By Martin Rumack
Most people know that real estate values can be affected by how property that is being sold has been used. One of the more unusual scenarios – and the one most likely to show up on the nightly news – is when a home has been used as a marijuana grow operation and/or for the manufacture of illegal substances.
The RCMP says there are about 4,000 confirmed grow-ops across Canada presently and those are only the ones they are aware of!
The main issue with grow-op properties relates to the resulting physical damage. In order to accommodate the high levels of electrical consumption (including the use of high-wattage lights needed to grow the plants), the home often contains illegal wiring. For an unknowing buyer, there may be extensive (and expensive) remediation work necessary to restore the home back to current required electrical code standards.
The high moisture levels necessary to sustain plant growth often give rise to mould contamination, health issues and structural damage to the property. The cleanup involves a thorough environmental analysis, the involvement of engineers and ultimately construction tradespeople. The hope is that the property can be salvaged and won’t require complete demolition.
If a home is known to have been a former grow-op, it may be extremely difficult or even impossible to obtain financing and/or insurance, because banks and insurers tend to steer clear of these properties. And while less tangible, there is often a stigma attached to such residences as well, serving to dissuade potential buyers from pursuing an offer. This may ultimately result in a major price reduction and possibly a monetary loss to the seller.
Disclosure: A big concern when selling a grow-up is disclosure. There is a clear legal duty on the part of all sellers to advise potential purchasers about those issues that are reasonably considered to be relevant to the buyer’s decision. Since illegal drug operations are generally kept secret, sellers may simply not be aware of the home’s history of illegal activity. But even if they are, the scope of the disclosure obligation may vary according to the specific circumstances.
In the decision of an Ontario Small Claims Court case (Leech v. Dietrich, 2012 CanLII 98284), the potential buyers agreed in 2010 to purchase what the judge called “a beautiful country home” for $655,000. However, they learned through casual conversations with both a local tradesperson and a neighbour that the home was rumoured to have been used as a grow-op or methamphetamine lab about 15 years earlier. The buyers made inquiries of their own with local police and were told that there was no record of the home having been used for these major types of drug operations, but that it had contained a smaller “clandestine lab”. The buyers were also told that at one point a “large quantity of hash oil” had been found on the property, but no further details were ever given.
Based on this information, the buyers refused to close and the deal fell through. The sellers sued for damages; the buyers sued for the return of their $10,000 deposit. The court was asked to consider whether the buyers had been justified in refusing to complete the transaction and whether the sellers had known about the home’s prior use and whether they had breached their duty to advise the buyers accordingly.
At trial, the buyers produced a 1995 police report indicating that a room beneath the garage was being used as a “hydroponic grow room”. It detailed the drug-making paraphernalia, including “hazardous chemicals”, that had been seized from the home by police. The report also indicated that several people had been charged with possession for the purposes of trafficking, which was also chronicled in a newspaper article that the buyers were able to produce as part of their evidence.
However, the court’s task was to examine how this information, known at the time the sale agreement was submitted and being negotiated, affected the parties’ legal rights and the sellers’ duty to disclose. The court conceded that the details the buyers had initially received from the police (and which formed the basis of their refusal to close) had been “extremely low-quality information”. Still, the home had never been used as a meth lab or marijuana grow-op; it only housed a small hash-oil operation. And since the sellers had been completely in the dark about it in any event (aside from the rumours from neighbours perhaps) there was no disclosure obligation on them at all.
More importantly, the court found that the lab’s existence had not damaged the property, nor was there evidence that it created a health hazard. As a result, the buyers had no legal right to not proceed with the deal and the sellers were entitled to damages.
Property values: Although it is not common that a home’s use as a grow-op only comes to light after a property has changed hands, this kind of late-breaking revelation can have a devastating effect on property values, which comes into play when it comes time to sell the home. Conversely a buyer or a mortgagee may be unaware of the home’s previous, value-deflating use, until it’s too late.
Such surprises are never a good thing. The news that a home or property has been used as a grow-op often triggers a long and unfortunate series of legal disputes and wrangling between all kinds of different participants, often culminating in costly litigation.
This was exactly the situation in a case called Lindner v. Williams (2004 BCCA 243), which went all the way to the B.C. Court of Appeal. In that case, the couple had been approached by a friend/mortgage broker to invest $65,000 on a property valued at approximately $450,000. The broker emphasized the secure nature of the potential investment, which would be secured as a second mortgage subject to a first mortgage of almost $300,000. The couple decided to proceed with the mortgage investment.
It later came to light that the home was being used as a marijuana grow-op. The home had been destroyed in the process and its value had plummeted. After foreclosure proceedings, the couple were out of luck in recovering their $65,000. They launched several lawsuits against the property owner, against a party to whom they thought they were lending, against their own lawyer and against the friend/mortgage broker.
In connection with their negligence lawsuit against the friend/broker specifically, the court found that his liability hinged on the difficult question of whether there was evidence to show that, at the time the mortgage was being negotiated, there was insufficient value in the property to adequately protect them – in other words, that the property was overvalued at the time the friend/broker urged them to invest. The court found there was no evidence to support such a finding and that it was just as likely the damage had occurred after the mortgage was arranged as opposed to before the mortgage was arranged and the funds advanced. The couple was unable to prove that their losses flowed from such an overvaluation and their negligence-based claim against the broker failed.
The bottom line: So what’s the solution to the potential problem of grow-ops? In Ontario, the standard form Agreement of Purchase and Sale does not contain any sort of warranty that covers either grow-ops or the manufacture of illegal substances on the property. Real estate agents should make it a standard practice to include this form of representation and warranty together with a non-merger survival provision in all of their Agreements of Purchase and Sale. Here is a clause you may wish to consider including in your offers:
“The seller represents and warrants that during the time the seller has owned the property, the property has not been used for the growth and/or manufacture of any illegal substance, and that to the best of the seller’s knowledge and belief, the property has never been used for the growth and/or manufacture of illegal substances. This warranty shall survive and not merge on the completion of this transaction.”
At the end of the day, you want to ensure that the deal you have diligently worked on does not go up in smoke or does not explode in an illegal chemistry lab – and does not destroy your commission as the end result.
Toronto lawyer Martin Rumack’s practice areas include real estate law, corporate and commercial law, wills, estates, powers of attorney, family law and civil litigation. He is co-author of Legal Responsibilities of Real Estate Agents, 3rd Edition, available at www.lexisnexis.ca/bookstore. Visit Martin Rumack’s website at www.martinrumack.com.