Illegal Substances Clauses in Real Estate Agreementsedit
The Ontario Court of Appeal recently issued a decision about the interpretation of an “illegal substances clause”, which is commonly used in Ontario Real Estate Association/Toronto Real Estate Board Agreements of Purchase and Sale.
The purchaser and a couple (the “sellers”) entered into a standard form Ontario Real Estate Association/Toronto Real Estate Board Agreement of Purchase and Sale dated May 15, 2016 (the “agreement”) for a residential home in Toronto, for the purchase price of $916,000. The purchaser submitted a deposit of $30,000. Closing was scheduled for August 22, 2016.
The agreement consisted of a standard, pre-printed section, to which were attached two schedules.Schedules A and B formed part of the agreement. Both contained, as an additional term, an identical illegal substances clause (the “Illegal Substances Clause”), which stated:
“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.”
About a month after the execution of the agreement, the purchaser’s real estate agent conducted internet searches and came across information that suggested the property had been used as a grow-op before being purchased by sellers. Subsequently, the Toronto Police Services confirmed to the purchaser that in 2004 the property had been used to produce marijuana. By letter dated July 8, 2016, the purchaser’s counsel conveyed this information to the sellers’ counsel and stated:
“As a result of the stigma from the fact the home was a previous marijuana facility, my client is not willing to complete the transaction and demands return of his deposit.”
The sellers refused to terminate the agreement. Instead, they commenced an application seeking declarations that the purchaser had breached a binding agreement by refusing to close, the forfeiture of the deposit to them, and damages for any loss they might suffer as a result of the delayed re-sale of the property.
The purchaser responded by seeking a declaration that he was not required to complete the purchase of the property, together with the return of the deposit and damages resulting from the sellers’ breach of the agreement.
The sellers ultimately sold the property to another purchaser for $86,100 less than the price stipulated in the original agreement.
Lower Court Decision
The application judge dismissed the sellers’ application but granted the purchaser’s, holding that the purchaser was entitled to rescind the agreement and to the return of the deposit.
The application judge found that the purchaser’s discovery after the execution of the agreement that the property previously had been used to grow marijuana and the purchaser’s communication of that information to the sellers meant the sellers’ representation was false. He reasoned that since the sellers would be obliged to disclose such information if they discovered it after signing the agreement, then upon acquiring the information from the purchaser, “the Sellers could no longer honestly give the representation in the Illegal Substances Clause.”
The application judge found that the purchaser was induced to enter into the agreement on the basis of the sellers’ misrepresentation and, as a result, the purchaser could rescind the agreement.
Court of Appeal Decision
The court focussed on the meaning of the representation and warranty given by the sellers in the second part of the Illegal Substances Clause, which stated: “[T]o 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.”
Applying the general principles of contractual interpretation, the court found that the sellers’ representation and warranty that the use of the property had never been for the growth or manufacture of illegal substances was limited to their knowledge and belief as it existed when they executed the agreement.
As a result, the court allowed the appeal,declaring that the purchaser had breached the agreement by failing to close and the sellers’ were entitled to the deposit in the amount of $30,000.
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