OCA rules on interpretation of illegal substances clause
By Kirsten McMahon, Associate Editor
An Ontario Court of Appeal decision that looked at the interpretation of an illegal substances clause in a real estate agreement reaffirms that if a purchaser wants to protect against possible problems or defects, it has to be spelled out in the contract and the representation of the vendor should be unlimited, Toronto real estate lawyer Lisa Laredo tells AdvocateDaily.com.
She notes the interpretation of the words of limitation is strictly a matter of contract and speak only at the time of its execution.
“If a purchaser wishes to preserve a right of rescission or damages should it appear that there was an illegal prior use or that there is a latent defect unknown to the vendor, the representation must be unlimited as to the vendor’s knowledge,” says Laredo, principal of Laredo Law. “Or it must be clearly stated that a representation limited to the vendor’s knowledge and beliefs speaks as of the day of closing and not just at the date of execution of the Agreement of Purchase and Sale (APS).”
The case dealt with parties who had entered into a standard form Ontario Real Estate Association/Toronto Real Estate Board APS. The respondent purchaser put down a $30,000 deposit on the appellant’s residential property. Prior to closing, the purchaser independently discovered that the house had been used as a marijuana grow-op before the sellers acquired it.
“At issue is the second part of the clause where the seller represents and warrants 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,’” the ruling states.
In allowing the appeal and overturning the trial judge’s decision, Justice David Brown concluded that the sellers’ representation and warranty in the illegal substances clause was limited to their knowledge and belief as it existed when they executed the APS.
“At that time, they did not know about the property’s prior use as a grow-op. In those circumstances, I conclude the application judge erred in finding the sellers breached the clause. They did not.”
Laredo, who was not involved in the matter and comments generally, says if the house was used as a grow-op in a period prior to their ownership, their representation and warranty is still true that ‘to the best of his knowledge or belief’ the property had never been used to cultivate an illegal substance
“The representation and warranty as to its use prior to the ownership is limited to the vendor’s knowledge and belief,” she says. “If there is no evidence that the vendor knew of the prior illegal use, his representation in the contract is still truthful because when he made the representation he had no reason to believe otherwise.”
She says a vendor typically has no knowledge of the use of the property before they purchased it. However, a vendor with knowledge of a latent defect in the property is obliged to disclose it to the purchaser.
“Failure to disclose may amount to fraud,” Laredo says.