What’s Wrong with the “Good Working Order” Clause (Chattels)?
A fairly standard and regular clause that has been used for years in the real estate business is as follows:
The Seller represents and warrants that the chattels and fixtures as included in this Agreement of Purchase and Sale will be in good working order and free from all liens and encumbrances on completion. The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction, but apply only to the state of the property at completion of this transaction.
We will look at this clause in the context of our previous10 year old stove example:
Let’s have a look at this clause, line by line and word by word:
The Seller represents and warrants that
This is confirmation that we have a statement (representation) and a further contractual agreement (warranty). This part of the clause will expose the Seller to both liability in tort for misrepresentation and contract for breach of warranty.
the chattels and fixtures as included in this Agreement of Purchase and Sale
This is a very broad general reference. It is not helpful if we are trying to be specific. It says “chattels” and it also says “fixtures”. Effectively that means ALL chattels and ALL fixtures. That may not have been what was actually intended by the parties, but that is the agreement.
In this case, the stove is a chattel, and it is covered.
will be in good working order and
Here we have a future tense. So, it doesn’t matter what the condition of the stove may have been, at the time of listing, at the time of showing, at the time of the agreement, at the time of the home inspection, or at the time of the agreement firming up.
And, just exactly what does “good working order” really mean?
free from all liens and encumbrances
The stove is to be owned outright and “paid for”, so that it can be conveyed outright to the Buyer. Buyer Bill is to receive good title to the stove from Seller Sam. That means it cannot be a rental and it cannot be subject to a conditional sales contract with ongoing payments.
This statement naturally makes good sense when it comes to chattels because they “don’t go with the house”, they are not part of the real estate.
However, the clause also purports to deal with fixtures. They are part of the real estate and they do go with the house anyways. That means this lien and encumbrance provision does not really apply. I suppose the question might be “what’s the harm…”, but nevertheless, it is not really needed and could run into potential conflict with the similar provisions in the agreement which already deal with liens, and encumbrances. A potential problem would be the assumption of a first mortgage. That mortgage is intended to be assumed not discharged. So, this statement applying to fixtures would be in conflict with the “assumption provision”.
In our example, this transaction closed at 2:15 pm on 31 July. So, the warranty was “in effect” at that time. Note, that the clause does not say “the date of completion”. That added statement would bring the warranty up to midnight, or 11:59:59 pm.
Later we will deal with the matter of “completion time” and it’s uncertainty.
The Parties agree that this representation and warranty
This is simply a statement referencing the contract.
shall survive and not merge on completion of this transaction,
The legal doctrine of merger ends all representations and warranties for executory contracts upon closing. An executory contract is a two step contract, first the agreement and then the closing or delivery sometime in the future.
The effect of this provision is to exclude the application of the doctrine. The warranty is still intended to be in effect and the Buyer should be able to sue upon it for breach afterwards.
If it did merge, then the Buyer would have to inspect the item immediately before closing, confirm that it is in good working order and then complete the transaction. Right after closing, there would be no warranty. The warranty would run up to the closing time, but not continue afterwards.
But apply only to the state of the property at completion of this transaction.
This statement is intended to deal with the “time issue”. It was to be in good working order “on completion”, that means 2:15 pm, or “the date of completion”, meaning 11:59 pm.
This is designed to help the Seller. There is a cap or a “time limit”. The Buyer will have to figure out right away that it is defective.
So, the question here is “how long does the Buyer have to figure this out…”. That’s not clear. The clause doesn’t say. In many cases, the Buyer will not move in, or check for a day or two. Is that too late?
In a recent case (Robinson v. Hobbs-Lingard, 2015) a Buyer who discovered a problem for the first time, 10 days after closing was found to be out of time. The issue is, of course, PROOF.
So, do you see any changes or improvements that could be made to this common everyday clause?
Brian Madigan LL.B., Broker