The Latest on Representations and Warranties in Real Estate Contracts

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

In my blog post on June 28, 2017, entitled “Real Estate Transactions and Misrepresentations: When Can a Purchaser Back Out of the Deal?“,  I reviewed the Superior Court decision in Beatty v. Wei. That 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 that the seller owned the property, it had not been used to grow or manufacture any illegal substances. The clause also provided that at the best of the seller’s knowledge and belief, the property had never been used for that purpose by anyone else.

Between the date that the sale agreement was signed and the closing date, the purchaser’s real estate agent discovered that the property had in fact been used to grow marijuana plants before the seller had purchased the property. There was no evidence that the seller had known this before, but everybody now knew this prior to closing.

The purchaser took the position that as at the closing date, the seller’s representation that to the best of his knowledge, the property had never been used for this purpose, was no longer true. As the purchaser felt that this fact devalued the property, he refused to close.

When the issue came to Court, the judge ruled in favour of the purchaser. The judge concluded that the seller’s statement that to the best of his knowledge, the property had never been used to grow illegal substances had to be true not only at the date of the sale agreement, but right up until the closing date. As this was not the case, the purchaser was entitled to back out of the deal.

The seller appealed that decision to the Ontario Court of Appeal.

In a decision released earlier this summer, the Court of Appeal reversed the lower Court judge’s decision and found in favour of the seller. After a discussion about the differences between representations and warranties in real estate contracts, the Court of Appeal focused on the essential issue in this case, which was the effective date of the representation contained in the sale agreement as to the seller’s knowledge about the previous use of the property. In the view of the Court of Appeal, the seller’s representation and warranty that the property had never been used to grow illegal substances referred only to his knowledge and belief as it existed at the date that the sale agreement was signed. There were several reasons for this conclusion.

Firstly, the Court found that this interpretation was more consistent with the plain language in the clause in the sale agreement itself.

Secondly, there was an absence of any language in the clause dealing with the seller’s knowledge at the date of closing, unlike a number of other clauses in the sale agreement.

Accordingly, the Court of Appeal concluded that the representation as to the seller’s knowledge and belief had to be true as of the date of the sale agreement when the representation was made. It did not have to continue to be true up to the date of closing. For the purchaser to have succeeded, he would have had to prove that the seller knew at the time that the sale agreement was entered into that the house had been used for this purpose in the past. There was no evidence to this effect at all.

This case highlights the fact that purchasers must be careful to protect themselves in these circumstances right up until the closing date by insisting that any representations and warranties, relating both to existing facts and to the state of the seller’s knowledge, be true and correct as of the closing date.