Beatty v. Wei, 2017 ONSC 3478: Illegal Substance Clauses in APS – Warranties and Representations

Beatty v. Wei, 2017 ONSC 3478: Illegal Substance Clauses in APS – Warranties and Representations

Overview:

Agreements of Purchase and Sale contain warranties and representations. A warranty is a legal promise that the subject of the sale is of a certain quality; such warranties survive the completion of the contract. Representations, on the other hand, are statements of fact, that when made, may induce the purchaser to enter the contract, and may be relied upon by that purchaser.

In Beatty v. Wei, 2017 ONSC 3478, the Ontario Superior Court determined that if a representation made by a vendor is untrue at the time of closing, regardless of whether it was true at the time it was made, the purchaser, who relied on such representation, may terminate the agreement and is entitled to the return of their deposit. Furthermore, Illegal Substances Clauses, and the representation that a property was never used for the growth or manufacture of illegal substances, are representations that go to the root of the contract, and as such, may entitle the relying party to rescission.

Facts:

This case involves two applications, one brought by the purchasers and the other by the vendors of residential real estate stemming from the purchaser’s refusal to close pursuant to an Agreement of Purchase and Sale (the “Agreement”). The Agreement included an Illegal Substances Clause whereby the vendor represented and warranted that the property was never used for the growth or manufacture of illegal substances.

After the Agreement was made, but before closing, the purchaser’s real estate agent, via an internet search of the property, discovered that the property had been used to grow marijuana in 2004; this was confirmed by the Toronto Police Service. The purchaser’s solicitor thereby informed the vendor that, pursuant to the Illegal Substances Clause, the purchaser would no longer be proceeding with the transaction and requested the return of the $30,000.00 deposit; the vendor refused.

As such, the vendor brought an application to the Superior Court seeking a declaration that the Agreement was firm and binding; that the purchaser was in breach for failing to close; that the deposit was forfeit and that the purchaser was liable for damages. The purchaser, in their application heard at the same time, sought a declaration that the purchaser was not required to close; that the vendor was in breach; that the vendor is liable for damages; that the purchaser is entitled to the return of the deposit; and finally, that the purchaser was entitled to terminate the Agreement as a result of the vendor’s misrepresentations.

The vendor argued that the statements made in the Illegal Substances Clause were true when the representations and warranties were given as they had no knowledge of the marijuana growing operations at the time the Agreement was signed. Furthermore, they argued that the Clause did not place a duty on the vendor to determine whether the property had ever been used to grow or manufacture illegal substances.

The purchaser argued that the Clause was intended to protect buyers in these exact circumstances and that the vendor knew before closing, as the purchasers had informed them, that the property was used for illegal purposes, therefore the representation made became a misrepresentation.

In making its decision, the Court found that the Illegal Substances Clause was both a warranty and a representation. A ‘warranty’ is a contractual promise that the thing being sold has some particular quality and that survives the completion of the transaction. A ‘representation’ is a statement of fact that was intended to be relied upon when made. The Court found that it is settled law that where a representation is made in the bona fide belief that it is true, and the party who made it later discovers that it is not, that party cannot remain silent. Therefore, the representation that the property was not used for the growth or manufacture of illegal substances became a misrepresentation when the vendor discovered that this was not the case.

The Court ultimately found that such a misrepresentation was material because it induced the purchaser to enter the Agreement. As such, the purchaser was entitled to rescind the contract and receive their deposit back. The issue of damages is to be determined in a later action.

Bottom Line:

This case outlines the importance of vendor due diligence before providing any warranties or representations to potential purchasers and the need for continued due diligence upto closing. Illegal Substance Clauses in residential real estate agreements can be a warranty and a representation. Even if at the time the warranty or representation was made, usually at the time the agreement was signed, they were true, if circumstances arise, or information becomes available indicating that such statements are no longer true and the vendor becomes aware of such, the party who relied on such representations is likely entitled to rescind the contract and have their deposit returned. When illegal substances may pose an issue, it is prudent that both vendors and purchasers thoroughly research the property before either listing for sale or closing a transaction.

Christopher Mendes