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'Language is critical' when drafting real estate contracts

An Ontario Court of Appeal decision that questioned the interpretation of an illegal substances clause illustrates that language is critical in drafting Agreements of Purchase and Sale (APS), Toronto real estate lawyer Daniel Bernstein tells AdvocateDaily.com.

Bernstein, a founding member of Weltman Bernstein, says he thinks the decision by the province’s top court is the right one and comes as a relief for real estate lawyers.

“If you want a warranty and representation to speak of the period up to closing, make sure you draft accordingly,” he says.

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.”

Bernstein, who was not involved in the matter and comments generally, says based on the language used, sellers need to spell out the exact time that they give a representation to the best of their knowledge.

“If the representation is true, they shouldn’t have to worry about facts coming to a third party that may contradict their representation if it was given truthfully,” he says.

However, if, for example, a clause contained qualifying language such as: “As of the date of closing, to the best of the seller’s knowledge and belief, the property and the buildings and structures thereon have never been used for the growth or manufacture of illegal substances” then the language goes to the seller’s knowledge up until closing. 

“The seller would be caught in a misrepresentation if contrary information was discovered by a purchaser,” Bernstein says.

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