The Alberta Court of King’s Bench provides clarification on both the interpretation and application of the Occupational Health and Safety Act regarding asbestos as well as the duties of landlords and tenants to carry out their contractual obligations in good faith in its recent decision CNOOC Petroleum North America ULC v 801 Seventh Inc, 2025 ABKB 145.
Background
The Plaintiff, CNOOC Petroleum North America ULC (the “Tenant”), leased the entirety of Nexen Tower, a commercial office building located in downtown Calgary, from the Defendant landlords (the “Landlord”). The Tenant discovered asbestos in the air distribution system of the building and argued that the Landlord had failed to address the issue as required by the lease and by provincial law. The Tenant alleged that it was the Landlord’s obligation to remove all asbestos present in the building. When this was not done, the Tenant purported to terminate the lease and initiated legal action to recover its losses.
The Landlord contended that prior to the discovery of asbestos, the Tenant was already seeking to exit the lease. The Landlord argued that, following the discovery of asbestos in the building, the Tenant exploited the situation to terminate the lease and claim damages. Additionally, the Landlord asserted that the Tenant was incorrect regarding the amount of asbestos present and what the lease and applicable law required of the Landlord in the circumstances. The Landlord counterclaimed for losses resulting from the Tenant’s alleged wrongful termination of the lease and subsequent non-payment of rent.
Each party accused the other of breaching the duty of good faith in its contractual performance during the period between the discovery of asbestos and the lease termination. This case presented the Court with an opportunity to clarify the Alberta regulatory framework with respect to asbestos in existing buildings and the interplay of that framework with the terms of the lease, as well as to explore important issues regarding a party’s duty to perform contractual obligations in good faith.
Decision
The case primarily turned on the interpretation of Alberta’s asbestos legislation, particularly regarding what is required for existing buildings having asbestos-containing material (“ACM”). The Court noted that the level of asbestos in the Nexen Tower was below the maximum limit established by provincial law. Although the Tenant chose to implement a “Safety First” policy to protect its employees, the Court found that the lease did not allow the Tenant to shift the costs of its safety measures to the Landlord.
Regarding the alleged breach of the duty of good faith, the Tenant claimed its actions were motivated by employee safety, while the Landlord argued that the Tenant was primarily focused on using the asbestos discovery to negotiate a favourable lease amendment or to terminate the lease altogether.
The Court determined that there was insufficient evidence to substantiate either party's narrative of the Tenant’s motives on a balance of probabilities. While this finding weakened the Landlord's claim that the Tenant had acted in bad faith, it remained open to the Landlord to allege that the Tenant had breached its duty of cooperation with the Landlord by failing to adhere to its contractual obligations during the four months between the Tenant’s discovery of the asbestos and the Tenant’s ultimatum that the Landlord remove all ACM in the Nexen Tower.
The Court determined that the Tenant had unlawfully terminated the lease and unlawfully ceased paying rent as was required under the Lease. It also decided that the Tenant had failed to prove that the Landlord was unjustly enriched by the amount of the Tenant’s rent payments made subsequent to the discovery of the asbestos in the air distribution system.
Despite the Landlord's ultimate success, the Court did provide guidance emphasizing the Landlord’s obligation to comply more fully with provincial legislation regarding its management of asbestos within the Nexen Tower.
Key Updates to the Law
One significant update from this decision pertains to the impact of provincial legislation on managing asbestos in existing buildings. After analyzing the relevant law including the Alberta Occupational Health and Safety Act (“OHS Act”) and the Alberta Occupational Health and Safety Code (“OHS Code”), the Court concluded that the regulatory framework prioritizes the management of asbestos, requiring its removal only under specific circumstances:
- Removal may be mandated during imminent disturbances, such as demolition or renovations or alternations, where asbestos fibers may be released;
- ACM must be removed if its presence is deemed unsafe and poses a risk of fiber release;
- ACM should be removed when it is reasonably practicable to do so for purposes of minimizing asbestos exposure, or when it is reasonably achievable to reduce worker-exposures to asbestos by removing it; and
- Buildings must be kept clear of "unnecessary accumulations" of asbestos, requiring ongoing removal regardless of health risk levels.
The preference for management over removal is underscored by stringent safety regulations during removal processes, aimed at protecting workers’ health.
The Court also clarified how the implied duty of good faith may be affected when parties anticipate litigation and seek to protect their legal interests. It outlined four key principles:
- What is entailed by the obligation to have “appropriate regard” for the contract counterparty depends on the context;
- Legal privilege is presumptively paramount to the contractual obligations of acting in good faith;
- A party will not be found in breach of the duty of good faith for acting in its own litigation interests; and
- Being in litigation does not diminish the parties’ obligation of honesty to one another in the performance of the contract (subject only to keeping confidential privileged information).
Being involved in litigation does not permit evasion of contractual commitments in bad faith. However, the delays associated with litigation and the need to consult legal counsel about relevant decisions do not constitute bad faith or a breach of the duty to cooperate.
Finally, the Court examined whether a party, believing it has found a lawful opportunity to exit a contract (an opportunity not orchestrated by them), may still breach the duty of good faith while pursuing that opportunity. Ultimately, it was determined that a party remains bound by the duty to perform the contract in good faith, even when seeking to exit.
Takeaways for Tenants and Landlords
Key Takeaways for Tenants:
Understanding Responsibilities Pertaining to Asbestos: The Court clarified that a landlord is generally not responsible to remove all ACM in existing buildings; often, managing asbestos is an appropriate remedy. Tenants should understand the landlord’s obligations concerning ACM and ensure that any preferences for removal are explicitly included in the lease.
Landlord Compliance with Safety Policies: While the Tenant’s implementation of a “Safety First” policy was noted, the court emphasized that this does not justify the shifting of costs to the Landlord. If a tenant wishes to hold its landlord responsible for the costs of health and safety measures, these responsibilities must be explicitly stated in the lease to ensure contractual compliance and enforceability.
Good Faith Performance: Tenants should recognize that while they are entitled to protect their legal interests and confidential privileged information during potential litigation, they must still discharge their duty of good faith. This means being honest and cooperative in satisfying their contractual obligations, even when a dispute is anticipated. Engaging in litigation does not provide a license to evade contractual commitments or act in bad faith. Furthermore, should a tenant identify a lawful opportunity to exit a contract, they must still pursue that option without compromising their good faith obligations to the landlord.
Key Takeaways for Landlords:
Compliance with Legislation: Landlords must stay informed about and comply with provincial regulations regarding asbestos management, including those contained in the OHS Act and OHS Code. Proactive measures to address hazardous materials can mitigate legal risks and protect tenant relationships.
Good Faith Performance: Landlords should recognize that obligations to act in good faith in respect of the performance of their obligations under leases run both ways, and take proactive steps to address good faith compliance especially when in the shadow of anticipated litigation.
Key Takeaways for Both Landlords and Tenants:
Communication: Landlords and tenants should be cognizant of and prioritize timely and candid communication regarding the performance of lease obligations especially as they pertain to sensitive issues like, as was the case here, asbestos or other environmental contamination or incidents that have the potential to affect the health and safety of persons working in the building. Adopting postures that support and encourage frank communication regarding the problem as well as potential solutions and legitimate concerns for both parties increases the likelihood of achieving practical commercial solutions and mitigates the risk of disputes rising to the level of litigation or arbitration, where positions become hardened and more difficult to resolve.
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