SELLER BEWARE! - BE CAREFUL WHAT YOU REPRESENT/WARRANT

Posted: May 14, 2019 | Last Updated: May 14, 2019
Written by: Edward D. Brown

Edward D. (Ned) Brown
Pitblado LLP
May, 2019

You wish to sell your property and you find a willing buyer.  You enter into an agreement of sale and purchase and your buyer - or more likely your buyer's lawyer - requires that you make the following representations and warranties:

  1. that the property has not been used for one or more specified purposes and/or the carrying on of one or more specified activities during the time of your ownership/occupation of same;
  2. that the property has not to your knowledge and belief been used for any such purposes or to carry on any such activities prior to your ownership/occupation of same; and
  3. that the property has not prior to your use/occupancy of same been used for such purposes or for the carrying on of any such activities, but without the "knowledge and belief" qualification.
     

Most lawyers and most reasonably sophisticated clients will instantly "twig" to the stark differences between (ii) and (iii) above.  Such persons will also no doubt appreciate the reasonableness of the difference between (i) and (ii) above, in that the seller should be able to provide strong assurances as to use/non-use during the seller's own tenure at the property, but, in most cases, will not be in a position to provide an unconditional assurance as to previous ownerships and occupations.  Of course it is possible that a current owner may have acquired information that leads her/him to suspect or to conclude that the property was previously used for certain purposes/the carrying on of certain activities, which the current prospective buyer wants to know about.  In such cases, it might be reasonable for the seller to provide at least some information to the buyer concerning the seller's knowledge - and perhaps even the seller's suspicions - so as to enable the buyer and its counsel to make appropriate "due diligence" investigations and confirmations.

A further variation on the above scenario would be where, after the seller has represented and warranted to the buyer that, to the seller's knowledge and belief, the property has not been previously used for specified purposes/activities, the seller acquires knowledge, between the date of the contract and the date of closing, that indicates the existence of a buyer non-desired prior usage, and the sale and purchase agreement contains an additional provision to the effect that the seller's representations and warranties are to be deemed to be made continuously down to - and perhaps even for a period of time after - the closing.  In this latter situation and with such knowledge, the seller would almost certainly be held to be in breach of its representation and warranty if it didn't advise the buyer of what it had learned.

These questions came before the Ontario Court of Appeal in the Beatty v. Wei case (Judgment, May 24, 2018, hereinafter, the "Beatty Case").  In the Beatty Case, the seller, in addition to representing and warranting that the property had not been used for the "growth or manufacture of illegal substances" during the seller's ownership/occupation, also represented and warranted that "to the best of the seller's knowledge and belief, the use of the property and the buildings and structures thereon (had) never been (used) for the growth and manufacture of illegal substances".  After the contract date but before closing, both the buyer and seller acquired information that indicated a prior usage of the property as a "grow-op".  Upon learning of this, the buyer repudiated the sale and refused to close.  The Court had to decide whether or not the seller had breached its representation and warranty.  The Trial Court held that that the moment the seller acquired knowledge of such prior usage, the seller was in breach of its previously made representation and warranty.  The contract did not contain a "continuous down to closing" representation and warranty provision.

The Appeal Court held that the seller had not breached its prior use representation and warranty.  A reasonable interpretation of the contractual statement was that it was true at the time of its making, but that it was not intended to be true continuously from the date of the entering into of the contract, down to the time of closing.  Just because the seller discovered contrary information subsequent to the contract date did not mean that the particular representation and warranty was false.

The Court noted that the parties had conducted extensive negotiations before they determined the final wording of their contract.  If the parties - the buyer in particular - had wished to have an assurance in the form of a contractual promise from the seller as to all possible pre-closing usage of the property down to the time of closing, the parties could have included provisions of the following types:

  1. that the seller's representation and warranty was made both at the time of the entering into of the agreement and thereafter, continuously, down to the date of the closing; and/or
  2. that it was a condition of closing (not just a representation and/or warranty) that at the time of closing, there never had been, at any time prior thereto, any buyer non-desired usage of the property, and, that if, between the contract date and the closing date, the buyer acquired knowledge or information to the contrary, the buyer was entitled to terminate the transaction.
     

From the seller's point of view, the problem with (ii) above is that it leaves the seller in a vulnerable position.  Notwithstanding that both parties had acted in good faith, the buyer's last-minute acquisition of knowledge/information indicating a prior undesired use would mean that the seller would not have the usual assurance that the deal would in fact close (subject to the usual conditions which normally are satisfied, waived or determined well before the closing).  That assurance would not be available until the closing had actually occurred.  A compromise might be an arrangement whereby the seller represents and/or warrants no buyer non-desired usage during the seller's ownership/occupation and no knowledge of any such non-desired usage prior to the seller's ownership/occupation.  But, then with a further proviso to the effect that the buyer had the right to conduct due diligence with respect to pre-seller usage for a limited period of time immediately following the contract date.  If within such period, the seller obtains credible evidence of a prior undesired usage, then the buyer would be entitled to terminate the deal on a "no fault" basis.  That is, contractual rights and obligations would cease, the buyer would get its deposit monies back and neither of the parties would have any claim against the other by reason of the termination.

In considering the meaning and effect of the Appeal Court's holding in the Beatty Case, readers should consider the following:

  1. The Trial Court had held that the seller was not in breach of its warranty "because the contractual language did not disclose an intent that the warranty could change with changing circumstances after the date of the (contract) when the warranty was given".  On the other hand, the representation to the same effect was a "material representation that induced the Purchaser to enter into the contract which, if ultimately shown to be false, entitled the Purchaser to rescind".  The Appeal Court held that this was a flawed analysis.  Although a "representation" and a "warranty" are, in law, different things, in this context, they were really one and the same.  Of course there will be situations in which a representation performs a different "contractual function" than a warranty, even though they both provide assurance to the recipient with respect to the same subject matter.  Readers of legally drafted documents will frequently encounter references to "representations and warranties" in a context where the underlying commercial reality is that both words are intended to convey the same meaning/provide the same assurance.
  2. This was not a case where the seller knew of but concealed material information regarding the property from the buyer.  This appears to be a "given" in the Beatty Case, but it is important for readers to be aware that had the seller knowingly concealed information from the buyer, the Beatty Case would almost certainly have been decided differently.
  3. Providing for a representation and/or warranty to be true both at the time of entering into the contract, and continuously thereafter down to the time of closing is frequently seen in contractual arrangements involving sales, purchases and secured lending where the deals involve substantial amounts of money.  Counsel for sellers and borrowers should keep this in mind when their clients are requested to provide such continuous or continuing promises.  The writer's preference is to either avoid or minimize such terms.  Or, at the very least, provide that if there is a post-contract date change - either in the situation/circumstances involving a promise's subject matter or a post-contract date acquisition of knowledge which makes the promisor's earlier promise no longer correct - then require that the contract specify a "no fault" termination of contractual relations.  If the matter is a "big deal" for the buyer (or lender), then the buyer (or lender) should be relieved to be rid of an obligation to complete the transaction.
  4. The Appeal Court pointed out that representations and warranties by a seller to a buyer may be usefully included in their agreements relating to matters other than pre-closing buyer non-desired usages.  Examples could include:
    1. a representation and/or warranty as to the existence/non-existence of work orders;
    2. a representation and/or warranty regarding compliance or non-compliance with zoning by-laws and development schemes;
    3. a representation and/or warranty regarding the existence or non-existence of building, electrical, plumbing, mechanical and fire code compliances, whether or not a work order has been issued;
    4. a representation and/or warranty regarding the existence or non-existence of certain substances and/or materials in or about the property, in particular, with respect to insulation and pollutants; and
    5. a representation and/or warranty pertaining to the fitness or physical condition of the property.

All of such representations and warranties should be considered in light of the actual knowledge and/or information held by the party making the representation and/or warranty and the timing or deemed timing of the making of same.

Manitoba readers should be aware of the fact that the Beatty Case involved the sale and purchase of a residential property utilizing the Ontario form of agreement typically used by realtors and sanctioned by the Ontario Real Estate Association/Toronto Real Estate Board.  The pre-closing representation and warranty by a seller to a buyer found in the Ontario form is not a standard pre-printed term in the form of Offer to Purchase mandated for use by Manitoba realtors for single family residential properties.  Manitoba Offers may have similar representations and warranties added by the parties or by their realtors and/lawyers.  But there is no "standard" language, and the writer has seen clauses as "bare-boned" as a scrawled "no UFFI", without any elaboration whatsoever, that is, without limitations as to the seller's personal knowledge and experience and when the representation/warranty is made or deemed to be made.

  1. In the Beatty Case, the buyer argued that the "survives closing" provision in the contract itself meant that the seller's representation and warranty regarding pre-closing usage should be considered to have been made at - and probably even after - closing.  The Appeal Court held that this was not the meaning of the survival clause.  The provision meant only that if the buyer did have a right of action against the seller based on pre-closing usage - which the Appeal Court held that it did not - such right would continue to exist following closing so as to enable the buyer to pursue its claim, presumably, subject to the application of limitations of actions legislation.  Reference to post-closing survival of a pre-closing right of action should remind us that a further solution to a cautious buyer's concern about the pre-closing status of the property would be to have the contract provide for a limited post-closing period of time within which the buyer would be able to continue its due diligence.  Where the same revealed a material problem for the buyer, the buyer would be entitled to terminate (in effect, reverse) the deal.  Because parties to a transaction usually wish to achieve certainty on or immediately following closing, this sort of an arrangement will be of a limited appeal to both sellers and buyers.  Its use will no doubt be limited to situations where big dollars are at stake and the subject matters of the sale and purchase are such that they involve complex, costly and time-consuming due diligence processes in order to properly enlighten the buyer as to what it has contracted to acquire.