Jan 17, 2020

What do I do if the house I bought turns out to have been a grow-op?

Beatty v. Wei, 2018 ONCA 479 (CanLII)

In Beatty v Wei and ReMax [2018] ONCA 479, Brown J.A. reversed the motion judge on whether a seller’s warranty needs to be true at the date of sale or at the date of closing.

The standard sellers warranty confirmed that the seller didn’t use the house as a marijuana grow-operation and that the seller did not have any information to suggest that it had previously been used as such.

Whether the warranty was true or not at the time of sale, between sale and closing the buyer found out it had been a grow-op with a previous owner. The seller now had information that pointed to grow-op. This information was in the seller’s knowledge at the time of closing.

So did the warranty extend to closing?

The motion judge said yes. Brown J.A. said no.

Brown J.A. was correct as a matter of contract interpretation. There were several other clauses which were specifically required to carry to closing. The warranty clause did not have words that carried over to closing. The lawyers were free to write new warranty clauses that carried over to closing (or afterward!). They had not done this here.

How did warranty in property contract come into English law?

The social malignancy and prevalence of grow-ops makes house-sales vaguely resemble cattle-sales in pre-Norman England. Apparently cattle-theft (and then sale) was wide-spread. Numerous rules evolved to deem sales to be valid. Sales were to take place in a market, the town reeve was to be present. The buyer was to have two credible witnesses with him for his purchase.

When a dispute arose as to the provenance of a particular cow, the seller was required to warrant to four owners backward in time. Pollock (The History of English Law before the time of Edward I p.65) describes this as the origin of the doctrine of warranty in property contracts.

How would an economist see this?

As a matter of contract interpretation, Brown was certainly correct in maintaining a narrow reading of the warranty clause.

Putting the onus implicitly upon the seller, for instance, Insisting upon a seller investigation back to three previous owners (as the original cattle warranty would have done) would dramatically increase the inconvenience of sale.

Is it more important to make the sale-side easy?

As between buyers and sellers, the buy-side has more freedom of action to self-protect (by simply not purchasing that particular house). Automatic imposition of a comprehensive warranty cannot eliminate uncertainty per se. Although uncertainty is reduced to the new buyer (through a comprehensive warranty), the difficulty of sale is increased to the seller. Markets become efficient when both uncertainty and transaction cost are minimized, not merely lowering one at the expense of the other. In a well populated market with many buyers and sellers uncertainty is not fatal. Price is usually the variable that internalizes uncertainty. In economic theory it is a joint minimization exercise.

We all know that these uncertainties are addressed by implicit price adjustments. The degree of worry and uncertainty as to the provenance of a house (whether it was a grow-op) always manifests ultimately in price. The common law is full of situations (such as the Beatty plaintiffs) who have to absorb the alleged loss of buying a grow-op for a higher price than they would otherwise have paid. The genius of the system is that a plaintiff can look to their agent (for not investigating) and their lawyer (for not protecting with a comprehensive warranty) to assist in distributing the loss caused by a deficient warranty clause. The market will implicitly adjust to this malignancy (with explicitly comprehensive warranties or lower prices) as England adjusted to address cattle-theft in earlier times.