Court of Appeal clarifies the application of “to the best of my knowledge and belief” and overturns “Beatty v. Wei “

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In a prior email and at the Real Estate Summit, I discussed the Superior Court decision in Beatty v. Wei.  Many lawyers thought the case was wrongly decided  and did not like its implications in drafting agreements of purchase and sale.   In that case, the sellers “represent and warrant” that during the time that they had owned they property, the property had not been used as a grow op and that “to the best of the Seller’s knowledge and belief,” the property had never been used as a grow op.  The warranty was to survive and not merge on closing.

The sellers had no knowledge that prior owners had used the property as a grow op.  However, between the date of the execution of the agreement of purchase and sale and closing, the buyer discovered and confirmed with police that it had previously been used as a grow op.  The buyer considered the house stigmatized and refused to close.  The buyer sued for the return of the deposit: the sellers sued for breach of contract and damages for losses arising from the reduced price of the house on resale.

The Superior Court concluded that the buyer had the right to terminate because, as at the closing date, the representation was not true and being a representation, the buyer had the right to terminate. The court found that the buyer was induced to purchase the property based on the representation which was now proven not to be true.

The ultimate issue and concern of us real estate lawyers was how the representation was to be treated.  What was it really about?  Was the issue the vendor’s knowledge at the time the representation was made or was it the fact that the property had been used as a grow op.

The Court of Appeal first dealt with more esoteric issues: namely, the extent to which a court of appeal should review a lower court decision on the interpretation of a contract. It then considered the lower court judge’s analysis of the contract terms and concluded that it was in error.  The representation and warranty had to be read as part of the parties’ contract (and not as a precontract representation standing apart from the contract itself).  The Court of Appeal applying standard rules of interpretation finally got to the issue most of us care about.  And this is important and it is precedent setting for the things that we do.

The court held that the effective date of the truth of the representation made to “the best of the seller’s knowledge and belief” was at the time the representation was made and that, without express language that the representation  continued until closing, the representation did not continue if, as in this case, it was discovered that the property had in fact been used as a grow op at some prior time but that that fact was unknown to the seller.  The emphasis to be placed on the representation is the knowledge of the seller when the representation was given and not on whether the property had been used as a grow op.   The representation given was limited to the seller’s knowledge at the time it was given and was not absolute. The caveat of course is that the sellers had no knowledge of the prior use. Liability might well attach if the sellers knew about a major latent defect and concealed it but here, the sellers were absolutely unaware of the prior use.

In formulating its analysis, the court distinguished provisions in an agreement of purchase and sale that apply only to the date of the agreement of purchase and sale and those applying as at the date of closing.  Many commercial agreements provide that representations and warranties have to be true when made and at the date of closing.  The court in deciding how to interpret the subject clause considered other provisions in the agreement of purchase and sale that clearly apply up to the date of closing i.e. the residency of the vendor and the removal of work orders on or before closing.   If the buyer wanted the representation to apply up to the date of closing, the agreement of purchase and sale should have said so.

But this clause had no such language and as a result applied only as of the date of the execution of the agreement of purchase and sale.

We rely frequently on “to the best of my knowledge and belief” in our agreements and it is perhaps nice to know that, without language that makes the knowledge apply up to the date of closing, the time of effectiveness and application of the knowledge is limited in time to the date that it is given.  The court also confirmed that the provision that the representation survives closing does not change its nature or application.  As long as the vendor did not know on the date the agreement of purchase and sale was signed, subsequently learned contrary information does not set up rights in the buyer to terminate the agreement.

Lessons?

  1. The court did not answer this question alluded to in the reasons: if the seller (not the buyer) discovered the prior use after the agreement of purchase and sale was signed, was there a duty to disclose it, even if the contract would not be terminated.
  2. Language is critical in the drafting of an agreement of purchase and sale.  Make sure you are clear on your expectations and that of the client. It was an agent’s clause here but we lawyers review such clauses regularly and must ensure that we are clear ourselves on what the contractual terms mean and what are clients want to give and to get.
  3. The two different results once again confirm to me that we lawyers cannot guarantee clients’ rights based on what we may perceive may be the prevailing law based on case law.  Especially when advising whether a client has the right to terminate or is obligated to close, we lawyers must ensure that we do not express absolutely what the parties’ rights are since our courts are not predictable on results.   And make sure you document your advice in writing so that no one can then claim that “you told me I did not have to close.”  That is an invitation to a lawsuit.
  4. The court of appeal got it right, in my view, in the context by which certainly residential agreements of purchase and sale are drafted and what the parties actually expect. A representation is not absolute if qualified by knowledge and belief and the timing that the representation is given is critical to the parties’ expectations.

The decision can be found at http://www.ontariocourts.ca/decisions/2018/2018ONCA0479.pdf

My disclaimer: The issues raised in this bulletin are for information purposes only. My comments should not be relied upon to replace specific legal advice. Readers should investigate all matters independently before acting on the basis of material contained herein. I reserve the right to be wrong and to change my mind. Use at your own risk.

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