted sub-metering chose electrical sub-metering.”

Energy management analysts note that heat sub-metering is particularly problematic in high-rise multi-residential buildings where the heat load can vary significantly due to stack effect and the unit’s orientation to the sun. Occupants thus have less control over the amount of heat a unit requires and consumes, 10 January/February 2010 | Canadian Property Management

whereas electricity is allotted equally to all units and consumption can be more directly tied to occupant behaviour.

“In principle, tenants paying for the actual energy they use is fairer and rewards renters who conserve heat, but renters deserve to have confidence that the devices used to measure their energy use are accurate and the amount they’re being charged is clear and understandable,” states Alberta Service Minister Heather Klimchuk.

The new Regulation applies only to the period from November 18, 2009 onward.

There will be no recalculation of bills previously issued based on submetering.

For more information see www. servicealberta.ca/pdf/tipsheets/Heat_ submetering.pdf SASKATCHEWAN CONTEMPLATES VIGILANCE MODEL DEEMED UNWORKABLE IN ONTARIO Proposed changes to Saskatchewan’s environmental legislation introduce a framework for a results-based regulatory model that would largely replace the current permitting system with a Saskatchewan Environmental Code.

Other proposed initiatives include: a revamp of the process for designating contaminated sites; enabling legislation for industry stewardship programs to oversee recycling and waste reduction; and enhanced reliance on and responsibilities for qualified professionals to oversee and certify environmental compliance.

The provincial government plans to repeal four existing statutes – The Environmental Management and Protection Act, The Clean Air Act, The Litter Control Act and The State of the Environment Report Act – and roll them

into a new Act that would establish a Code to guide allowable activities and required environmental safeguards.

A particularly noteworthy change would eliminate the existing permit requirements for activities that create emissions to the atmosphere. Instead, developers/owners/operators of such undertakings would be expected to comply with Code requirements that establish allowable base-level emissions, ambient air quality standards and reporting responsibilities. This would also be backed up with stricter penalties and government audits to support compliance.

Although the initial policy proposal emphasizes that permits will still be required for drinking water treatment plants and other high-risk activities, there would no longer be a permit requirement for the construction of water distribution and sewage collection systems serving 5,000 or more people. Rather, project proponents would submit an environmental protection plan developed and certified by a qualified professional.

Concomitantly, the Ministry of the Environment would cease to review and sign off on reports, designs and other do cumentation th at a qu alif ied professional had approved.

“Throughout our consultations, we heard that environmental regulation in Saskatchewan needs to better reflect best practices in protection of the environment and keep up with the pace of economic development. Results-based environmental regulation will allow us to do both by focusing on the use of effective, custom-designed environmental safeguards rather than one-size-fits-all approaches,” Saskatchewan Environment Minister Nancy Heppner said when the legislation was introduced in late November.

Critics of the scheme counter that it will allow environmental violators to operate without scrutiny or detection since they can forego the basic screening that obtaining a permit entails.

“Permitting is very important in terms of the government even knowing what activities are taking place,” observes Mark Winfield, a professor in York University’s Faculty of Environmental Studies. “The catastrophic example of where this can go off the rails was the Plastimet fire in Hamilton in 1997. In that case, the [Ontario] Ministry of the Environment didn’t even know that a

regulatorybriefs plastics recycling facility existed in that location.”

The fire destroyed 400 tonnes of polyvinyl chloride (PVC) plastic and brought to light potential liability issues – the Ontario government was among 14 defendants named in a Class Action case – that prompted the provincial government of the day to abandon plans for a permitting system similar to the one now contemplated in Saskatchewan. “This approach has been touted as a potential model in other jurisdictions, including Ontario, but there was just a whole range of complications that arose here in Ontario,” Winfield notes.

Most of the details of Saskatchewan’s proposed system are still to be determined and the government has promised ongoing consultation. “We have engaged industry, communities, non-governmental organizations and First Nations and Métis organizations in discussions over the past 16 months. The overall commitment to a results-based model is high and we will continue to seek feedback and advice from them as we move forward,” Heppner said.

For more information see www.gov. sk.ca/adx/aspx/adxGetMedia. aspx?mediaId=1014&PN=Shared NEW RULES EXPAND ONTARIO’S CONTAMINATED LAND INVENTORY Property deals could get more complicated in Ontario when recently announced new standards for allowable levels of soil and groundwater contaminants go into e ff e c t . O . R e g 5 11 / 0 9 u n d e r t h e E nv i ro n m e n t a l P ro t e c t i o n A c t contains amendments to Ontario’s existing regulations for assessing, registering and remediating lands known as brownfields that will trigger requirements for costlier and more time-consuming risk assessments much more frequently than is the case now.

“We anticipate we will be getting calls from property owners who are upset when contamination is discovered in the middle of their deals,” says John Willms, a senior p a r t n e r w i t h Wi l l m s & S h i e r Environmental Lawyers and Co-Chair of the Policy and Technical Committees of the National Brownfields Association, Ontario Chapter. “Deal time is when soil and groundwater testing are often done.”

Under current rules, owners/developers conduct a Phase One environmental site assessment (ESA) if there has been any history of activity on a property that could have caused soil and/or groundwater contamination. This will be a regulatory requirement for development approvals and a requirement by lenders and insurers before they will provide financing and/or liability coverage.

The Phase Two ESA then gauges the types and volumes of contaminants present. A qualified professional (QP) – typically an engineer or a hydrogeologist – must oversee the work and sign off on the results.

I f t h e P h a s e Tw o E S A f i n d s contamination levels within the Ministry of Environment’s (MOE) limits of acceptability, a Record of Site Condition (RSC) can be filed immediately to verify the property complies with standards for redevelopment. If contamination levels exceed the MOE limits, property owners have options to remediate to generic standards or carry out a risk assessment process.

A s o f J u l y 1 , 2 0 11 , t h e n e w Regulation will impose stricter standards that significantly reduce the allowable levels of many contaminants.

Many properties that previously would have been straightforwardly cleared for redevelopment in a Phase Two ESA will likely need further study and investment.

“Changing the standard downward for some of the most common contaminants such as hydrocarbons, benzene and solvents – without changing the physical characteristics of the property – effectively transforms a lot of properties from clean to contaminated,” Willms observes.

It should also inspire caution. “The quality of consulting works is critical,” he adds . “With brow nfields w e constantly see people who have underestimated the importance of doing the environmental site a s s e s s m e n t p r o p e r l y, w h o h a v e accepted low bids and who are now in litigation as a result.”

Property owners can still obtain RSCs under the current standards until June 30, 2011 and the Ministry of Environment will still recognize RSCs from the earlier era after the new standards go into effect.

However, industry observers predict that lenders may already be asking owners/

developers in the initial stages of a project to meet the new standards as a condition of financing.

“Whether to use the old or new standards during the transition period will depend on the circumstances of each case,” Willms says. “If a lot of the cleanup has already been done, it may be best to move ahead quickly to obtain the RSC under current rules.”

There has been no suggestion that properties complying with current standards for allowable levels of contamination are unsafe or pose risks to human and/or environmental health.

Rather, the new standards heighten vigilance at an earlier stage of the assessment process and call for a more rigorous examination of possible outcomes and applicable solutions determined through the specialized risk assessment.

“The new standards were developed with the most conservative possible assumptions about a property,” Willms explains. “That would mean the maximum permeability of soil and most shallow depth of the water table etc., but the odds are that very few properties are going to exhibit all those factors. Almost all of the properties that complied with the old standards should pass the test of a risk assessment.”

Other amendments in the new Regulation are aimed at streamlining the administrative process and reducing delays in the risk assessment process that have frustrated developers until now.

Willms suggests financial institutions are also going to have to amend their ways, particularly as more properties fall into the risk assessment category.

“Today in 2010 there is a stigma attached to risk assessment properties that doesn’t exist for properties that comply with the generic [Phase Two ESA] standards. Chartered banks generally won’t loan on risk assessment sites,” he notes. “At the same time, the Ontario government has definitely committed to urban redevelopment and intensification. Either the government is going to have to abandon its agenda or the industry will have to evolve and cope.

We believe the brownfields development industry will evolve and cope.”

For more information see www.ene. g o v. o n . c a / e n / l a n d / b r o w n f i e l d s / amendments.php. zz

Canadian Property Management | January/February 2010 11

regulatoryupdate

Consumer Protection Principles Drive Condo Legislation New Laws Tighten Financial Oversight

By Barbara Carss

Four Canadian provinces have recently introduced or adopted updated legislation for the condominium sector. In British Columbia and Nova Scotia, new and proposed amendments are expected to bring a few noteworthy changes to how developers, condominium boards of directors and property managers conduct business, along with several largely administrative revisions that clarify wording and streamline procedures.

New legislation in the other provinces represents a more significant overhaul of longstanding Acts dating back to 1969 in New Brunswick and 1975 in Newfoundland and Labrador.

New Brunswick’s Condominium Property Act, which came into force on January 1, 2010, now mandates reserve fund studies for condominium corporations with more than 10 units.

This will be required before new development is approved, while existing condo corporations will have five years to complete the studies and 12 January/February 2010 | Canadian Property Management

build the required financial reserves.

All condo corporations will have to produce annual financial statements and file them with the Province’s newly appointed Director of Condominiums, who is charged with administering the Act. “It became pretty obvious that the old legislation just wasn’t up to the task of dealing with the new issues and options that have come forward.

The old Act couldn’t give adequate direction to developers and it didn’t provide any protection to the developers or consumers,” observes Steven Christie, a Partner practicing in the Real Property and Land Use Planning Group with McInnes Cooper Lawyers in Fredericton. “This is a complete rewrite. I would characterize this new legislation as very consumer protection oriented.”

Currently, 189 condo corporations encompass about 3,040 units in New Brunswick, and more than half of those units have been registered since

2004. Market observers anticipate ongoing growth in the sector as more aging homeowners look for downsizing options and the new legislation helps create more consumer confidence.

“For a long time, condominiums w e r e n ’t t h a t p r o m i n e n t i n N e w Brunswick. They just hadn’t caught on, but in the last 10 years there has been an explosion in interest,” Christie notes.

The condo sector has a greater share of the residential real estate market in neighbouring Nova Scotia, representing more than half of new housing starts in the Halifax Regional Municipality in the past three years. Recently introduced amendments to the Condominium Act update the trailblazing 2000 Act, when Nova Scotia became the first Canadian province to compel reserve fund studies and require that they be conducted by certified professional engineers.

regulatoryupdate

NOVA SCOTIA TEMPLATE “New Brunswick and Newfoundland have modelled their new legislation pretty much on Nova Scotia,” says Pat Cassidy, a Partner who practices condominium law with the Halifaxbased law firm Cassidy Nearing Berryman. “Primarily what the New Brunswick Act is doing is giving it a truly modern Act.” Cassidy will be in New Brunswick this winter to lead a seminar on the new legislation. The Nova Scotia chapter of the Canadian Condominium Institute (CCI) is also providing guidance in the development of a new CCI chapter in New Brunswick.

In addition to reserve fund requirements, New Brunswick’s Act and the proposed amendments to N e w f o u n d l a n d a n d L a b r a d o r ’s Condominium Act set out rules to address administrative redundancies and extra costs that developers and condominium corporations assuming title have faced in multi-building

projects constructed in stages.

Previously, developers typically registered each new building as a separate condominium thus necessitating easement and costsharing agreements to enable residents of a multi-building complex to share facilities and services.

The new legislation allows for phased condominium development and clears the way for adjacent condominium corporations to amalgamate. “I believe the amalgamation provisions are in the legislation to deal with what might have happened before this Act,” Christie adds.

One of the proposed amendments in Nova Scotia also deals with phased developments. It requires developers of multi-building projects to place a restrictive covenant on land that is to be developed in later phases to ensure that it will be developed as envisioned.

Cassidy identifies that among the more substantive amendments.

Also related to new development, a proposed amendment would require developers to present an operating budget to purchasers when they perform their initial due diligence and to defer pass-through of 10% of the operating budget in the first 15 months after completion. If there is a variance of more than 10% between the developer’s projected budget and the actual operating costs, the condominium corporation could then make a claim against the holdback.

Another major change would open the way for Nova Scotia’s Residential Tenancies Officers to hear and settle disputes. This would be a further option beyond the 2000 Act, which established binding arbitration as an alternative to Court actions.

“We were looking for a remedy that people could use that didn’t involve great expense or delay, but arbitration did not prove to be inexpensive or quick,” Cassidy explains. “The beauty of this approach is that it is relatively

Canadian Property Management | January/February 2010 13

regulatoryupdate quick – usually within a month – and should be inexpensive. The [Rental Tenancies Officers’] decisions really take the same place as a Court order.”

The Nova Scotia legislation also contemplates a warranty system somewhat similar to insurance for new homebuyers in Ontario and British Columbia, but this would have to be further defined through future Regulations.

BC QUIRKS Amendments to British Columbia’s Strata Property Act highlight one aspect of the legislation that is unique among Canadian provinces. Strata corporations – as condominium corporations are known in BC – have the ability to pass by-laws to restrict or prohibit rental occupancies.

Until now, the initial developer and first owner of a unit were exempt from any such by-law and could rent a unit to tenants during the time period set out in the Rental Disclosure Statement that developers file when they register a project. Developers can set rental expiry dates for many

14 January/February 2010 | Canadian Property Management

decades into the future, but a strata corporation’s rental restriction by-law comes into effect once the first buyer sells the unit and remains for all subsequent turnovers of ownership.

Under a new amendment, all unit owners will be exempt from rental restriction by-laws for the entire period established in Rental Disclosure Statements filed on or after January 1, 2010.

“It’s an attempt to make more rental available and to limit how the owners collectively can invoke rental restrictions or prohibitions,” says Pat Williams, a lawyer with the Strata Property Practice Group at Clark Wilson LLP in Vancouver. “This is the most significant change that has been changed in law, but there are other significant changes that have not been made into law yet because they require Regulations or amendments to other Acts.”

Among the pending changes, he points to requirements for strata corporations to provide audited financial statements and obtain depreciation reports on the state of

their capital assets as two of the most significant. “The new stuff that has not been made law yet is really to bring the BC Act more in line with the Ontario Act with regards to financial dealings,” Williams says.

Another amendment may result in more disputes reaching the courts since it will give owners leeway to take all of their disputes to the Provincial Court. Previously, the Provincial Court limited its jurisdiction in strata disputes to debt claims, while the Supreme Court was the venue to deal with disputes involving administrative and decision-making issues.

“This amendment will potentially give owners a lot more access to the courts with their complaints,” suggests Jamie Bleay, a lawyer practicing strata/condominium law with Vancouver based Access Law Group and the President of the CCI Vancouver chapter.

British Columbia’s leaky condo crisis in the 1990s and other occasional incidents of financial mismanagement also underlie the changes. “I think, for the most part, the legislative changes are really aimed at cleaning up some problems that interest groups and the Housing Minister have seen develop over time,” Bleay says.

“Certainly, CCI endorses anything that helps strata corporations and their owners to manage and address their financial responsibilities.”

The new areas of expertise to master will likely require more professional services and mean extra costs for strata corporations, and could push more boards of directors to seek professional management. It’s a trend that observers in other parts of the country also anticipate.

Christie notes that new condo boards in New Brunswick have often initially rejected hiring a property manager in an effort to save money then discovered that they do need more support to effectively operate their properties. “I think having all these additional requirements probably will tip the scale even more to wanting to download these responsibilities to outside expertise,” he says. zz

regulatoryupdate

environmentalmanagement

Local Responsibilities Complement

Emissions Reductions

Paybacks in Buildings, Planning and Waste Management

The following is an excerpt from Act Locally: The Municipal Role in Fighting Climate Change, a report from the Federation of Canadian Municipalities – Editor.

The government of Canada has a target to reduce emissions to 20% below 2006 levels by 2020, which is equivalent to 575 megatonnes (Mt). As of 2006, Canada’s total GHG emissions were 718 Mt, with local community emissions under direct or indirect municipal control accounting for 315 Mt. The remaining sectors include emissions from primary industries; rail, marine and aircraft transportation; and agriculture.

Municipalities have direct or indirect influence on activities that account for between 20 and 50 Mt of emission reductions, equivalent to 15 to 40% of Canada’s 2020 emission reduction target. This includes waste management, transportation and design or commercial and residential buildings.

More than one-quarter of these emission reductions can provide a neutral or even 16 January/February 2010 | Canadian Property Management

positive return on investment (less than $0/tonne reduced) even without the implementation of a carbon price. More than two-thirds of emission reductions can be achieved at a cost of less than $25/ tonne reduced – less than the average cost of regulating industry or developing renewable energy, and a fraction of the price of carbon capture and storage. All of the emission reductions are projected to cost less than $75 per tonne reduced, which is significantly less than the projected cost of competing options such as carbon capture and storage.

EARLY EVIDENCE, UNTAPPED POTENTIAL During the past decade, municipalities have undertaken thousands of projects to reduce GHG emissions, from turning landfill gas to electricity to putting high-efficiency buses on the road. Many projects pay for themselves – and save taxpayers money – by improving energy efficiency.

These projects build more liveable communities, boost our quality of life and economic competitiveness. They don’t hinge on experimental technologies or complex legislation.

Through participation in the Federation of Canadian Municipalities’ Partners for Climate Protection (PCP) program, 194 municipalities representing more than 78% of the Canadian population have made commitments to reduce GHG emissions in their own operations and within their community boundaries, but only a small number have begun to actively implement a comprehensive set of emission reduction initiatives.

Estimates drawn from Measures Report 2009 of emission reductions from 40 municipalities in Canada over the last 10 years indicate that municipal emission reductions have risen to about 1.3 Mt annually. Total emission reductions for all municipalities likely exceed this amount substantially.

However, trends in municipal emissions indicate that it is unlikely that more than 10 Mt of municipal emission reductions from the baseline have been achieved to date. The total potential of all municipal options to achieve emission reductions relative to a 2006 baseline is estimated at 48 Mt.

regulatoryupdate ACTION AREAS Municipalities can undertake many different types of measures or actions to reduce GHG emissions. In general, these measures can be divided into the following categories.

• Municipal Operations: emission reductions related to the improvement in energy efficiency of buildings, fleets and facilities operated directly by a municipality.

• Solid Waste: emission reductions related to capture of landfill gas at landfill sites and from the use and recycling of materials that would otherwise be permanently disposed of.

• Buildings: emission reductions through construction and retrofit of energy-efficient private buildings, implemented through federal, provincial/territorial and/or municipal guidelines, zoning by-laws, energy codes or incentives.

• Transportation and Land-use: emission reductions achieved by reducing private and commercial vehicle trips or vehicle kilometres travelled through urban design and planning initiatives, as well as supportive federal, provincial/territorial and/or municipal regulations such as changes to tax codes or the implementation of user fees.

• Energy Systems: emission reductions achieved through the implementation of privately or publicly owned community energy systems or the acquisition of renewable energy.

CITIES SEE POSITIVE RETURNS

Regina Street Light Retrofit To date, the City of Regina’s corporate greenhouse gas (GHG) emissions have been reduced through a series of operational improvements, including converting street lights to high-pressure sodium vapour in partnership with SaskPower. The street light retrofit resulted in an annual cost savings of $450,000 and a savings of 1.3 million kilowatt-hours. The annual GHG reduction of this measure is 1,053 tonnes.

Greater Sudbury Solar Wall Installation The installation of a 569-square-metre solar wall at a Greater Sudbury Housing Corporation 250-unit high-rise dramatically increases the efficiency of the building’s heating system. The solar wall technology provides a low-cost, high-value option for reducing on-site energy consumption that produces warm air. The City of Greater Sudbury reports that this measure has resulted in an annual cost savings of $23,600 and annual resource savings of 600,555 kilowatt-hours. The annual GHG reduction is 108 tonnes.

Ottawa Alternative Fuel Mix In a City of Ottawa pilot study, public transit buses were fuelled with biodiesel as part of the city’s efforts to cut GHG emissions and to reduce dependence on non-renewable fossil fuels. The city used a 5–20% biofuel (soya) mix with regular fuels, thus reducing emissions of hydrocarbons, carbon monoxide and particulate matter. The City of Ottawa reports that this measure has resulted in annual resource savings of 3.5 million litres of diesel and an annual GHG reduction of 8,936 tonnes.

Toronto Energy Retrofit Programs Under numerous City of Toronto programs, energy retrofits have been carried out in more than 500 municipally owned buildings. The improvements include: updating lighting systems; installing heat recovery systems; reducing drafts and leaks around windows, walls, and doors; installing deep lake cooling systems; and upgrading heating, ventilation, and air conditioning systems. Combined with other initiatives such as greening the City fleet, switching 2,000 traffic signals to LEDs and powering City Hall with renewable energy, these programs have resulted in annual cost savings of approximately $19 million per year, and an associated annual greenhouse gas reduction of 692,000 tonnes.

Landfill gas recovery is of particular interest because it can offer substantial emission reductions. It is estimated that 47 landfill gas recovery projects were active in Canada in 2006. These projects alone captured more than 0.3 Mt of landfill methane, with about half of the methane being flared and the other half being used for heating and electricity applications. This activity contributed more than 6.43 Mt of GHG emission reductions in 2005 and represents a reduction of 1.62 Mt compared to 1999 levels.

Given that there are more than 800 active landfills in Canada and at least 100 major landfills, the potential to implement more projects is large, although many smaller landfills do not generate enough methane for recovery to be economically feasible. It is estimated that the capital investment costs for landfill gas capture and utilization projects in Canada will cost between $250 and $400 million in order to achieve an additional 6.5 Mt of reductions annually. zz The complete report can be found at www.fcm.ca// CMFiles/FCM_Climate_En_ Final1RSG-1272009-2598.pdf Canadian Property Management | January/February 2010 17

regulatoryupdate

Ontario’s Smart Meter Schedule Unfolds Slowly Rental Housing Conversions Approved with Conditions

By Barbara Carss Electrical sub-metering is emerging from limbo in Ontario with the introduction of legislation that clears the way for the provincial government to mandate the technology in new residential buildings and sets out a process to gain approval for installations in existing buildings.

However, rental industry advocates predict it will take some time to convert existing buildings because submetering is likely to be implemented only as a unit turns over.

“The legislation says you can convert sitting tenants if they consent and if you meet a set of yet unknown rules for rent reductions and other standards, but, realistically, sitting tenants are not likely to consent and certainly high energy users will never consent,” suggests Vince Brescia, President and CEO of the Federation of Rental-housing Providers of Ontario (FRPO). “So we expect the process is going to be very, very slow, costly and inefficient.”

The proposed Energy Consumer Protection Act, which was introduced in the Ontario legislature in early December, is two-fold legislation that also establishes new rules for the marketing, confirmation, cancellation and renewals of energy contracts. The rental housing industry in particular had been anticipating the legislation since the summer of 2009 when the Ontario government pledged to address the sub-metering issue.

The Ontario government is aiming to have smart meters to measure 18 January/February 2010 | Canadian Property Management

electricity consumption at the time of use installed in all households in the province by the end of 2010, but contradictory policies and conflicting points in law sidetracked that goal last year. Notably, the Ontario Energy Board’s (OEB) Compliance Officer issued a bulletin in March 2009 to affirm that the installation of submeters in residential complexes other than condominiums was not authorized by the Electricity Act. This effectively halted sub-metering installations while the OEB conducted a proceeding into the matter. In August 2009, the Board released a decision that allowed sub-metering, in conjunction with conditions to ensure that tenants agree and that licensed sub-meter providers conduct all installations, but stressed that the ruling was an interim measure until the provincial government could pass explicit enabling legislation.

“It is the Board’s view that, during the period between now and the time the government is able to put in place its comprehensive legislative package, the public interest requires that some measure of regulatory guidance is given,” the OEB decision stated.

CLARIFICATIONS & NEW OBLIGATIONS Varying interpretations of Ontario’s controls on rent increases for sitting tenants have also complicated the issue. When electricity is defined as a component of rent, the rate that is charged for it arguably cannot vary from month to month.

regulatoryupdate The new Act will establish a process for calculating a rent reduction if/when a sitting tenant agrees to sub-metering.

Energy costs would subsequently be defined separately from rent.

“Having the new legislation clarify that you can have a separate charge for electricity is a positive and necessary change,” Brescia says. “Also, it’s important that the legislation clarifies that electricity is a not a vital service.

Otherwise, the metering company would never be able to enforce payment by the customer.”

Although many of the details are still to be defined in the yet-to-be released Regulations, the Act indicates that rental housing landlords will be required to meet energy efficiency standards for appliances and suites.

Landlords attempting to rent out submetered units will also have to provide prospective tenants with historical d a t a a b o u t t h e s u i t e ’s e n e r g y consumption.

Energy management experts note that such information doesn’t provide an accurate reading of expected costs since past occupants of the unit may have consumed electricity disproportionately to the norm.

Moreover, rental housing owners and managers face logistical obstacles to supply the data.

“Landlords don’t have this information and we don’t know as yet how the government is going to ensure that we get it. It’s more administrative costs for dubious benefits,” Brescia asserts. “Ontario will be the only jurisdiction in the world that I am aware of that has such a requirement.

Tenants have rented individually metered suites for decades without this ever being required.”

heard stories from constituents, friends and family members who felt pressured, confused or misled,” the then Energy and Infrastructure Minister, Gerry Phillips, said as he introduced the Act in the Ontario legislature. “Each week, the Ontario Energy Board, or OEB, logs between 100 and 150 consumer complaints about the practices of energy retailers.”

Nevertheless, commercial consumers will receive no added protection even though unauthorized contracts and automatic contract renewal without

notification are also issues of concern in the sector.

“This legislation only applies to lowvolume consumers, meaning homeowners,” observes Mike McGee, President of the energy management consulting firm, Energy Profiles Ltd. “The business owner is still fully exposed to the risks and abuses of the electricity and gas retailers.” zz For more information see www.mei.gov.on.ca/ en/energy/ecpa/

COMMERCIAL SECTOR EXCLUDED FROM PROTECTIONS Meanwhile, the consumer protection elements of the proposed legislation stipulate that only text-based energy contracts containing the signature of the utility account holder for the household will be valid.

Consumers will be given three possible cancellation alternatives, while excessive cancellation fees and automatic renewals of contracts will be prohibited.

“The sale of fixed-rate energy contracts has been a business in Ontario since 1997 for natural gas, and on the electricity side since 2002. The companies offer something that a number of consumers choose, but we’ve all Canadian Property Management | January/February 2010 19

legal

Credit Crunch Spurs Mortgage Loan Sales Due Diligence Secures Deep Discounts on Distressed Properties

By James Papadimitriou and Thomas Von Hahn With the rapidly changing environment in the mortgage loan industry since the advent of the credit crunch, the sale of mortgage loans in the secondary market is increasingly becoming a source of liquidity. This is particularly the case due to the demise of the commercial mortgage backed security (CMBS) market.

20 January/February 2010 | Canadian Property Management

Buyers of single mortgages and portfolios in Canada should consider some key issues. Numerous permutations and combinations of the following issues may well arise in the upcoming months as the market continues to adjust to the new economic situation.

REGULATORY MATTERS If the value of the portfolio being acquired exceeds thresholds applicable to the value of the mortgages and the size of the parties, Competition Act approval may be required.

Exceptions may apply if, for example, the transaction is structured as individual mortgages being purchased at the option of the buyer from time to time, or if the

legal

transaction is structured to involve only a partial interest in a pool of mortgages, thereby perhaps qualifying for a securitization exemption.

As a threshold consideration, the federal laws on foreign banks carrying on business in Canada should be reviewed. Often foreign banks that simply hold such mortgages may be exempt from registration requirements.

Further, mortgage broker legislation of the various provinces and territories may apply to parties to the transaction and compliance with such laws should be considered.

DUE DILIGENCE As in most transactions, the extent of the required due diligence depends on the particular circumstances of the deal. For example, the due diligence to be performed

may be more extensive if an entire loan or a distressed loan is being purchased as opposed to the due diligence to be performed if a participation or partial interest is being purchased, especially if the seller retains an interest and provides representations and warranties as to the assets being acquired.

The scope of due diligence will usually include a review of the loan documents with a focus on the commercial terms and the more important provisions such as prepayment rights, due-on-sale, due-onencumbrance, prohibition on subordinate security, limited recourse clauses, crossdefaults and assignability by lender.

Typically, a review of title insurance or title opinions is undertaken. If a lender’s policy of title insurance was originally obtained, a new assignment endorsement in favour of the buyer as well as a “date down” of the existing policy should be considered.

Often, initial due diligence will also involve a sub-search of title to confirm ownership, priority, subsequent mortgages or construction liens, assignments of mortgage, partial discharges and registered renewals or amendments. Personal property searches to confirm the continued effectiveness of prior registrations and any required amendments and renewals as well as bankruptcy, execution and realty tax searches are normally undertaken.

The buyer will also confirm the financial strength of the borrower and other usual underwriting such as a review of leases, operating and management agreements, insurance coverage, repair and other reserves, and rights to future advances.

If a single large loan in default is being acquired, the due diligence involved will likely be extensive and require a complete underwriting of the property secured by the loan. It is likely that the loan will not be repaid in full if the reason for the default is that the underlying cash flow does not support the debt payments. The value of such a loan in default is not a function of the outstanding balance, but rather depends on the likely proceeds from enforcement after deducting all costs and factoring in the risks of delay and frustration inherent in the enforcement process.

As well as performing due diligence on the loan documents and re-underwriting the property subject to a loan, the purchase of a non-performing loan would usually require a review of the actions taken by the lender and the borrower prior to and during the period the loan has been in default. Any actions that will provide a valid defence to enforcement are, of

course, extremely important. Any waivers, amendments or correspondence would need to be carefully reviewed.

Another important factor in determining the extent of due diligence is the time afforded for the task. If the seller has a need to sell without delay, due diligence may be shortened and to an extent may result in a lower purchase price to account for the additional risk taken by the buyer. In addition, a more complete set of representations and warranties may be required from the seller.

REPRESENTATIONS AND WARRANTIES Often the most heavily negotiated provisions of the mortgage purchase agreement are the representations and warranties of the seller. A more complete set may be expected when a seller is selling a participation or partial interest in which it remains as co-owner as opposed to an outright sale of the entire interest of the loan.

Typically, on the sale of a distressed portfolio, the representations and warranties will be minimal as these sales are often conducted on an “as-is, where-is” basis given the deep discounts associated with distress sales.

Besides the usual corporate authority representations and warranties, a buyer will typically seek representations and warranties from the seller that: a) the purchased assets are owned beneficially and of record by the seller, free of any liens or encumbrances; b) seller is not aware of any litigation that might adversely affect the assets; c) there are no restrictions on sale or assignability; d) complete copies of the loan and security documents have been delivered; e) the security has been validly perfected and has not been amended, waived or released; f) there are no cross-defaults or crosscollateralization; g) the loans are full recourse, the outstanding balance at time of closing; and h) the seller is not a non-resident of Canada for purposes of the Income Tax Act. As additional representations, particularly for performing loans, a buyer may seek comfort that: a) t here have been no defaults during a certain period of time prior to the sale; b) t he seller performed customary due diligence on origination;

Canadian Property Management | January/February 2010 21

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“If a single large loan in default is being acquired, the due diligence involved will likely be extensive.” c) a ll the conditions precedent on origination were fulfilled; d) there are no rights of set-off; and e) all applicable laws relating to usury, antiterrorism, anti-money laundering or similar “know your customer” legislation have been complied with.

Only representations and warranties that are provided by an entity with a strong covenant and that survive closing for a reasonable period are of value.

Typically, survival periods run anywhere from one year to the life of the loans purchased, subject to any limits on survival periods imposed by law. Buyers will often require that the seller agree to repurchase the mortgage if there was a material breach by the seller of representation and warranty with respect to that mortgage or if the mortgage security becomes unperfected.

If a co-ownership interest is sold, the agreement will usually contemplate the

22 January/February 2010 | Canadian Property Management

administration of the loans by the seller or existing servicer and restrictions on each co-owner’s ability to sell without the other co-owner’s consent (often including rights of first refusal and tag-along rights) and arrangements to deal with the resignation of the seller as servicer. A default under a distressed loan may trigger the requirement that the loan be serviced by the special servicer instead of the master servicer which may result in higher servicing fees, which should be taken into account when pricing the transaction.

Closing and post-closing adjustments are also of importance and often tie into the representations and warranties. For example, consideration of the status of accounts with tenants on properties where the loan is in default can be important as the sums at risk can be substantial and tenants will require recognition of these accounts from the ultimate owner of the property.

PURCHASE OF SUBORDINATE DEBT If mezzanine or other junior debt is being purchased, a review of intercreditor rights is required. For example, the purchaser of a mezzanine loan would want to ensure that default under the mezzanine loan would not trigger a default under the senior loan to allow the subordinate lender an appropriate period in which to deal with defaults or exercise remedies.

The subordinate debt buyer would also want to confirm that a cash sweep is not triggered under the senior loan that would deprive the subordinate lender of any available cash flow to service the mezzanine debt. A separate acknowledgment from the senior lender should be obtained to ensure that the senior loan is not already in default.

Standstill provisions should also be carefully considered as they may negatively impact the distressed loan buyer’s ability to recover losses in a timely fashion. zz James Papadimitriou and Thomas Von Hahn practice with Blake, Cassel & Graydon LLP’s Real Estate Group. The preceding article is reprinted from the Blakes Real Estate Bulletin, November 2009. For more information see the web site at www.blakes.com.

interiorproducts

Qualified Coverage Improper Can Care Nullify Carpet Warranties

By Robert Kravitz When purchasing any product or service for their buildings, astute property managers examine a number of factors including the item’s warranty.

When it comes to carpet, they should be aware that there is big difference from the warranties for items like computers or copiers.

With many office products, the manufacturer will likely fix or replace the machine per the warranty’s terms provided the item is not abused or misused. That is not so true of carpeting. There are numerous variables – including how the building is used, where the carpet is installed, how it was installed, the type of matting (cushion) installed, and how the carpet is cleaned – that can influence whether the manufacturer will fix or replace the carpet.

Property managers should read the fine print when it comes to selecting carpets for their facilities and make sure that they are fully aware of how the warranty works, what it covers and does not cover, and what the manager (or property owner) is expected to do to protect the warranty.

Given the investment that carpets in a large facility can represent, reviewing and understanding these details is well worth the time.

PURCHASERS’ MISINTERPRETATIONS One of the most common complaints involving carpet has nothing to do with the carpet itself, although the manufacturer is often the recipient of the blame. Improper installation is an issue to be discussed with the retailer or installer.

24 January/February 2010 | Canadian Property Management

The Carpet and Rug Institute has developed standards and criteria for carpet installation such as the CRI 105 S t a n d a rd f o r I n s t a l l a t i o n o f C o m m e rc i a l C a r p e t . P r o p e r t y / facilities managers should make sure that the retailer/installer is familiar with this standard and that the carpet will be installed per its criteria.

Installation issues typically occur more frequently with carpets installed in new homes, where the developer may be more interested in the speed than the method of installation.

However, problems in commercial installations are common as well.

Wears and stains on the carpet are among other complaints that can be misinterpreted by readers of the carpet warranty. Some observers assume that wear relates to changes in the carpet’s appearance, especially in heavily trafficked areas, and will complain to the manufacturer or retailer that the carpet is not holding up as well or as long as expected.

In fact, the wear warranty usually refers to a loss of carpet fibres. This may or may not affect the appearance of the carpet.

Most stain warranties cover common stains that result from food and beverages, whereas carpet manufacturers report that consumers file complaints regarding a variety of unusual stains, from oil to bleach, assuming the manufacturer should intervene when these stains cannot be removed. No matter what the stain, many manufacturers now require that a certified carpet cleaner from the Institute of Inspection, Cleaning and Restoration Certification (IICRC) be brought in to identify the stain and see if it can be removed using proper stain removal products and techniques.

CERTIFICATION PROVIDES CONFIDENCE Proper cleaning procedures can have a great impact on whether a

CARPET PURCHASING AND CARE TIPS

• Do not base a carpet purchase decision solely on the warranty. It is important to fully understand what is covered.

• Select an installer who knows and follows the installation procedures outlined by the Carpet and Rug Institute for Installation of Commercial Carpet.

• Keep a small sample of the original uninstalled carpet. Should there be a problem, this unused piece can be evaluated to see if the manufacturer is at fault.

• Carpet cleaning equipment should bear the Seal of Approval logo. Gold certification, means the machine meets the highest standards and criteria.

• References to carpet wear do not relate to the appearance of the carpet. They refer to the loss or breakdown of carpet fibres – which tends to be more of a concern with wool carpets. Carpet fibre breakdown may not affect the appearance of the carpet.

interiorproducts manufacturer or retailer will support its warranty. Many manufacturers formalized these concerns effective January 1, 2007.

“The [cleaning] equipment must be certified by CRI’s Seal of Approval (SOA) Program,” says Nick Wiebe, Marketing Manager for U.S. Products, a manufacturer of portable carpet cleaning equipment and related products. “Almost all of the big carpet manufacturers (Shaw, Mohawk, and

others) announced that after that date warranties will be tied to the types of products and equipment used to clean the carpets.”

The SOA program evaluates equipment such as hot water extractors based on how well they remove soil and moisture from carpets. It also appraises appearance retention, which ensures the machine does not harm the carpet fibres.

“It’s a fairly stringent testing

process, and if a machine qualifies it earns one of three certificates,” Wiebe adds. “These are Gold, Silver and Bronze, with the Gold certificate being the most coveted, indicating the machine meets the highest standards.”

By 2008, at least one carpet mill manufacturer took this a step further by requiring that all carpet cleaning work be performed by companies or carpet cleaning technicians holding IICRC certification. This requires carpet cleaning technicians to attend a two-day program covering everything from the history of carpets and the different types of fibres to stain removal and actual cleaning techniques. They must then pass a test, which allows them to market themselves as IICRC-certified.

“Many professional carpet cleaners believe this certification is important to them as well as the [carpet cleaning] industry,” Wiebe asserts.

“For managers, selecting an IICRC carpet cleaner along with using SOAcertified carpet cleaning equipment d o e s o ff e r s o m e m u c h n e e d e d assurance that carpets will be cleaned properly and that the carpet’s warranty will be protected.”

Many carpet manufacturers have now made changes to their warranties, clarifying what is covered and what can impact coverage, in an attempt to avoid misunderstandings and expensive warranty-related problems.

It typical warranty might state: The warranty does not cover tears, burns, pulls, cuts or damage due to excessive pivoting; or other damage due to improper use, the application of improper cleaning agents or maintenance methods, or carpet installed on stairs. The warranty does not cover or imply protection against matting, pilling, colour change, or other characteristics of aesthetics or appearance retention.

“Property managers must read the warranty, ask questions and make sure they fully understand coverage,” Wiebe advises. zz Rober t Kravitz is a former building service contractor, author of two books on the professional cleaning industry and a frequent writer for the industry. He may be reached at info@alturasolutions.com.

26 January/February 2010 | Canadian Property Management

legal

Contractual Interpretation Conforms with Business Sense Court Costs a Reprisal for Commercial Absurdity

By Lisa A. Borsook and Benjamin H. Wong A recent court decision should give tenants cause to reflect before pursuing a contentious course of action and relying solely on their lease. Calloway REIT Inc. v. Michaels of Canada, ULC suggests that the courts are unafraid to use the tools of contractual interpretation to arrive at a result that makes sense and ensures a fair result. In this case, the Ontario Superior Court of Justice and Court of Appeal clearly held no sympathy for a tenant seeking to completely avoid its obligation to pay rent nearly 18 months after taking possession and operating on the premises.

The parties entered into a shopping centre lease on December 19, 2005, and the tenant, Michaels of Canada, ULC, took possession of the premises and opened for business on July 5, 2007, but did not pay rent. Calloway R E I T ( We s t g a t e ) , t h e l a n d l o r d , commenced this action on November 21, 2008, as a result of the tenant’s continuous refusal to pay rent.

The lease provided that rent accrued from the rental commencement date, which could not occur until the landlord fulfilled its construction obligations in accordance with the completion date. The tenant took the position that this meant all buildings in the shopping centre had to be constructed before rent was owed. In November 2008, the shopping centre was 90% complete.

At first instance, the application judge engaged in a factual analysis to determine 28 January/February 2010 | Canadian Property Management

the “general context that gave birth to the document” and concluded that the interpretation argued by the tenant did not accord with good business sense for several reasons. The tenant was aware that the shopping centre was proceeding as a phased development project.

Moreover, under the lease, Wal-Mart was the only tenant that was required to be open for business as a condition of the tenant’s obligation to pay rent.

The tenant had negotiated nine previous leases within phased development projects that contained the same provisions, and in those instances had commenced paying rent for those premises well before all of the buildings in those shopping centres were fully built out. The judge also found internal inconsistencies within the lease that favoured the landlord’s interpretation that the shopping centre need not be fully constructed to trigger the tenant’s rental obligations.

The application judge then highlighted the practical effect of the tenant’s position that, if allowed, would permit it to “occupy the Premises, rent-free, until the Shopping Centre is fully completed, despite itself being fully operational . . .”

In a unanimous decision, the Court of Appeal dismissed the appeal and ordered costs against the tenant. Unlike the lower court, the Court of Appeal resolved the issues on appeal using contract interpretation principles alone.

The Court of Appeal accepted the application judge’s finding of internal inconsistencies within the lease and invoked the doctrine of latent ambiguity – which requires that an interpretation of an agreement must accord with good business sense and avoid commercial absurdity – to put the matter at an end.

The ambiguity is latent because it is usually not obvious on the face of the document and only arises when there is conflict with the evolving factual circumstances. In applying the doctrine, the Court of Appeal determined that it was not commercially reasonable to interpret the completion date and rental commencement date in such a way that would allow the tenant to take possession, carry on business, and avail itself of the common elements and other services of the landlord, but not pay rent.

The Court of Appeal went on to conclude that the tenant’s conduct in the circumstances effectively waived strict compliance by the landlord with its construction obligations as a condition triggering the tenant’s rent obligations. zz Lisa A. Borsook is the Managing Partner and Benjamin H. Wong is an Associate at WeirFoulds LLP in Toronto. For more information, see the web site at www. weirfoulds.com.

CASE STUDY: SCOTIABANK REAL ESTATE

Scotiabank Real Estate Is Cashing In On Energy Saving Opportunities!

Scotiabank Real Estate is one of the many companies in Toronto’s downtown core cashing in on energy saving opportunities.

THE SCOTIA PLAZA, located at 40 King Street West, underwent a major lighting retrofit that allowed Scotiabank Real Estate to reduce its environmental footprint through energy conservation, while reaping significant cost savings. The BOMA Toronto Conservation and Demand Management (CDM) Program offers incentives of up to 40 percent of eligible capital costs.

“The grant from BOMA played heavily into our ability to make a business case for the energy savings program,” said Darren Da Silva, Director of Asset Management, Real Estate for the Bank of Nova Scotia.

Scotiabank Real Estate was able to target numerous areas of its offices and branches for lighting retrofits. Lighting fixtures in the office, hallways, elevator lobbies, custodian rooms and lobbies were all upgraded. Through the replacement of lamps and ballasts to higher efficiency components, Scotiabank Real Estate has managed to save, on a national basis, 2,434 KW or 4,367 tons of GHGs annually. Lighting retrofits are extremely attractive for buildings

with long operational hours.

Funded by the Ontario Power Authority, the BOMA CDM Program is providing building owners and managers with competitive financial rewards for undertaking positive energy conservation projects in their buildings. The Program has expanded to include commercial tenants, as well as providing incentives for an assessment of potential projects to be carried out. This allows commercial tenants to proactively search out energy conservation projects, without having to act with their building as a whole.

“Exciting news for 2010 is the expansion of the program to include the doubling of incentives for all non-lighting projects. This will contribute to further energy savings for the province” said, BOMA CDM Director R. Wayne Proulx.

The BOMA Toronto CDM Program is available to properties 25,000 square feet or greater in the 416 telephone exchange area. CDM Program incentives are for peak demand, electricity consumption or cooling

ton reduction at a rate of $800 per kilowatt, $0.10 per kilowatt-hour ($400 per kilowatt and $0.05 per kilowatt-hour for lighting projects) or $250 per ton for geothermal cooling projects.

For further information, call 416-440-0101 or visit www.bomacdm.com.

Lower your electricity bills.

We’ll pay you to do it.

Update your facilities, lower your energy costs and reduce your environmental footprint.

The BOMA Toronto Conservation and Demand Management (CDM) Program is offering $60 million in incentives to commercial, industrial, retail and hospitality owners and tenants to reduce electricity use in the City of Toronto. Qualified system retrofits include: lighting, metering, motors, air conditioning, windows, insulation, control systems and many others.

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Simple Application Process Quick Project Approval Rapid Incentive Payments

How to begin? $5,500 is currently available to help you assess your energy cost saving potential and submit your funding application.

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Advertising Feature 22/09/09 12:27 PM

interiorproducts

Removal is Only Option for Toxic Drywall Material Suspected Throughout BC, Prairies and Toronto Area

By Camille Atrache The U.S. Center for Disease Control and Prevention cautions that prolonged exposure to compounds found in the drywall – particularly, high levels of carbon disulphide – can cause chest pains, affect the nervous system and even result in death.

The majority of complaints thus far have arisen in southern U.S. states where a warm, humid climate encourages the emission of sulphur fumes. In dryer, cooler climates, it may be years before people begin to see the health and safety risks associated with this material.

The controversy surrounding Chinese drywall relates to products brought into the United States between 2001 and 2007. These also made there way into Canada, with as much as 929,000 square metres arriving in Vancouver and then primarily used in construction in the Lower Mainland of British Columbia.

However, evidence indicates that the contaminated material was also distributed in the Prairie provinces and the Greater Toronto Area.

It has been estimated that as few as three sheets of compromised drywall in a 1,500-square-foot space can be enough to contaminate it to the point of making it uninhabitable. As the sulphur in the drywall off-gases it produces a noxious odour, which does not dissipate. It also creates a corrosive atmosphere – reportedly corroding metals and causing Defective drywall imported from China has been found to emit hydrogen sulphide and other toxic gases that migrate into the indoor air, especially when exposed to humidity. The issue is of growing concern as these sulphide gases are alleged to cause serious health conditions and illnesses, such as breathing problems, dizziness, headaches, bloody nose, fatigue, insomnia and eye irritations.

30 January/February 2010 | Canadian Property Management

POSSIBLE INDICATIONS OF TOXIC DRYWALL

• Foul, sulphurous rotten egg odour coming from walls.

• Continuous, inexplicable failures of air conditioning coils, HVAC units or appliances beyond anything normal.

• Black corrosion in electrical wiring in the walls • Metal in contact with relatively new drywall is corroding quickly.

• Severe upper respiratory problems, nose bleeds, headaches or other potentially serious medical conditions.

• Drywall is newer than 2001.

interiorproducts significant damage to HVAC systems, metal plumbing components, electrical wiring, light bulbs and fixtures, smoke detectors and other appliances.

When compared to North American manufactured counterparts, Chinese drywall has been shown to contain higher levels of sulphuric and organic compounds, as well as traces of strontium sulphide. Strontium sulphide is a grey powder that reacts with acids to emit hydrogen sulphide gas or a rotten egg odour when exposed to moist air.

Chinese drywall has also been found to contain higher levels of hydrogen sulphide, carbonyl sulphide and carbon disulphide than American-made drywall. All of these compounds are potentially toxic, and carbon disulphide in liquid form is extremely flammable.

Although there is no definitive explanation, the contaminated drywall’s composition offers the best clue why it emits sulphur fumes. Drywall is made with fly ash – a waste product generated in the combustion of coal – which is then reformulated into calcium sulphate or gypsum.

In North America, drywall is also made from fly ash, but the material is taken from the smokestack where it is scrubbed, resulting in a cleaner product. In China, the fly ash may be obtained before it makes its way to the smokestack. This creates a less refined product.

Properties built or renovated with contaminated drywall cannot be repaired. Unlike airborne hazardous materials, such as lead-based paint and asbestos, phosphogypsum-based drywall cannot be sealed with a coat of paint.

The only possible remediation is to gut the entire space and then rebuild the interior – obviously requiring the displacement of building occupants for several weeks. Anything within the space that may have been contaminated by the sulphide gases will also have to be destroyed and replaced. zz

“In dryer, cooler climates, it may be years before people begin to see the health and safety risks associated with this material.”

Camille Atrache is Chief Operating Officer and partner at Tri-Phase Environmental Inc. For more information, see the web site at www.pcbdisposal.com. The preceding a r t i c l e i s re p r i n t e d f ro m B u i l d i n g Strategies, October/November 2009.

Canadian Property Management | January/February 2010 31

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