Seller Has Legal Obligation to Update Representations at Closing
The matter of the Remedy of Rescission has been raised again in a recent Ontario case Beatty v. Wei, released in June 2017 by the Ontario Superior Court of Justice. The Court concluded that the misrepresentations in the real estate transaction warranted use of this remedy.
Here was the clause which was included:
“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.”
This is the standard form OREA clause which is generally used for this purpose.
After the agreement was signed the Buyer's real estate agent undertook a Google search of the address. Police files and raids popped up indicating that it was indeed a marihuana grow house.
The Buyer then made a decision to refuse to complete the purchase.
The Judge looked at the clause and concluded that it was both a:
1) Warranty, and
The legal effects in the circumstances were somewhat different.
The Judge, Mr. Justice P.J. Cavanagh said:
“The statement in the Illegal Substances Clause that the Property had never been used for the growth or manufacture of illegal substances was expressly made “to the best of the Seller’s knowledge and belief”.
I accept that through the use of these words, the Sellers did not warrant the absolute truth of the statement that the Property has never been used for the growth or manufacture of illegal substances: John Levy Holdings Inc. v. Cameron & Johnstone Ltd. 1992 CarswellOnt 602 at para. 64, affirmed 1993 CarswellOnt 5613 (C.A.).”
“… there is an important distinction between a warranty and a representation when one considers a contractual provision such as this.”
“A warranty is a contractual promise, usually made in the context of a sale, that the thing being sold has some particular quality…”
“In respect of the Illegal Substances Clause, the qualifying words mean that there is no contractual promise, or warranty, that the Property has never been used for the growth of illegal substances.”
So, in effect, the Judge said that this is really NO WARRANTY at all, when it came to the fact of the matter. It only relates to the Seller’s knowledge.
Justice Cavanagh went on to say:
“The statement in the Illegal Substances Clause is, however, also a representation.
The representation is that, to the best of the Sellers’ knowledge and belief, the use of the Property has never been for the growth or manufacture of illegal substances.
In my view, this representation is a statement of a present fact, to the best of the Sellers’ knowledge and belief, that was intended to be relied upon when made and one upon which the Purchaser was entitled to continue to rely, at least until closing, while the APS was an executory contract.”
Consequently, it was to be true at the time of the agreement, and it was to be updated on closing.
The Judge on representations:
“It is well settled that where a representation has been made in the bona fide belief that it is true, and the party who has made it discovers that it is untrue, such party cannot remain silent.
Silence which follows a representation can found an action for misrepresentation where the silence continues after the representor learns that the representation is no longer true or was never true…”
Irrelevant Who Made the Discovery
The update to present knowledge is required. It doesn’t matter who found out first. In this case, it was the Buyer’s Agent who informed the Listing Agent. That doesn’t matter.
The fact is that the statement could no longer be made. It was untrue!
As per the Judge:
“The Purchaser’s rights are not affected by the fact that he was the one who discovered this information and communicated it to the Sellers.
Upon acquiring knowledge that the Property had been used to grow marijuana, the Sellers could no longer honestly give the representation in the Illegal Substances Clause….
…This principle applies even where a representation made at the time a contract is signed becomes untrue before or at the time of completion.”
Warranties and Representations are clearly different in law. This particular Warranty related to the Seller’s knowledge at the time of the Agreement. It really wasn’t a Warranty which went to the substance of the matter.
To improve this Warranty the words “that to the best of the Seller’s knowledge and belief…” should be deleted.
However, when it came to the Representation, there was an obligation to ensure that it remained true as of the time of closing. When it became untrue, the Buyer had certain remedies.
Brian Madigan LL.B., Broker