Warranties in Sale Agreements

The recent case of French Family Funeral Home Limited v. Player et al. provides a useful review of the rights and obligations of parties to a real estate transaction where one party misrepresents the state of the property but the innocent party knows about it before closing, and goes ahead and closes anyway.

In this case, the property in question was located in Kirkland Lake, Ontario. The parties entered into an agreement of purchase and sale that included a warranty on the part of the vendor that there were no environmental issues concerning the property.

After a number of hiccups, the deal finally closed. As part of the deal, a portion of the purchase price was covered by way of promissory note from certain individuals involved in the company that took title to the property. The note was never paid and the vendor sued the individuals who had signed the note.

Part of the defence set up by the defendants concerned the fact that notwithstanding the representation contained in the sale agreement, the property did have environmental issues and as a result, the warranty given by the vendor had been breached. The defendants claimed that they were relieved from any obligation to pay the note and furthermore, that the entire transaction should be set aside.

The plaintiff moved for summary judgment.

The motions court judge granted the motion. The judge made a careful review of the evidence including a report prepared prior to closing, revealing that the property had previously been a mine site and that there existed a possibility of some non-native material buried on it including potentially hazardous chemicals.

The defendants had relied on this report in support of their argument that the vendor had made false representations upon which the defendants were entitled to rely, to avoid their contractual obligations.

However, the judge also found that the defendants were aware of this information for over a year before closing and possibly even before entering into the sale agreement itself.  They had the report in hand before closing together with similar information from the municipality. They did obtain additional information on the point after closing, but the judge found that this added little or nothing to what they already knew. Accordingly, the judge found that there had been no misrepresentation. In the view of the judge, the warranty contained in the sale agreement was not intended to cover matters of which the defendants were aware prior to closing.

This case highlights the importance of giving careful thought to deficiencies in a property of which one becomes aware prior to closing.  Making a choice to complete a transaction knowing of these deficiencies may well deprive the purchaser of any remedies after closing that might otherwise have been available.

The New World of Summary Judgments: Are the Courts Going Too Far?

The recent case of King Lofts Toronto I Ltd. vs. Emmons involves the granting of a summary judgment where the remedy would never have been possible in the past.

This was a solicitor’s negligence case in which the law firm moved for summary judgment dismissing the claim and, without formally bringing a cross-motion for summary judgment, the former client requested a partial summary judgment against the law firm.

In 2005, a developer retained the Defendant law firm to act on a purchase of four commercial properties in downtown Toronto. The price was $22.5 million. The title indicated that the City of Toronto owned a strip of land and a laneway under the rear of one of the buildings.

The purchaser assigned its interest in the purchase agreement to the Plaintiff in this case, whose principal was described by the Court as an experienced businessman and investor in real estate. The Plaintiff retained the law firm to continue and to complete the transaction.

Before closing, the lawyer handling the file told the Plaintiff about the laneway. He also said that this was a minor issue that was covered by title insurance that was being obtained. He indicated that the problem would be solved by converting the property from the Registry System to the Land Title System, that this could be completed after closing, and that the cost of doing so would be relatively nominal. Subsequently, the law firm indicated that after closing they could approach the City and ask for a by-law to be passed to convey the lane to the Plaintiff. Alternatively, they could attempt to obtain a court order based on the length of time that the building had been located on the laneway itself.

In any event, it was clearly conveyed to the Plaintiff that the problem was a minor one and likely covered by title insurance.

What the Plaintiff was not told is that the City would request payment for a conveyance of the laneway even though it had been located under a building for about eighty-six years. He was also not told that the title insurance policy excluded coverage for City-owned laneways.

The deal closed with no holdback in respect of the laneway. After the closing, the Plaintiff did nothing about the laneway and several years passed.

In 2008, the Plaintiff received an unsolicited offer from a Real Estate Investment Trust to purchase the properties. An agreement was signed for the sale to the REIT for a purchase price of $31.5 million.

Before the closing of that transaction, the lawyer for the REIT demanded that the title be rectified so that the Plaintiff could convey the laneway. When the Plaintiff looked into it further, it discovered that it would cost $106,000 to get the City to convey the laneway. An application was made to the title insurance company for coverage but that was denied.

The Plaintiff had no choice but to pay the $106,000 for the laneway. It then closed the deal to sell the properties to the REIT for $31.5 million – $9 million more than it had paid four years earlier.

The Plaintiff then sued the law firm for negligence.

At this point, one might well take a step back and suggest that having achieved a profit of almost 50%, the Plaintiff might have better things to do than to chase its former law firm over $106,000. It may be the fact that the law firm had billed the Plaintiff more than $270,000.00 in fees for the purchase transaction, which the Plaintiff had apparently found excessive, played a role in the Plaintiff’s decision to pursue the matter.

In any event, the law firm brought a motion for judgment to dismiss the claim on a variety of grounds. The most interesting one, in my view, related to the issue of causation.

As the Court pointed out, for a lawyer to be liable for professional negligence, the client must prove that the misconduct caused the client’s loss and that the client has suffered damages as a result. Generally, the “but for” test is used, on a balance of probabilities. In other words, the client must show that the injury would have not occurred “but for” the negligence of the lawyer.

In this case, the Plaintiff argued that had he been made aware of the extent of the problem, and the cost of resolving it, he would have insisted on a reduction in the purchase price.

By way of contrary evidence, the original purchaser of the property (who had assigned the purchase agreement to the Plaintiff) provided evidence that the vendor was notoriously hard to deal with and would never have agreed to such a reduction.

If that is true, of course, it could be argued that the law firm actually did the Plaintiff a tremendous favour. If the Plaintiff had been told of the extent of the problem and asked for the reduction, and the vendor had refused, it is very possible that the Plaintiff would have lost the deal (and therefore, the handsome profit achieved upon resale four years later).

As a reflection of the current state of the law on summary judgments, however, what is particularly interesting is what the Judge did with this evidence.

The Judge simply accepted the Plaintiff’s evidence and disregarded the evidence of the original purchaser. He decided that it was “at least doubtful that the vendor…could have simply relied on the recession clause to withdraw from the transaction” and concluded on a balance of probabilities that likely, there would have been agreement between the parties on a holdback or an abatement of the purchase price.

The Judge went on to dismiss the law firm’s motion for summary judgment and to grant summary judgment in favour of the Plaintiff on liability, with a trial to follow on damages.

In my view, this is a surprising decision that may move the yardsticks for summary judgment a long way. The current jurisprudence does allow the judges to make some credibility findings in certain circumstances. Here there was a contest between written evidence from the Plaintiff as to what he would have done (with the benefit of hindsight) on the one hand, and written evidence from another individual with nothing to gain or lose in the transaction suggesting that what the Plaintiff would have done would not have worked. I would have thought that this would have required a trial in order to resolve. However, that was not this motion court Judge’s opinion.

Subject to review by the Court of Appeal, this case might well constitute a significant development in the law of summary judgment in Ontario.