Breach of Contract / Litigation / Real Estate Law

Misrepresentation Prompts Court to Rescind Real Estate Agreement

When parties enter into a contract, they generally do so in reliance on certain information. For example, if a business contracts a supplier to provide a certain number of widgets over a certain period of time, there is a representation on the part of the supplier that they have the ability to produce and distribute the widgets in accordance with the terms. If, partway through the term of the contract, the supplier became unable to keep up with demand, or if the quality of the widgets dropped dramatically, the business may have a valid claim against the supplier, who misrepresented their abilities.

Types of Misrepresentation in Ontario Contract Law

Misrepresentation refers to an untrue statement made by one party, which in turn induces another party to enter into a contract with them. It is important to remember that misrepresentation is not always intentional. There are three types of misrepresentation recognized by Ontario courts:

  • Fraudulent misrepresentation – Fraudulent misrepresentation occurs when a party deliberately misleads the other party about details pertaining to the contract.
  • Negligent misrepresentation – Negligent misrepresentation occurs when a party breaches the duty it owes to the other party to ensure its representations are accurate. Failure to perform due diligence or take reasonable care to ensure all representations are accurate could result in a finding of negligent misrepresentation.
  • Innocent misrepresentation – Innocent misrepresentation is any misrepresentation that does not fit within the above two categories.

The remedy for a finding of misrepresentation can vary depending on the circumstances and the type of misrepresentation. For the first two categories above, a claimant can seek damages, rescission of the contract, or both. For innocent misrepresentation, a court is more likely to award damages rather than recession.

Seller and Agent Provide Inaccurate Square Footage Data to Homebuyer

In a recent decision before the Ontario Court of Appeal, a homebuyer had brought a claim seeking recession of an agreement of purchase and sale after discovering a significant discrepancy in the square footage of the home from what had been presented initially. The buyer was relatively young and inexperienced in real estate, and this was the first time he had purchased a property. He was looking for a specific amount of space in order to accommodate himself, along with several members of his family.

His real estate agent showed him a home and told the buyer it was approximately 2100 square feet in size. The real estate had relied upon information provided in a previous listing of the property as well as details provided by the homeowner, however, the agent did not conduct a property measurement exercise. The agent agreed he had been negligent in failing to do this.

The buyer visited the property himself twice and inspected each room. On the second visit, he was accompanied by members of his family as well. He signed an agreement of purchase and sale to purchase the house. However, his financial institution required that he have an appraisal done on the home as a condition of the approval of his mortgage. When the appraisal was completed, the size of the home was assessed at 1450 square feet. Given the significance of the difference, the buyer withdrew from the transaction and brought a claim seeking rescission of the agreement and a return of his $50,000 deposit.

Buyer’s Inspection Did Not Override Representations of the Homeowner and the Agent

The lower court found in favour of the homebuyer and rejected the argument that the buyer’s personal inspection of the home should have been a better determination of his expectations regarding the size of the home than the representations made. The court took the buyer’s age, inexperience with square footage and first-time homebuyer status into account in determining that it was reasonable he had relied on the representations even after seeing the home himself.

The defendant real estate agent appealed the decision, claiming again that once a buyer has inspected a property, the inspection should displace any representations made regarding the size of the home. The Court of Appeal dismissed the appeal, holding that this argument might apply in some cases, whereas in others, such as the case at hand, the constellation of facts would render this finding unfair. The following facts were at the core of the Court’s decision:

  1. The agent and the homeowner had each made explicit claims that the house was 2,000 square feet in size or more. Further, the agent admitted negligence in relying on other sources for this information rather than confirming it for himself.
  2. The discrepancy between the stated and actual size of the home was substantial.
  3. The buyer’s reliance on the claims of the agent and homeowner was confirmed by the fact that he had been ready to close the deal up until the moment he discovered the actual size through the appraisal of the property.
  4. The trial judge was correct to take contextual matters, including the buyer’s age and lack of experience into account in determining the reasonableness of his reliance on the claims made to him.

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