What Does the Illegal Substances Clause Mean in OREA Agreements of Purchase and Sale?

Nick P. Poon, B.Sc. (Hons.), B.A., J.D.Agents and Brokers, Appeals, Broker and Agent Claims, Civil Litigation, Commercial, Commercial Litigation, Contract Disputes, Contract Termination, Misrepresentation, Negligence, Real Estate Agent and Broker, Real Estate Litigation0 Comments

The Court of Appeal decision in Beatty v. Wei, 2018 ONCA 479, involved the failed closing of a residential property in Toronto and the proper interpretation of an illegal substances clause that is commonly found in OREA Agreements of Purchase and Sale.

Illegal Substances Clause in OREA Agreement of Purchase and Sale

In this case, about a month after entering into the Agreement of Purchase and Sale, the purchaser’s real estate agent discovered the property had been previously used as a marijuana grow-op in 2004.  The purchaser sought to terminate the agreement and demanded the return of the $30,000 deposit.  The sellers refused to terminate the agreement and commenced an application for a declaration that the purchaser breached the agreement by failing to close and an order that the sellers were entitled to the deposit and related damages.  In response, the purchaser commenced a competing application for similar relief.

The dispute was in respect to an illegal substances clause that is commonly inserted by real estate agents into Schedule A of OREA Agreements of Purchase and Sale, and reads as follows:

The Seller represents and warrants that during the time the Seller has owned the property, the use of the property and the buildings and structures thereon has not been for the growth or manufacture of any illegal substances, and 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.  This warranty shall survive and not merge on the completion of this transaction.

Application Decision

The application judge found that the sellers’ representation in the underlined portion of the illegal substances clause was interpreted as “a statement of present fact, to the best of the Sellers’ knowledge and belief, that was intended to be relied upon when made and one upon which the Purchaser was entitled to continue to rely, at least until closing, while the APS was an executory contract”.  Therefore, after the purchaser discovered and disclosed to the seller that the property had been used as a marijuana grow-op, the sellers could no longer “honestly” give the representation.

Accordingly, the application judge held that the purchaser was entitled to rescind the Agreement of Purchase and Sale because he was induced into entering the agreement based on the sellers’ misrepresentation.  The purchaser was entitled to the return of the $30,000 deposit and legal costs.  The sellers appealed.

Court of Appeal Decision

The Court of Appeal first addressed the issue of which standard of review applied under the circumstances.  The Court of Appeal held that the correctness standard applied because the appeal involved the interpretation of a widely-used illegal substances clause in the standard OREA Agreement of Purchase and Sale which would have significant precedential value.  Further, there was no meaningful factual matrix that would assist in interpreting the clause.

Second, the Court of Appeal held that the meaning of the representation given by the sellers in the illegal substances clause must be limited to their knowledge and belief at the time they signed the Agreement of Purchase and Sale.  The illegal substances clause must be interpreted in accordance with the standard rules of contractual interpretation, including: (a) the plain language used in the clause; and (b) provisions in a contract should be read in light of the whole agreement and its other provisions.

The Court of Appeal noted that the plain language used in the clause did not state that the representation continued “at least until closing”.  Furthermore, the Agreement of Purchase and Sale contained other provisions which included representations and warranties that were expressly stated to operate at the time of closing.  The absence of similar language in the illegal substances clause reflected the parties’ intention that the representation was limited to the sellers’ knowledge and belief at the time of signing the Agreement of Purchase and Sale.  The Court of Appeal also held that the “surviving closing” language merely provided that the purchaser could commence an action for breach of warranty or condition following the closing of the transaction.

As a result, the Court of Appeal held that the sellers did not breach the illegal substances clause.  The evidence indicated the purchaser’s discovery also came as a complete surprise to the sellers.  The appeal was allowed.  The sellers were entitled to the $30,000 deposit and the sellers’ claim for damages was remitted back to the Superior Court of Justice for determination.

Caveat Emptor and Stigmatized Properties

This case illustrates that purchasers (and their real estate agents and lawyers) must take care to research a potential property prior to signing an Agreement of Purchase and Sale because the doctrine of caveat emptor or “let the buyer beware” generally applies to all residential real estate transactions.  Standard clauses in OREA Agreements of Purchase and Sale may not protect the purchaser from a pre-closing discovery that the property is stigmatized by, for example, being a former marijuana grow-op, reports that the property is haunted or a murder or suicide that occurred on the property.  A stigma on the property not only affects the value and marketability of the property but may also prevent the purchaser from securing a mortgage and/or insurance on the property.  In this case, the purchaser could have avoided any issues and litigation altogether if he had performed cursory internet searches and enquiries with Toronto Police Services prior to making an offer to purchase the property.

If you require legal advice and representation in respect to real estate litigation matters including misrepresentation, please contact us for an initial consultation.

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About the Author

Nick P. Poon, B.Sc. (Hons.), B.A., J.D.

Practitioner in Civil Litigation with a focus in insurance defence, real estate litigation, condominium disputes and commercial litigation. Bio | Contact

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