A recent Court of Appeal ruling illustrates the severe consequences that can flow from aborting a real estate transaction. In the decision of Joo v. Tran, 2021 ONCA 107, the Court of Appeal declined to give effect to a term that was included in an agreement of purchase and sale (APS), on the basis that such an interpretation of the clause would have resulted in an absurdity. The clause indicated that the vendors would discharge any encumbrances on or before closing, either through sale proceeds or by way of a solicitor’s undertaking, which term was included in Schedule A of the APS.
The decision arose from the appeal of a ruling on a summary judgment motion brought by the seller, who sued the purchaser in a real estate transaction for breach of contract, after the purchaser expressing concerns regarding utility easements on the property, aborted the real estate transaction. The purchaser was ordered to pay $430,000 in damages to the seller.
The Facts:
The offer of purchase was accepted by the sellers on April 30, 2017, and paragraph 10 of the APS indicated that the property was free and clear of encumbrances save for minor utility easements.
The property contained four utility easements related to: water mains, sewers and drains; hydro; cable television; and telecommunications. The public utility easements service the subject and adjacent properties.
Despite paragraph 10 of the APS, “Schedule A” of the APS indicated that the vendors would discharge any encumbrances on or before closing, either through sale proceeds or by way of a solicitors undertaking and made no direct reference to the utility easements referred to at paragraph 10.
On May 4, 2017, the APS was amended to include “Schedule C” which contained a property survey indicating the nature of the easements.
On August 14, 2017, the purchasers took the position that the sellers failed to disclose easements of “material significance” and requisitioned their removal. The seller refused on the basis that the easements were fully disclosed at paragraph 10 of the APS. The purchasers subsequently refused to close the deal.
The seller relisted the property and sold it at a significantly lower price and then commenced suit against the defaulting purchaser for the difference in price (amongst other damages). Pursuant to a summary judgment motion, judgment was granted in favour of the seller in the amount of $430,000, being the difference in the sale value between the failed deal and the subsequent sale completed by the seller on the subject property.
The Decision Under Appeal:
The Superior Court in the decision under appeal noted that the overriding test requires a consideration of whether the easement, in any significant way, affects the use and enjoyment of the property. Citing a prior decision, the judge set out the factors to be considered in deciding the overriding test, which include: the location, size and point of access of the easement, and its impact on the owner’s enjoyment of the property.
In this case the Judge hearing the summary judgment motion in Superior Court, was critical of the facts that the purchaser offered no evidence or testimony regarding the practicality of removing the easements, the impact of their removal and how the subject property and adjacent properties would then be serviced with the utilities that the easements provide. The judge was supportive of the description the sellers used to identify the easements in the APS as “minor utility easements”.
In applying the test and it’s factors the Superior Court judge acknowledged that the easements took up a significant percentage of the lot. However, the judge noted that there are no encroachments of structures into the easements, nor did the easements have any impact on the purchaser’s use of the backyard. In finding in favour of the sellers, the judge concluded that “these are the types of easements that any purchaser might expect in a residential subdivision.” Accordingly, the judge found that the purchaser by aborting the transaction was in breach of the APS and liable to the seller for damages.
The Appeal Decision:
The purchasers appealed the summary judgment, primarily seeking a strict interpretation of the wording of Schedule A to the APS, taking the position that the seller was obligated by the wording of Schedule A to discharge any encumbrances on or before closing.
On Appeal the Panel agreed with the Superior Court’s interpretation of the relevant provisions of the APS, ruling that the interpretation was open to the lower court, and in fact to give effect to the interpretation sought by the seller would result in an absurdity, since it would mean that the subject and adjacent properties would not have utilities. The Panel rejected the notion that the wording of “Schedule A” required the seller to discharge the utilities, regardless of whether it was possible, or made commercial sense to do so.
It is important to note that the lower court did not view paragraph 10 of the APS to be in conflict with the wording of Schedule A, but rather, held that Schedule A simply modified paragraph 10, allowing the seller to discharge encumbrances by way of a solicitors undertaking. As a result, the Court of Appeal was not required to rule on any potential conflict between the two clauses.
The Takeway:
This case illustrates one of the reasons people sue after buying or selling real estate. The decision highlights the importance for purchasers to conduct their due diligence with respect to easements on any property, and the disclosure obligations of a seller regarding easements. Courts are unlikely to give effect to a clause in the contract that would result in an absurdity. Whether you are a purchaser or a seller, in an expensive and heated real estate market, the consequences of aborting a real estate transaction can be significant.
If you are faced with a situation where you have suffered damages because of an aborted real estate transaction or you are facing a lawsuit as a result of same, it is important to get legal advice. The lawyers at Gilbertson Davis LLP have experience with real estate litigation. Contact us for an initial consultation.
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