By Natalka Falcomer

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, 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 discovered that the property was once used to grow marijuana prior to the sellers buying the property. The purchasers refused to close because this discovery materially affected the quality of the property and it was no longer what they’d bargained to purchase. The sellers maintained 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, because 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. However, the matter didn’t end there.

The sellers appealed the decision and the judges at the Ontario Court of Appeal sided with the sellers. The judges concluded that the sellers would have violated the illegal substances clause only if they knew about the defect when signing the APS but concealed the information from the buyer. The sellers didn’t know 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 grounds to rescind the contract.

The judges further concluded 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 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.

The fact that the clause stated 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:

  1. a) they clearly stated that the seller’s representation and knowledge of the fact was true up until the closing date; or
  2. 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 shows it is 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.

5 COMMENTS

  1. The Lesson

    1) Publicly available data ( apparently only found out after a firm agreement had been reached) revealed this home was a former grow op. Obviously knocking on the closest 10 doors to the subject and asking a simple question…never took place. Sue the Buyer Brokerage for damages as clearly they did their job after the deal was signed not before.

    2) the term “to the best of our knowledge and belief” has been a RED FLAG since Buyer Agency became legal. Any party to a transaction who is not explicitly explained this means ” they are claiming they don’t know so you can’t sue them ” is receiving incompetent service that probably violates any provincial trading legislation in Canada today.

    3) When the Median Annual Transaction count of 127,000 CREA members is below 1 sale a year, it is not only ludicrous for the public to not seek Leqal review of any contracts placed before them to sign prior to signing but it is also so symbolic of why the real estate brokerage industry as we know it today cannot survive.

    Regardless of the efforts to maintain the desk rental model of the franchise real estate brokerage branding business and extreme RE Sale Rep to Owned Homes Ratio, 2020 will make the revolution of the real estate brokerage industry. Not one of the current real estate brokerages in Canada is designed to navigate this revolution as Legacy transactions and False Remuneration models cannot escape the wraith of in informed, educated and connected consumer base.

    That is Lesson the fairy tale and unicorn citing crowd have tried to keep hidden for 19 years.

  2. What about the point in law where you can’t plead ignorance and say you didn’t know when “you should have known”. In other words, why did the previous/original sale on the property not reveal anything. And should the previous seller not be on the hook. I am rarely using standard clauses.

  3. Natalka:

    My question is: How could the sellers have proved that they did not know about the previous grow-op in their home that existed prior to their ownership of same? Did they simply swear that they did not know, and the court accepted that assertion? People do lie under oath when money or jail time is on the line.

    The last half of the clause in question should be stricken from further usage by sellers and Realtors. Who knows what went on in/on a property during years gone by when owned by others…other than Colombo? Realtors should never potentially entrap seller clients into lawsuits by influencing them to sign a document including a clause stating that a subject property was ‘never’ used for anything other than legal purposes.

    How could the buyers possibly have proved that the seller(s) concealed the truth of the matter, assuming that they did so? That could occur only if the the buyers already knew about the illegal use of the property pre offer or pre closing. They obviously did not. Therefore, there is no actual ‘proof’ that the sellers did not know. This case turned on the credibility of the sellers, which might have been misplaced.

    The ‘intent’ of the iffy clause should have held more sway in my opinion. This case demonstrates why so many—who are not lawyers— despise legal wording and hidden meanings (loopholes/escape opportunities etc.) of contract clauses. The shifting court judgements—by upper court judges no less—demonstrates the absurdities of human interpretations of the meanings of words and attendant arrangements of same.

    It appears that the buyers in this case did not have a lawyer look at the offer/acceptance etc, before finally signing their money away on the dotted line. Had the buyer(s) used a lawyer, could he/she/they have sued same for damages in this case citing negligence?

    I would say that the wording of this clause is proof positive that it was designed by people whose only goal is to make sure that a deal closes and commission is paid…with heavy emphasis on the commission aspect. Therefore, this clause was not designed for the protection of the public; it was designed for the protection of the commission.

    My question now becomes: Was this bastardized-standardized clause designed by a salesperson type or by a lawyer working for the salesperson (read brokerage-commission-chaser-boss) type? No commissions; no business; no brokerage.

    The answer seems obvious.

    Natalka: What say you?

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