What Buyers Need to Know Before they Sign an Agreement of Purchase and Sale

The interpretation of a “standard” clause by the court is always a coin toss. This is especially true as it relates to interpreting representations and warranties, as the decision in Beatty v Wei highlights.

Beatty v. Wei, 2018 ONCA 479 involved the sale of a residential property that, unbeknownst to the sellers, was once used to grow marijuana. Since the sellers had no clue that the property was once a “grow op”, they agreed to include the following clause in the agreement of purchase and sale (APS):

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.

The buyers assumed, based on this clause, that if it was discovered after the closing that the place was ever used for the growth of illegal substances then they’d be able to back out of the deal or sue for damages. After all, the sellers guaranteed that the property was not used for such purposes and that this guarantee survived the closing date.

Between the date when the APS was executed and the closing date, the buyer’s real estate agent uncovered that the property was once used to grow marijuana prior to the sellers buying the property. The purchasers refused to close as this discovery materially affected the quality of the property and the property was no longer what they’d bargained to purchase. The sellers maintained that there was no violation of the APS because they never knew of this fact and that the purchaser breached the contract.

The issue made its way to the Superior Court of Justice where the judge ruled in favour of the purchaser. The judge first reviewed the difference between a representation and a warranty. The sellers didn’t breach the warranty portion of the above clause as a warranty is a promise that the thing being sold has some particular quality. The statement didn’t promise that it was never used for growing illegal substances, rather that it was not used for such purpose during the current’ seller’s ownership. As such, the warranty was not in breach. The representation part of the clause, however, was violated. Representations are a statement of present fact that the other party can rely upon to be true up until the closing date. Since the representation was not true upon the closing date the Illegal Substances Clause was a misrepresentation and the buyers, therefore, had the option to rescind the agreement. The matter, however, didn’t end there.

The sellers appealed the decision where the judges at the Ontario Court of Appeal sided with the seller. The judges concluded that the sellers would have violated the illegal substances clause only if the sellers knew about the defect when signing the APS, but concealed the information from the buyer. The sellers, as mentioned earlier, didn’t know that the property was used as a grow up when signing the APS and they never concealed this fact. Accordingly, they never breached the Illegal Substances Clause and the purchasers had no ground to rescind the contract.

The judge further conclude that the Superior Court judge erred in finding that the seller’s representation had to be true not only at the singing of the APS, but also on the closing date. It’s clear, the judges stated, that the parties didn’t draft the clause in this manner. Rather, they drafted the illegal substances clause so that the representation or warranty had to be true only during the execution date and that it didn’t “run” until the time of closing. This was evidenced by the fact that all of the other warranty and representation clauses stated that the contents of that representation and warranty had to be true up until the closing date. Such language was not included in the Illegal Substances Clause (“Clause”).

The fact that the Clause stated that the representation and warranty was to “survive the closing” also didn’t matter because the Clause was never violated:

In my view, the “survives closing” language at the end of the Illegal Substances Clause does nothing more than clarify that whatever the content of the representation or warranty given by the Sellers, it did not merge with the deed on closing. The representation and warranty survived closing to offer a basis for a post-closing action for breach. However, that language does not assist in ascertaining the content or meaning of the representation or warranty given.

In other words, for the buyer to have succeeded in its claim of misrepresentation, the buyers had to prove that either: (a) the clearly stated that the seller’s representation and knowledge of the fact was true up until the closing date; or (b) that the seller knew about the deficiency upon signing the APS and concealed it. No evidence for either claim was provided. Accordingly, the Court of Appeal decided that the sellers did not breach the Clause. Rather, it was the buyers who breached the APS by failing to close. The judge ordered that the sellers were entitled to keep the $30,000 deposit and were entitled to damages.

The Lesson

This case is very important for buyers and sellers to be precise with their language when they draft an APS. If something is important to a buyer, they need to protect themselves by drafting representations and warranties that hold true up until the date of closing and not only when the APS is signed. If this language isn’t included, the home buyer will be required to close even if some unpleasant surprises arise between the signing of an APS and the closing date. As this case demonstrates, without conditions and representations and warranties that must be true up until closing, a buyer’s rights are checked and the price of walking away from the transaction can be crippling.

Written by Natalka Falcomer, JD, Vice President Corporate Development