Representations & Warranties in Selling Real Property

When selling a home, the seller and buyer will typically enter into an Agreement of Purchase and Sale (APS); a contract containing the various terms and conditions the parties have agreed to with respect to the transaction. In most cases, the APS will contain certain terms referred to as representations and warranties that the seller will make with respect to the property, for the buyer’s benefit. This can include anything from the fact that the seller will leave the home and property in good condition upon vacating the property, or that certain furnishings or other non-permanent items will be included in the purchase. In recent years, it has become common for the seller to provide a warranty that they have not used the home for the growth of cannabis, as this type of operation can have significant detrimental effects on a home. This is now a standard clause in the standard form of the APS provided by the Ontario Real Estate Association.

At Trial: A Warranty Extends to Closing

However, how far does this type of warranty go? Does it include the time before the seller owned the property? Does the seller’s obligation change if they become aware of a prior use after signing the APS? These questions were addressed by the Ontario Court of Appeal, in the decision Beatty v. Wei. In this case, the parties entered into an agreement for the sale of the home, set to close four months after the agreement was executed. The agreement contained the following clause:

The Seller represents and warrants that during the time the Seller has owned the property, the use of the property and the buildings and structures thereon has not been for the growth or manufacture of any illegal substances, and that to the best of the Seller’s knowledge and belief, the use of the property and the buildings and structures thereon has never been for the growth or manufacture of illegal substances. This warranty shall survive and not merge on the completion of this transaction. [Emphasis added]

After the APS was signed, the Purchaser’s lawyer conducted searches on the property that indicated that, prior to the Seller owning the home, the home had been used as a cannabis grow-op. This was confirmed by Toronto Police Services. Upon learning this, the Purchaser no longer wished to buy the property and instructed their lawyer to inform the Seller that they would not be completing the transaction, and sought the return of their deposit.

The Seller objected, and commenced an action against the Purchaser for breach of contract, seeking a forfeiture of the deposit and damages for any losses due to relisting the home for sale. The Seller, in turn, commenced a counter application seeking a declaration that they were not in breach of the APS and a return of their deposit.

At trial, the court found in favour of the Purchaser and dismissed the Seller’s application. While the judge accepted that the Seller was truthful in that ‘to the best of [their] knowledge and belief”, they had not been aware of the grow-op at the time the APS was signed, they felt that the Seller had also made a warranty that carried through to the date of closing. The court’s logic was that if the Seller had been made aware of the past use of the property through another means after signing the APS, they would have been obligated to inform the Purchaser. Given that, once the Purchaser found out about the past use, the Seller “could no longer honestly give the representation in the Illegal Substances Clause.” Since the Purchaser had been induced into entering the APS at least partly on the basis of the representation, they could not be held to the contract once the representation no longer applied.

Court of Appeal: The Representation Did Not Extend to Closing

On appeal, the ONCA carefully considered the language used in the clause, and found that at the time the parties signed the APS, the Seller had no reason to doubt their statement with respect to the use of the home as a grow-op. While it was vital that the statement was true at the signing of the document, the clause was not intended to continue until the date of closing. The later discovery about the property came after the contract was signed, and did not serve to invalidate the Seller’s warranty at the time it was made. In order for the new information to constitute a breach of the APS, the clause would either have had to specify that it continued to the date of closing, or it the statement would have to have been made a clear condition of closing. Since neither was the case here, the ONCA found in favour of the Seller.

The Wording of a Clause is Key

In any purchase and sale transaction involving real estate, the parties are advised to review the APS with an experienced real estate lawyer before signing, in order to ensure that the items that are important to them are covered off appropriately. The smallest wording choices can have a major impact on how a court will interpret a clause and it could mean the difference between success or defeat in court.

The real estate lawyers at GLG LLP in Toronto assist clients with a full range of residential real estate services, including purchases and salesfinancing and even litigation if necessary. The firm offers exceptional client service as well as a Bay St. experience with more reasonable rates. Call 416-272-7557 or complete the online form to arrange a consultation.