[Pepall, Hourigan and Brown JJ.A.]
John Lo Faso and David Morawetz, for the appellants JoB and JaB
Patrick Bakos and Shida Azari, for the respondent Zhong Wei
Keywords: Contracts, Real Property, Agreements of Purchase and Sale of Land, Ontario Real Estate Association/Toronto Real Estate Board Standard Forms, Contractual Interpretation, Standard of Review, Correctness, Illegal Substances Clause, Breach of Representation, Breach of Warranty, Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37
This appeal puts into question the interpretation of an Illegal Substances Clause (“the Clause”) commonly used in the Ontario Real Estate Association/Toronto Real Estate Board standard forms of Agreement of Purchase and Sale (“APS”). At issue is the second part of the Clause, where the seller represents and warrants 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.”
In the present case, after the parties had entered into an APS, the Purchaser discovered that the property had been used as a marijuana grow-op before the Sellers had acquired it. The Purchaser took the position that he was entitled to terminate the agreement and demanded the return of his deposit. The Sellers disagreed and refused to terminate the APS. Competing applications ensued. The application judge held that the Purchaser’s discovery of information about the property’s prior use amounted to a breach by the Sellers of their representation and warranty in the Clause. The application judge held the Purchaser was entitled to rescind the agreement and obtain the return of the deposit, but directed the Purchaser’s claim for damages to proceed to trial. The Sellers appealed.
(1) Is the interpretation of a standard form contract a question of law subject to the standard of review of correctness?
(2) Did the application judge err in his interpretation of the Clause?
Holding: Appeal allowed.
(1) Yes. In Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37, the Supreme Court recognized that: “[W]here an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review”: para. 24. Illegal Substances Clauses are standard provisions commonly included in residential APS’s in the Toronto region. There is no meaningful factual matrix specific to the parties that could assist interpreting the Clause. In addition, interpretation of the Clause in this case will have precedential value, since Illegal Substances Clauses are widely-used. Therefore, the interpretation of the Clause is best characterized as a question of law subject to a correctness review.
(2) Yes. As set out below, the application judge erred in his interpretation of the Clause in various ways.
The application judge’s differentiation of the “representation” from the “warranty” in the Clause. When he considered the legal effect of the Clause, the application judge applied different analytical approaches to the same contractual term: he interpreted the “warranty” language as a term of the contract, while he looked at the “representation” language through the lens of the principles concerning pre-contractual representations. That approach contained several errors: It failed to consider the inter-related nature of the “representation” and the “warranty” in this particular contract. It failed to address the real interpretive issue of what the representation in the Clause actually meant. It was problematic to view the “representation” in the Clause as a pre-contractual or collateral representation. Finally, to treat the “representation” contained in the Clause as something other than a term of the contract would ignore the language of the entire agreement clause in the APS. Instead, the application judge should have interpreted the Clause as a term of the parties’ contract in accordance with the standard rules of contractual interpretation.
The application judge’s reliance on a duty to disclose to inform his interpretation of the Clause. The application judge erred in his reasoning, as he posited that if the Sellers had discovered after the execution of the APS, that the property had been used as a marijuana grow-op before they acquired it, their silence — or failure to disclose such information to the Purchaser — could found an action for misrepresentation. From this, he concluded that the Purchaser’s rights are not affected by the fact that he was the one who discovered this information and communicated it to the Sellers. This reasoning is not persuasive, as the representation and warranty the Sellers gave about the use of the premises was limited, not absolute. It was a representation or warranty “to the best of [their] knowledge and belief”. The Purchaser’s discovery that a previous owner of the house had used it for a grow-op was a complete surprise to the Sellers. While liability may attach where a vendor knew about a major latent defect but concealed the information from the purchaser, these are not the facts of the present case. Therefore, the application judge improperly applied principles concerning a vendor’s concealment of material information about the condition of a property to a situation where no such concealment had occurred.
The meaning of the Illegal Substances Clause: The Sellers’ representation and warranty that the use of the property had never been for the growth or manufacture of illegal substances was limited to their knowledge and belief as it existed when they executed the APS. This conclusion is reached for three reasons: (1) The plain language used in the clause; (2) The absence of any language in the Clause that speaks of the Sellers’ knowledge and belief at the date of closing, in contrast to the use of such language in other provisions of the APS; and (3) The effect of the “survives closing” language at the end of the Clause does nothing more than clarify that whatever the content of the representation or warranty given by the Sellers, it did not merge with the deed on closing. The representation and warranty survived closing to offer a basis for a post-closing action of breach. However, that language does not assist in ascertaining the content or meaning of the representation or warranty given.
For these reasons, the Sellers’ representation and warranty in the Clause that the use of the property had never been for the growth or manufacture of illegal substances was limited to their knowledge and belief as it existed when they executed the APS [emphasis added]. At that time, they did not know about the property’s prior use as a grow-op. In those circumstances, the application judge erred in finding the Sellers had breached the Clause. They did not breach the Clause.
In the result, the Sellers were entitled to a declaration that the Purchaser was in breach of the APS for failing to complete the purchase, and were entitled to keep the $30,000 deposit that had been paid by the Purchaser. The matter was remitted to the Superior Court to determine the Sellers’ entitlement to the costs of the application below, the real estate broker and agent’s entitlement to costs and the Sellers’ claim to damages.
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