The Obligation of Disclosure in Agreements of Purchase and Sale (APS) …and The Case Of Marijuana!

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Beatty et al. v. Wei et al. is a Superior Court of Justice decision dated June 5, 2017. This case is significant because it speaks to representations and warranties made by a Seller in an Agreement of Purchase and Sale, specifically with respect to the relationship between representations and warranties made to the best of the Seller’s knowledge and belief and the ability to rescind an otherwise valid APS. The basic facts of this case are as follows: An APS was entered into between Buyer and Seller. In the Agreement, the Seller represented and warranted that to the best of their knowledge and belief, the property had not been used for the growth or manufacture of illegal substances. At the time this representation and warranty was provided, this was in fact true. Before closing, the Buyers discovered through their own investigation that the property had in fact been used to produce marijuana in 2004. This was confirmed by a letter by Toronto Police. The Buyers refused to close the transaction and demanded the return of their deposit. The Sellers refused to agree to the termination of the APS and brought an application for declarations that the APS was a firm and binding contract, the Buyer had breached the APS and that the deposit had been forfeited. The Buyer applied for declarations that they were not required to complete the transaction and for the return of their deposit.

The Court ultimately found in favor of the Buyer. The Buyer was able to rescind the APS and the deposit was returned. Why? The Judge reasoned that this representation and warranty given by the Sellers was relied upon by the Buyers and induced them to enter into the APS. If it were the case that the Sellers had discovered there once was production of marijuana at the property, the Seller would be obligated to notify the Buyer before closing because they would no longer be able to make that representation and warranty. This would be a material change to the contract and would be grounds for rescission. The Judge reasons that the Buyer’s rights are not affected merely because they were the ones who made the discovery, and thus the same principle must apply. This was a material change to the terms of the APS and the Seller could no longer sell the property on the same material terms and conditions agreed upon in the APS.

Real Estate Agents should be mindful of this decision because of the potential implications it could have when this representation and warranty is made in an APS. If your Seller represents and warrants that to the best of their knowledge and belief a particular circumstance about a property is either true or untrue, a Buyer may have a valid claim for termination of the APS if in reality the state of the property conflicts with what your Seller has represented and warranted. If acting for a Seller, be aware of the potential risks to the APS if a representation and warranty is made that is discovered to be a mistaken belief in reality. If acting for a Buyer, if your Client has been induced to enter into an APS based on a mistaken belief that is represented and warranted by a Seller, your Buyer may have a right to terminate the APS and to have the deposit returned.

Knowledge is Power, which results in more business!

If you have any questions or concerns, please feel free to contact us at your convenience.  If you have any suggestions for future topics please let us know.

 

Prepared by Bryan Mayes, Solicitor with Paquette Travers

Contact toll free: 1-877-744-2281                                                          Online: www.paquettetravers.com

Watch for more Travers Tidbits to follow each month!

Buyer Beware! How to Avoid Being Trapped by Misrepresentation

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Remedies for Misrepresentation before Closing

Rescission (termination) is available where a material misrepresentation in the Agreement of Purchase and Sale was an inducement to the Purchaser to enter into the Agreement is established. This misrepresentation must be material and must have served as an inducement to enter into the Agreement of Purchase and Sale.

A representation which amounts to a statement of opinion, probability, expectation or exaggeration goes for nothing and although the statement may not be true, a Purchaser is not justified in placing reliance on it. Such statements have no legal significance and would not enable the Purchaser to terminate the Agreement.

Representation can be classified as an innocent misrepresentation, a negligent misrepresentation, or a fraudulent misrepresentation. A Purchaser is entitled to terminate the Agreement if the representation is material and in the Agreement, whether it is innocent, negligent, or a fraudulent misrepresentation. A misrepresentation is fraudulent when the Seller makes a false statement of fact knowing it is false, or recklessly, without caring whether it is true or false, intends to induce the Purchaser to enter into the Agreement and the Purchaser relies on it.

The “entire Agreement clause,” paragraph 26 in the standard form, will protect the Seller from an innocent misrepresentation made outside the Agreement. However, that clause will not protect a Seller for a fraudulent misrepresentation made by the Seller or the real estate agent outside the contract.

Whether the clause excludes negligent misrepresentation made by a Seller or agent and not included in the Agreement is unclear. In the case of Hayward v Mellick, a statement by the Seller’s agent described a farm contacting 65 workable acreage when in fact it was only 51. The Court of Appeal said that a negligent misrepresentation not included in the Agreement could not be relied upon by the Purchaser because it was excluded by the entire Agreement clause. However, in a subsequent case, Bear v Townsgate 1 United, casts doubt on whether the clause excludes pre-Agreement negligent misrepresentations.

Faced with a decision to close or not close, the lawyer must depend on how a court classifies the misrepresentation made by the Seller. Unfortunately, the distinctions between each class of misrepresentation is often tenuous.

If the statement in the Agreement is labelled a warranty and that statement is not true, even if discovered before closing, it does not give the Purchaser the right to terminate the Agreement. It only gives the Purchaser the right to sue for damages after closing.

If the misrepresentation is an innocent misrepresentation, and the Purchaser decides to close, the Purchaser must be made aware that they will not be able to sue for damages after closing.

Unfortunately, there is not always certainty in the law.

Knowledge is Power, which results in more business!

If you have any questions or concerns, please feel free to contact us at your convenience.  If you have any suggestions for future topics please let us know.

Prepared by Don Travers, Solicitor with Paquette & Travers Professional Corporation

Contact toll free: 1-877-744-2281                                                             Online:www.paquettetravers.com

Watch for more Travers Tidbits to follow!