The proliferation in recent years of residential homes being used as a cannabis grow-op has created confusion and uncertainty for buyers, sellers and real estate agents as to how far the obligations of a seller extend regarding information about a home’s history.
In the recent Court of Appeal Decision of Beatty v. Wei, 2018 ONCA 479, the Court offered clarity in response to the question: What is the effect of an illegal substances clause in a standard form Ontario Real Estate Association/Toronto Real Estate Board Agreement of Purchase and Sale (“APS”)?
The “Illegal Substance Clause” is a commonly included clause in such agreements and typically 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
The Court of Appeal provided helpful clarification on the interpretation of the second part of the clause, particularly “that to the best of the Seller’s knowledge and belief, the use of the property … has never been for the growth or manufacture of illegal substances”. The Court felt compelled to do so because the Court recognized that this provision is one that is commonly included in residential agreements of purchase and sale in the Toronto region.
In this case the Purchaser found out that the property they were purchasing was in fact used as a cannabis grow-op in the past, though not by the Sellers. The Purchaser found this out after the APS was signed but before the closing date and as a result, did not proceed to close the deal. Both the Seller and the Purchaser sued each other as a result and each of them sought the deposit as well as damages. The Seller subsequently sold the property with proper disclosure of the cannabis grow-op history, for $86,000 less than the original deal between these parties. Material to the dispute was the fact that the Seller did not have any knowledge at the time that they signed the APS with the purchaser, of the fact that in the past and prior to their ownership, the property was used as a cannabis grow-op.
The application judge of the Superior Court originally held that the clause meant that the Seller made a warranty and a representation that survived at least to the closing date, such that when the purchasers found out the fact was untrue, the Purchaser was entitled to back out of the deal. He held the APS was void ab initio which means the Purchaser was entitled to be placed into the same position as if they never signed the APS (often referred to as rescission), and this included a full return of their deposit of $30,000.00.
On appeal the Court of Appeal held that the statement only had to be true when the Seller signed the APS, which it was, since the Seller only became aware that the property had previously been used as a cannabis grow-op when they were told by the Purchaser who had uncovered this information prior to closing. The Court held that the APS did not include clear language revealing an intention that the statement had to be true on the date of closing. The Court pointed out that there were several other clauses in the APS that included such language as “… on completion” or “on or before closing” and the absence of that language in the clause made a difference to its interpretation and effect.
The Court also clarified that just because a clause in the APS includes the word “represents” does not mean that the clause is a pre-contractual representation but rather, it should be considered a term of the contract. The Court ruled that the Superior Court Judge erred in his analysis by interpreting the illegal substances clause as a pre-contractual representation instead of a term of the contract. The consequence is that different remedies flow from a misrepresentation than a breach of contract. The Court concluded that as a result the Seller had not been untruthful in their belief that the property had never been used as a grow-op at the time they signed the APS, and therefore the Purchaser was not entitled to rescind the APS or to a return of their deposit. Instead the Seller was entitled to retain the deposit and pursue a claim for damages which might include the lost value in the sale of the property to a subsequent purchaser for $86,000 less than the original deal.
It will be interesting to see how this clause will be amended and interpreted to consider the forthcoming legalization of cannabis consumption for recreational use, combined with the 2016 Federal Court of Appeal ruling in Allard v. Canada, [2016] 3 FCR 303, which held that medical marijuana patients had the right to grow cannabis at home for their own personal medical consumption and to prohibit them from doing so amounted to a charter violation. Many provinces including Quebec and Manitoba who have been tasked with legislating regulations to prepare for national legalization of cannabis for recreational use have already been making the move to ban cannabis grow-ops in homes. But many legal analysts consider a complete ban on personal cultivation as contrary to the federal governments objectives.
Many condo corporations are also grappling with how to craft community rules in a manner that balances the competing interests of various residents to use of their units, with the nuisance and potential health and safety risks, that cannabis plants, potential mold and moisture, and even smoke can cause when living in close quartered dwellings.
Have you been involved in a real estate transaction gone wrong? Contact us to see how we can help.
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