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.