Real Estate Transactions and Misrepresentations: When Can a Purchaser Back Out of the Deal?

Written by litigator and mediator Irvin Schein and originally published at irvinschein.com.

In the recent Superior Court decision in Beatty v. Wei, the Court provided a helpful overview of the law relating to misrepresentations in real estate transactions.

This case involved the sale of a residential property. The sale agreement included a clause in which the seller represented and warranted that during the time the seller owned the property, no part of the property had been used for the growth or manufacture of any illegal substances. The clause went on to say that to best of the seller’s knowledge and belief, the property had never been used for that purpose.  Finally, the clause provided that the warranty would survive closing.

Between the date that the sale agreement was signed and the date set for closing, the purchaser’s real estate agent conducted an internet search and discovered that the property had been used to grow marijuana plants before the seller had purchased the property.

The purchaser refused to close and the matter came before the Court.

The Judge examined the clause closely and noted that it contained both a warranty and a representation. A warranty is a contractual promise that the thing being sold has some particular quality. This clause did not provide any promise that the property had never been used for the growth of illegal substances. The seller only warranted that he had never used it for that purpose and that he had no knowledge that the property ever had been used for that purpose. The Court accepted that this promise on the part of the seller had been honoured.

However, the clause also contained a representation to the same effect. The representation was that to the best of the seller’s knowledge, the property had never been used to grow illegal substances. The Court interpreted that representation as a statement of a present fact that was intended to be relied upon by the purchaser when it was made by the seller, and upon which the purchaser could continue to rely at least until the closing date.

Where a representation is made in the belief that it is true and the party who makes it discovers before closing that it is untrue, that party cannot remain silent. In other words, had the seller found out through his own sources of information, at any time prior to closing, that the property had indeed been used to grow marijuana plants, the seller would have had an obligation to report that to the purchaser.

In this case, the seller did discover this information before closing. The source of the information was the purchaser himself. In the Court’s view, this did not make a difference. The fact is that at some point prior to closing, the seller did discover that the representation contained in the agreement of purchase and sale was untrue. As a result, as at the closing date, the clause was deemed to contain a misrepresentation.

Where a misrepresentation in a contract is material and induces a party to enter into a contract, the innocent party may rescind the transaction prior to closing. The term “material” means that the misrepresentation must be substantial, or go to the root of the contract itself.

In this case the Court was persuaded that the representation was material to this purchaser and in general. After the deal collapsed, the property was resold at a purchase price almost $100,000.00 less, under an agreement in which the previous use of the property was fully disclosed. The Court saw this reduced price as evidence of the materiality of the issue.

It is open to a seller to avoid an adverse result by proving, either that the purchaser knew of the true state of affairs at the time the sale agreement was signed, or that the purchaser did not rely on the representation whether he knew the facts or not. The seller was unable to do so in this case.

As a result, the Court found that the purchaser was entitled to walk away from the transaction and recover his deposit.

On a plain reading of the clause, it would have been reasonable to conclude that as long as the seller did not know about the previous use of the property at the time the sale agreement was entered into, and of course as long as the seller himself had not used the property for that purpose, the representation would have been satisfied and information acquired afterwards would not matter. That is not the correct interpretation of the law.  This case makes it clear that a seller’s obligation in this area continues right up until closing.