The recent Toronto Superior Court decision in Beatty v. Wei provides some insight into the law relating to misrepresentations in real estate transactions. This column will explain the decision and its potential impact on buyers and sellers.
In this case a buyer purchased a residential property. The Agreement of Purchase and Sale contained a clause in which the Seller represented and warranted that during the time that it owned the property, no part of the property had been used for the growth or manufacture of any illegal substances. The clause also stated that to the best of the seller’s knowledge and belief, the property had never been used for this purpose.
The clause went on to state that the seller’s warranty would survive the closing. This is a common clause and I have seen it in many Agreements.
After the date that the Agreement was signed and prior to closing, the buyer’s realtor discovered via an internet search that the property had been used to grow marijuana prior to when the seller had purchased the property.
The buyer was advised of this and refused to close the transaction. The court had to decide whether the buyer was justified in refusing to close or whether the buyer breached the Agreement resulting in forfeiture of the buyer’s deposit and liability for damages.
Agreements of Purchase and Sale contain both warranties and representations.
A warranty is a legal promise. Representations are statements of fact which may be relied upon by a buyer and may induce a buyer to enter into a contract. The seller’s position was that the statements made were true when made and that they had no knowledge that the property was used for the growth of marijuana when the Agreement was signed. They also argued that the clause did not place a duty on the seller to determine whether the property had ever been used to grow or manufacture illegal substances. The buyer’s position was that the clause was intended to protect the buyer and that because the buyer discovered that the property had been used to grow or manufacture illegal substances, the representation became a misrepresentation.
In its decision, the court determined that the clause in question was both a warranty and a representation. The court stated that when the seller learned that the representation was not true, it became a misrepresentation and that the misrepresentation induced the buyer to enter into the contract.
The court found in favour of the buyer who was entitled to rescind the contract and receive the return of its deposit. Thus, the case stands for the proposition that if a representation is untrue at the time of closing, regardless of whether it was true at the time it was made, and if a buyer relied on the representation to enter into the contract, the buyer may terminate the contract and receive its deposit back.
This decision appears to go against the long standing belief that a buyer cannot rescind an Agreement where the seller has breached a warranty or representation. Prior to this decision, the belief was that a buyer would have to close and then sue the seller for breach of the warranty or representation. That law may no longer appear to be the law.
In my view, this case highlights that a seller must be very careful in providing representations or warranties to a buyer in an Agreement of Purchase and Sale. If the buyer can prove that a representation which turns out to be false, induced the buyer to buy the property, the buyer may be entitled to back out of the transaction. With specific reference to illegal substances clauses, a seller should not provide any representations or warranties or if they are prepared to provide them, the seller should conduct appropriate research on the property to verify that they are true.
It will be interesting to see if this decision is appealed to the Toronto Court of Appeal.