Ghost Tower: Inside the nasty legal battle that’s kept a Calgary skyscraper empty

Open this photo in gallery:

A silver, 37-storey office tower in downtown Calgary has sat devoid of any workers since mid-2019 and is frequently held up as a glaring symbol of the economic slump that has ravaged the city’s commercial real estate market.

At the former headquarters of Nexen Inc., doors at the street level and the second-floor skywalks of what’s known in Calgary as the Plus 15 network are locked. Merchants in the food court have long since closed down. The ground-floor atrium still looks tidy and filled with greenery, but no one is there to enjoy it.

This is more than a story about Calgary’s weak economy, however. Behind the scenes, the tower has been the subject of a nasty legal battle over alleged contamination that has played out for well more than a year. It pits the owners and landlord against the subsidiary of a Chinese state-owned oil company that last occupied it.

CNOOC Petroleum North America ULC vacated the premises last year, claiming it is laced with dangerous concentrations of asbestos and the landlord refused to properly get rid of the carcinogenic material. The company says that constitutes a breach of the lease and seeks damages of $70-million.

The building’s owners, which include Ontario government pension plan OPTrust and a group of prominent Calgary investors, accuse CNOOC of vastly exaggerating the problem so it could break its long-term lease and snap up space in one of the city’s premier office towers at a fraction of the cost. Few punches are pulled in court documents: The owners point to CNOOC’s past oil spills and fatalities in the oil sands as evidence of its own lax approach to safety and say Beijing is pulling the strings.

The case shines a new light on part of the city’s ailing downtown core, where office vacancy rates are now as high as 27 per cent from the effects of a five-year oil industry downturn exacerbated by the COVID-19 pandemic. To be sure, the Nexen building dispute has a sizable impact on the local economic crisis: The tower on the western side of downtown accounts for more than 5 per cent of the 11.5 million square feet of vacant office space in the core as reported by real estate firm CBRE.

“Due to the asbestos contamination, the building is not fit for occupancy as headquarters for a global energy company; it does not meet minimum regulatory standards, let alone the standards of a first-class office tower,” CNOOC says in its statement of claim.

“Contrary to its obligations, the landlord has made it clear it will not fully remove the asbestos. Instead, the landlord seeks to manage the deteriorating asbestos fireproofing in place, minimizing any commercial impact on the landlord by imposing unacceptable health risks onto CNOOC’s employees.”

CNOOC filed suit in May, 2019, after the landlord went to court to seek a judge’s ruling on whether there were grounds to break the lease. More than a year on, the legal to and fro continues. CNOOC submitted an amended claim this past May.

OPTrust and its partners, Centurion Holdings Ltd., Quantico Capital Corp., Westhills Land Corp., Canadian Income Fund Group Inc. and Tokay Capital Corp., have countersued. The partner firms are owned by such local business leaders as oil men Tony Vanden Brink and Kent MacIntyre and real estate investor Joseph Killi.

The group said, as landlord, it responded to CNOOC’s concerns with extensive testing and a plan to address any problems within legal guidelines – that is, spot abatement where needed.

It said the testing revealed the asbestos fibre concentrations, discovered as part of the fireproofing in the 38-year-old tower, are minute and can be dealt with safely without evacuating the building. CNOOC is using the presence of asbestos as an excuse to bail on a lease that had more than a decade remaining after extensive layoffs that left many floors vacant, the owners charge.

“By the fall of 2017, CNOOC found that its premises were much larger than it needed, and that it remained committed to pay rental rates significantly higher than prevailing market rates. CNOOC set about trying to break its lease,” the owner group said in its statement of defence.

CNOOC subsequently subleased space in the Bow, the curvy and swish landmark tower on the other side of downtown that has been the headquarters of Encana Corp. (now known as Ovintiv Inc. and headquartered in Denver) and Cenovus Energy Inc.

Angular and imposing, the 600,000-square-foot Nexen tower was built in 1982 as the corporate base of Nova Corp., the former pipeline and chemical conglomerate. Emblematic of the city’s brash corporate ambitions at the time, the sign at the front entrance once proclaimed it proudly as Nova’s “World Headquarters.” The plaza in front has always been dominated by a silver block-like sculpture called Nova Gate, by the Russian-born artist Kosso Eloul. Nova was acquired by TransCanada Corp., now TC Energy, in 1998.

Oil producer Nexen Inc., which had previously been known as Canadian Occidental Petroleum, leased the building in 2000, and in 2013 Nexen was taken over by CNOOC Ltd. in a controversial US$15.1-billion deal that required approval by Ottawa because the buyer was a Chinese state-owned enterprise. At the time, opponents of prime minister Stephen Harper’s government expressed concern about growing Chinese control over Alberta’s oil sands. To help gain the approval, the company committed to maintaining employment levels.

CNOOC renegotiated the lease that year, when the average rent for top-tier space in Calgary was more than $40 a square foot. It is now less than $25, according to CBRE. CNOOC extended the lease to 2031. According to the landlords, the company had 2,300 employees and contractors working in the building at the time. By 2017, after an oil price collapse and operational difficulties at Nexen’s Long Lake oil sands project in northern Alberta, the number had fallen to about 1,000.

Both sides agree the building has asbestos. Just how much, and what should be done about it, are in dispute.

CNOOC says it discovered the material in the fireproofing that coats the inside of the air distribution system in late 2017. Asbestos fibres, when released into the air in high enough concentrations, have been proven to cause such conditions as asbestosis and mesothelioma. As the fireproofing deteriorated, the contaminated dust collected on the ceiling tiles and wafted down to the work spaces below, presenting “grave danger” to staff, CNOOC said.

By the following July, CNOOC found 500 locations in the building with asbestos-contaminated debris. It said it was forced to vacate entire floors and close scores of offices and meeting rooms on floors that remained open. In its claim, CNOOC said it hired a consultant, Eco Abate, which conducted testing and concluded that the contaminated material was found throughout the building, the fireproofing had degraded in many areas and the tower should be evacuated to be remediated.

The company quoted provincial Occupational Health and Safety (OHS) rules stating that a building is unsafe if asbestos fibres may be released.

Meanwhile, studies by the landlord’s own consultant, WSP Canada, also showed the fireproofing to be in fair to poor condition, and it recommended the materials be removed, CNOOC said.

CNOOC said it kept the landlord apprised of its concerns and by November, 2019, the owners implemented an asbestos management plan that included monitoring the degradation of the fireproofing and remediating any problems in place. But the company deemed the response insufficient and demanded more testing. By May, 2019, CNOOC, blaming the landlord’s intransigence, terminated the lease and vacated the building, it said.

The owners tell a much different story. In its statement of defence, the group says it responded “quickly, diligently, and completely” to CNOOC’s concerns with extensive testing and the development of a comprehensive plan to deal with the problem within the stipulations of the lease agreement and the law.

The landlord sought to work co-operatively with CNOOC but found the company to be “resistant and secretive.” Despite what CNOOC claims, the owner group says its own consultant concluded that the asbestos was contained in a “cementitious, monokote-type” fireproofing product that was unlikely to release fibres. It said the material contained vermiculite from a mine in Libby, Mont., which had 0.1-per-cent asbestos content.

CNOOC threatened to stop paying rent while abatement was taking place, the owners claim. The oil company also said it would calculate how much rent money should be reimbursed while the company was unable to use several floors, according to the counterclaim.

The landlord began a pilot abatement program in the summer of 2018 that successfully rid an area of the building of asbestos, with CNOOC’s consultant, Eco Abate, monitoring the work. OHS reviewed the work and determined that abatement could be done safely in the occupied building, the landlord said.

But the owner group says CNOOC still appeared bent on tearing up its lease, using employee safety as an excuse. In its statement of defence, the group also shot a barb at the company by bringing up two recent incidents when CNOOC’s own commitment to safety was called into question.

In 2019, the company was fined $450,000 in the deaths of two workers in an explosion at its Long Lake oil sands project. A year before, it paid a $750,000 fine after pleading guilty of federal and provincial environmental laws over a 2015 oil spill at Long Lake.

“After experiencing environmental spills and workplace fatalities for which it pleaded guilty to offences and was fined over a million dollars, CNOOC had nonetheless decided to try to avoid its lease obligations on a pretext of ‘safety,‘” they said. “By this action, it seeks to make the court part of that effort. The effort is without merit.”

CNOOC declined to be interviewed for this story. In a statement to The Globe and Mail, the company said it sued its landlord after discovering asbestos during planned renovations. It said the legal action stems from its commitment to provide a safe environment for its staff. “The discovery of hazardous materials presented an unacceptable safety risk to our employees and resulted in management making a safety-first decision to relocate our population to a safer workspace,” the company said.

A major question is how the two sides can have such divergent interpretations of the extensive testing that has been done. Blair Yorke-Slader, lawyer for the owner group, said numerous older buildings in Calgary, including schools, hospitals and office buildings, have been found to contain more asbestos than the Nexen tower and have workable removal processes in place. He uses Foothills Medical Centre, a hospital in the city’s northwest, as an example of a major structure with an active asbestos management plan.

Today, the landlord is trying to attract new tenants, but the glut of vacant office space because of chronic economic weakness, coupled with the pandemic, have made for a dearth of interested parties. Indeed, there are acres of available office space downtown and three other buildings have been reported to be empty. Meanwhile, the owner group is out about $500-million in terms of the present value of the remaining rent on CNOOC’s lease, Mr. Yorke-Slader says.

“It seems to me that when you have a building where you’ve had hundreds, if not thousands, of tests conducted – this might be the most tested building in Alberta – and not a single test has revealed asbestos at a level that would be harmful to human health, then you can make some conclusions from that,” he says.

A court date has yet to be set.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.