Beatty et al. v. Wei et al. Wei v. Beatty et al.
[Indexed as: Beatty v. Wei]
Ontario Reports Ontario Superior Court of Justice, Cavanagh J. June 5, 2017 138 O.R. (3d) 699 | 2017 ONSC 3478
Case Summary
Sale of land — Agreement of purchase and sale — Representations — Sellers representing in agreement of purchase and sale that to best of their knowledge property had never been used for growth or manufacture of illegal substances — Purchaser discovering before closing that property had previously housed marijuana grow operation — Sellers unaware of that fact when agreement of purchase and sale was made — Purchaser materially induced to enter into agreement of purchase and sale on strength of illegal substances clause — Sellers' representation substantial and material — Agreement of purchase and sale void ab initio — Purchaser entitled to remedy of rescission and return of deposit.
The agreement of purchase and sale ("APS") for a residential property provided that the sellers represented and warranted that to the best of their knowledge and belief, the property had not been used for the growth or manufacture of illegal substances. Before closing, the purchaser discovered that the property had housed a marijuana grow operation in 2004. The sellers were unaware of that fact when the APS was made. The purchaser refused to close and demanded the return of his deposit. The sellers refused to agree to the termination of the APS and brought an application for declarations that the APS was a firm and binding contract, that the purchaser had breached the APS and that the deposit had been forfeited. The purchaser applied for declarations that he was not required to complete the transaction, for the return of his deposit and for related relief.
Held, the purchaser's application should be allowed; the sellers' application should be dismissed.
The illegal substances clause was a representation which was a statement of a present fact, to the best of the sellers' knowledge and belief, that was intended to be relied upon when made and upon which the purchaser was entitled to continue to rely, at least until closing, while the APS was an executory contract. The representation was substantial and material. The purchaser was materially induced to enter into the APS on the strength of the illegal substances clause. The APS was void ab initio. The purchaser was entitled to the remedy of rescission and to the return of his deposit.
Cases referred to
- Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423
- John Levy Holdings Inc. v. Cameron & Johnstone Ltd., [1993] O.J. No. 3183 (C.A.), affg [1992] O.J. No. 1592, 26 R.P.R. (2d) 130, 35 A.C.W.S. (3d) 134 (Gen. Div.)
- Lysaght v. Edwards (1876), 2 Ch. D. 499
- McGrath v. MacLean (1979), 22 O.R. (2d) 784, [1979] O.J. No. 4039, 95 D.L.R. (3d) 144, [1979] 1 A.C.W.S. 155 (C.A.)
- Panzer v. Zeifman (1978), 20 O.R. (2d) 502, [1978] O.J. No. 3456, 88 D.L.R. (3d) 131, [1978] 2 A.C.W.S. 327 (C.A.)
- Petersen v. Matt, [2014] O.J. No. 745, 2014 ONSC 896 (Div. Ct.)
- Sevidal v. Chopra (1987), 64 O.R. (2d) 169, [1987] O.J. No. 732, 41 C.C.L.T. 179, 2 C.E.L.R. (N.S.) 173, 45 R.P.R. 79, 5 A.C.W.S. (3d) 448 (H.C.J.)
- Singh v. Trump, [2016] O.J. No. 5285, 2016 ONCA 747, 76 R.P.R. (5th) 177, 408 D.L.R. (4th) 235, 62 B.L.R. (5th) 216, 271 A.C.W.S. (3d) 503
- Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of), [1991] O.J. No. 1787 (Div. Ct.), 51 O.A.C. 321, 4 B.L.R. (2d) 220, 40 C.C.E.L. 262, 29 A.C.W.S. (3d) 622 (Div. Ct.)
Authorities referred to
Swan, Angela, and Jakub Adamski, Canadian Contract Law, 3rd ed. (Markham, Ont.: LexisNexis, 2012)
APPLICATIONS by the purchaser and sellers for relief in relation to an agreement of purchase and sale.
John Lo Faso and David Morawetz, for applicants. Patrick Bakos, for respondent Zhong Wei. Amanda Gibson, for respondent Re/Max Premier Inc. Patrick Bakos, for applicant Zhong Wei. John Lo Faso and David Morawetz, for respondents Jonathan Beatty and Jacqueline Beatty. Amanda Gibson, for respondents Harold Balchand and Re/Max Premier Inc.
CAVANAGH J. : —
Introduction
[1] There are two applications before me that were heard together.
[2] The first application was brought by Jonathan Beatty and Jacqueline Beatty (the "sellers"), the sellers of a residential property municipally known as [number omitted] Stainforth Drive, Toronto (the "property"), against Zhong Wei (the "purchaser"), the purchaser of the property under an agreement of purchase and sale dated May 15, 2016 (the "APS"), and against Re/Max Premier Inc., the sellers' agent, which holds a $30,000 deposit (the "deposit"). The second application was brought by the purchaser against the sellers and against Harold Balchand and Re/Max Premier Inc., the sellers' agents (together, the "agent").
[3] Both applications are concerned with a particular provision in the APS. The APS includes Schedule A, which is attached to and forms part of the APS. Schedule A includes the following representation and warranty:
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.
I will refer to this provision as the "illegal substances clause".
[4] After the APS was made and before closing, the purchaser learned that in 2004 the property was used to grow marijuana. The purchaser's lawyer notified the sellers' lawyer of this discovery by letter dated July 8, 2016 which attached a letter dated June 27, 2016 from Toronto Police Service that confirmed that the property was used to produce marijuana and that the police attended at the property in 2004 and seized 265 marijuana plants.
[5] The purchaser's lawyer's letter advised the sellers' lawyer that the purchaser is not willing to complete the transaction. The purchaser demanded a return of his deposit. The sellers refused to agree to termination of the APS and they brought their application against the purchaser for remedies resulting from the refusal of the purchasers to complete the sale and purchase transaction.
[6] In order to mitigate their damages, the sellers sold the property to another purchaser. The purchase price was $86,100 lower than the purchase price under the APS.
[7] The sellers apply for declarations that
(a) the APS is a firm and binding contract; (b) the purchaser has breached the APS; (c) the deposit has been forfeited to the sellers; (d) the purchaser is liable to the sellers for damages for breaching the APS.
[8] The purchaser applies for declarations that
(a) the purchaser is not required to complete the transaction contemplated by the APS; (b) alternatively, if the purchaser is required to do so, that the purchase price be adjusted to reflect a fair market value which takes into account that the property was previously used for a marijuana grow operation; (c) the sellers have breached the APS; (d) the sellers are liable to the purchaser for all damages suffered by the purchaser from the sellers' breach of the APS and an order directing a reference for determination of such damages or, alternatively, damages in the amount of $250,000; (e) the purchaser is entitled to the return of the deposit; (f) the purchaser is entitled to termination of the APS resulting from the misrepresentations of the agent and that the agent is liable for the damages suffered by the purchaser resulting from such misrepresentations.
[9] The parties have agreed that
(a) if I find that the purchaser breached the APS and that the sellers are entitled to damages, I should determine the amount of such damages based upon the evidence filed on these applications; (b) if I find that the purchaser was not required to complete the APS, the purchaser is entitled to recover the deposit and his claims against the sellers and the agent for damages should be allowed to proceed as an action; (c) if I find that the purchaser (i) was required to complete the APS, (ii) is not liable to the sellers for damages, and (iii) is entitled to recover damages from the sellers and the agent, the applications should be converted to an action for determination of whether the purchaser is entitled to damages and, if so, in what amount.
[10] For the following reasons, I conclude that the purchaser is entitled to the remedy of rescission such that the APS is void ab initio.
Analysis
[11] The first question that arises on these applications is whether the purchaser is entitled to the remedy of rescission such that the APS is void ab initio. If the purchaser was entitled to elect not to complete the APS and to treat it as void ab initio, he is entitled to the return of the deposit and would not be liable to the sellers for breach of the APS.
[12] The sellers submit:
(a) The statements made in the illegal substances clause were true when the representations and warranty were given because the sellers had absolutely no knowledge at the time the APS was signed that marijuana had ever been grown at the property. (b) The illegal substances clause did not place a duty upon the sellers to make inquiries to determine whether the property had ever been used to grow or manufacture illegal substances. (c) Information discovered after the date on which the representations and warranty were given on May 15, 2016 through the illegal substances clause is irrelevant and, if the parties had intended that the statements made in the illegal substances clause must be true as of the closing date, they needed to use clear language to reflect that intention, and they did not. (d) Therefore, there is no basis upon which the purchaser could have rescinded or otherwise validly refused to close the APS, and his refusal to do so was a breach of the APS.
[13] The purchaser submits:
(a) The illegal substances clause is intended to protect a purchaser in exactly the situation in which the purchaser finds himself. (b) The illegal substances clause expressly provides that the warranty "shall survive and not merge on the completion of this transaction", such that the statements made must be true as of the date of closing, and thereafter. (c) The sellers knew, at least before closing when they were so informed by the purchaser, that the property had been used to grow or manufacture marijuana in 2004 and, therefore, upon acquiring such knowledge, the sellers could no longer truthfully give the warranty and make the representations in the illegal substances clause. (d) The statement in the illegal substances clause that, to the best of the sellers' knowledge and belief, the property has never been used for the growth of marijuana thereby became a misrepresentation, and the warranty was breached before closing, such that the purchaser was entitled to rescind the APS.
[14] In support of their submissions, the sellers rely upon a legal doctrine that, they submit, has been settled for hundreds of years. This doctrine is that when there is a valid contract for sale of land the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase money, a charge or lien on the estate for the security of that purchase money, and the right to retain possession of the estate until the purchase money is paid, in the absence of express contract as to the time of delivering possession. The sellers submit that where there is a contract for the sale of land, if anything happens to the estate between the time of sale and the time of completion of the purchase, it is at the risk of the purchaser: Lysaght v. Edwards (1876), 2 Ch. D. 499, at pp. 506-507. Therefore, on the basis of this doctrine, the sellers submit that after the APS, the risk of discovery that the property had previously been used for growing or manufacturing marijuana rested with the purchaser.
[15] I do not question the doctrine upon which the sellers rely. This doctrine is concerned with who should bear the risk of unforeseen events that occur between the date of an agreement of purchase and sale and the date for completion of the transaction. This doctrine is, however, subject to the contractual terms between the seller and the purchaser: Lysaght, at p. 506. This doctrine is, as well, subject to the law with respect to a seller's duty of disclosure of latent defects when there is a contract for the sale of land: McGrath v. MacLean (1979), 22 O.R. (2d) 784, [1979] O.J. No. 4039, 1979 CarswellOnt 1426 (C.A.), at paras. 13-15. It is also subject to the law concerning representations that materially induce a person to enter into a contract, including a representation that is incorporated into the contract.
[16] I will first address the legal effect of the illegal substances clause in the APS.
[17] The sellers submit that the illegal substances clause should not be interpreted to require that the statements made be true as of the date of closing and thereafter, but that such statements need only be true when made, on the date of the APS. The sellers point to other provisions in the APS (for example, clause 17 concerning residency, and the first paragraph of Schedule A concerning the working condition of chattels) where a representation and warranty was made that, by the express language thereof, was effective "on completion" or "on closing". The sellers submit that similar express language would need to have been included in the illegal substances clause in order for the statements to be required to be true as of the date of closing.
[18] The statement in the illegal substances clause that the property had never been used for the growth or manufacture of illegal substances was expressly made "to the best of the Seller's knowledge and belief". I accept that through the use of these words, the sellers did not warrant the absolute truth of the statement that the property has never been used for the growth or manufacture of illegal substances: John Levy Holdings Inc. v. Cameron & Johnstone Ltd., [1992] O.J. No. 1592, 1992 CarswellOnt 602 (Gen. Div.), at para. 64, affd [1993] O.J. No. 3183, 1993 CarswellOnt 5613 (C.A.).
[19] In my view, however, there is an important distinction between a warranty and a representation when one considers a contractual provision such as this. A warranty is a contractual promise, usually made in the context of a sale, that the thing being sold has some particular quality: Angela Swan and Jakub Adamski, Canadian Contract Law, 3rd ed. (Markham, Ont. LexisNexis, 2012), at para. 8.2.2. In respect of the illegal substances clause, the qualifying words mean that there is no contractual promise, or warranty, that the property has never been used for the growth of illegal substances. I accept the sellers' submission that, without clear language such as the words "on completion", or "on closing", to show that the parties intended that the content of the warranty could change with changing circumstances after the date of the APS when the warranty was given, the content of the warranty does not change. The warranty that survived completion of the transaction was the warranty that was given on the date of the APS.
[20] The statement in the illegal substances clause is, however, also a representation. The representation is that, to the best of the sellers' knowledge and belief, the use of the property has never been for the growth or manufacture of illegal substances. In my view, this representation is a statement of a 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.
[21] It is well settled that where a representation has been made in the bona fide belief that it is true, and the party who has made it discovers that it is untrue, such party cannot remain silent. Silence which follows a representation can found an action for misrepresentation where the silence continues after the representor learns that the representation is no longer true or was never true: Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of), [1991] O.J. No. 1787, 1991 CarswellOnt 146 (Div. Ct.), at paras. 14-16. This principle applies even where a representation made at the time a contract is signed becomes untrue before or at the time of completion: Sevidal v. Chopra (1987), 64 O.R. (2d) 169, 1987 CarswellOnt 226 (H.C.J.), at paras. 90-95.
[22] Had the sellers, themselves, discovered after the date of the APS and before closing that the property had been used to grow marijuana, they would have been required to disclose to the purchaser that their representation, made to the best of their knowledge and belief when the APS was made, was not true. 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. Upon acquiring knowledge that the property had been used to grow marijuana, the sellers could no longer honestly give the representation in the illegal substances clause.
[23] It is settled that rescission is available in the case of an executory contract where a material misrepresentation that was an inducement to enter into the contract is established. Rescission may be obtained on the basis of a non-fraudulent misrepresentation where the defendant has made a false statement that was material and that induced the plaintiff to enter the contract, and where the innocent party has sought rescission before the closing of the transaction. After completion of the transaction, absent a finding of fraud, in the context of real estate transactions induced by misrepresentation, execution of the agreement has typically been held to constitute a barrier to rescission: Singh v. Trump, [2016] O.J. No. 5285, 2016 ONCA 747, at paras. 156-157; Panzer v. Zeifman (1978), 20 O.R. (2d) 502, [1978] O.J. No. 3456 (C.A.).
[24] In order for a misrepresentation that is a term of the contract to give the innocent party the option of rescinding the contract and having it declared void ab initio, the misrepresentation must be material, substantial or go to the root of the contract: Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423, [1999] S.C.J. No. 60, at paras. 44, 47. A statement is material if it is of such a nature as would induce a person to enter into the contract, or would tend to induce him to do so, or that it would be part of the inducement, to enter into the contract. Even then, it would be open to the representor to show that the representee knew the truth before she entered into the contract, and therefore could not rely on the misstatements, or by showing that the representee did not rely upon the misstatements, whether she knew the facts or not: Panzer, at para. 20.
[25] On these applications, the purchaser provided affidavit evidence that he had no knowledge of the marijuana grow operation when he submitted his offer to purchase the property. He discovered that the property had been used to grow marijuana when his real estate agent so informed him after an Internet search in relation to the property. The purchaser's evidence is that he relied on the illegal substances clause when he entered into the APS as, he says, any purchaser would. He has given evidence that, as a father of two young children, he is extremely concerned about their safety if they were to live in this house, because the growth and manufacture of marijuana can lead to mould and other health risks. The purchaser appended to his affidavit published articles dealing with the health, safety and financial effects of a home with a former marijuana grow operation.
[26] The sellers provided evidence that since he and his wife bought the property in 2009 neither they, nor anyone else, has used the property to grow marijuana or produce any illegal drugs. The sellers have provided evidence that in the more than seven years they have resided at the property they have not seen any evidence of mould or any other indication that marijuana was previously grown at the property. The sellers's evidence is that Mr. Beatty's mother-in-law, who has severe asthma and is very sensitive to air quality, has slept in the basement of the property on many occasions, without incident.
[27] I do not need to decide whether there is or is not any problem with mould or air quality, or any other health concern at the property. The evidence filed on these applications does not, in any event, allow me to do so. However, given that the illegal substances clause was expressly included in the APS by the sellers and, separately, by the purchaser (using a clause with identical language) I am able to conclude that the purchaser was materially induced to enter into the APS on the strength of the illegal substances clause, including the sellers' representation that to the best of their knowledge and belief, the use of the property has never been for the growth or manufacture of illegal substances. The fact that when the property was sold on the open market, with full disclosure of the information that it had been used for the growth of marijuana, the purchase price was almost $87,000 less than the purchase price that the purchaser had agreed to in the APS, supports my conclusion that the sellers' representation was substantial and material.
[28] I therefore conclude that the purchaser is entitled to the remedy of rescission in respect of the APS and to treat it as void ab initio. The purchaser is entitled to the return of the deposit, and is not liable to the sellers for damages for breach of the APS.
[29] The purchaser has also submit that the sellers were in a better position to discover any former marijuana grow operation at the property and that they had the onus of showing that they could not have known of this fact, rather than the purchaser having to show that the sellers knew of the former marijuana grow operation. The purchasers cite Peterson v. Matt, [2014] O.J. No. 745, 2014 ONSC 896 (Div. Ct.) as authority for this proposition. The purchaser submit that the sellers made a representation as to the growth of illegal substances at the property with reckless disregard for the truth and, therefore, the sellers cannot meet their onus of showing that they could not possibly have known of the defect. The sellers dispute that they had an onus to undertake any investigations into whether the property had formerly been used to grow marijuana or any other illegal substance. The sellers rely upon the well-established principles in McGrath, at paras. 13-15.
[30] Given my conclusion that the purchaser is entitled to rescind the APS because, with the discovery that the property had formerly been used to grow marijuana, the material representation made in the illegal substances clause is not true, it is not necessary for me to decide whether the sellers breached an obligation to disclose a latent defect.
[31] The purchaser wishes to proceed with his claim for damages against the sellers and the agent, even if he is successful in obtaining an order for rescission of the APS. I did not hear submissions on whether he is able to do so as a matter of law, and I do not decide this question on these applications. I note that in Guarantee Co., the Supreme Court of Canada addressed the question of the availability of damages where a contract has been declared void ab initio and wrote, at para. 47: "We express no opinion on the availability of damages in such cases".
Disposition
[32] I therefore order that the sellers' application is dismissed.
[33] On the purchaser's application, I order and declare that
(i) the purchaser is entitled to rescind the APS and treat it as void ab initio; (ii) the purchaser is entitled to the return of the deposit held by the agent, and the agent is directed to return the deposit, together with interest earned thereon, to the purchaser; (iii) the purchaser's application against the sellers and the agent for damages shall be treated as an action and shall proceed to trial. I direct the parties to consult and provide the court with their proposal for directions for the action to be included in the formal order to be issued.
[34] If the parties are unable to resolve costs, the purchaser may make written submissions within 20 days (not to exceed five pages, excluding costs outline), and the sellers and the agent may make responding submissions within ten days thereafter (also not to exceed five pages).
Purchaser's application allowed; sellers' application dismissed.