Category: Real Estate

Involved in a Commercial Real Estate Transaction? Make Sure You Complete Your Due Diligence with Respect to Environmental Issues

Due diligence is an essential part of any real estate transaction. In a residential real estate transaction, searches are typically performed to determine if there are any issues with respect to title, encroachments, work orders, open building permits, arrears in taxes or utility bills, and writs against the seller. Of course, every property is unique and additional searches may be required depending on the particular situation. In a commercial real estate transaction, it is important to conduct searches for not only the above-mentioned issues but also for additional matters that can especially affect commercial properties. Failure to conduct proper due diligence can expose the purchaser to significant liability. In today’s post, we will focus on liability for environmental issues and how you, as a purchaser of a commercial property, can take steps to protect yourself.

Environmental Liability

Under Ontario’s Environmental Protection Act, RSO 1990, c E.19, current and former owners of a property can be held liable for environmental contamination, whether or not they are actually responsible for causing the contamination. In Hamilton Beach Brands Canada Inc v Ontario (Environment and Climate Change), 2018 ONSC 5010 (Div Ct) (leave to appeal to ONCA denied), the current owners and tenants of property were held liable for contamination that occurred at the hands of a former tenant decades earlier. As seen in the case of Midwest Properties Ltd v Thordarson, 2015 ONCA 819 (leave to appeal to SCC denied), corporate ownership of a property will not necessarily protect individuals from being held personally liable. Courts are willing to pierce the corporate veil and hold directors and officers liable for environmental contamination pertaining to properties owned by their respective corporations. Furthermore, a government order to remediate a property does not preclude a civil action for damages from owners of neighbouring properties that may be affected by the contamination.

How Can You Protect Yourself?

Before purchasing a commercial property, it is important to thoroughly investigate the history of the property and determine if it is possible that contamination occurred on the property at any time in the past. This may require determining all the previous owners and uses of the property. The Ontario Ministry of the Environment, Conservation and Parks (MECP) should be contacted to determine if there are any records of contamination relating to the property in question. If there are any storage tanks on the property, their history should be investigated. Since 2002, all underground fuel storage tanks must be registered with the Technical Standard Safety Authority, and larger tanks require annual testing. In some cases, it may be necessary to perform a Phase I or even a Phase II Environmental Site Assessment (ESA) to determine if any contamination exists on the property, either above or below the surface or in the groundwater. If there are plans to change the use of a property, the MECP may require that a Record of Site Condition be filed which in turn requires completion of an ESA.

If you have any questions regarding liability for environmental contamination or environmental due diligence that should be completed prior to purchasing either a residential or commercial property, please contact Laura Rosati, Commercial Real Estate Lawyer at Devry Smith Frank LLP, at 289-888-6643 or laura.rosati@devrylaw.ca.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

By Justin DominicBlog, Real EstateNovember 4, 2020November 4, 2020

Ontario Introduces the Personal Real Estate Corporation (PREC)

On October 1, 2020, the Government of Ontario filed Ontario Regulation 536/20, Personal Real Estate Corporations (“Regulation 536/20”), under the Real Estate and Business Brokers Act, 2002, SO 2002, c 30, Schedule C (“REBBA 2002”). Regulation 536/20 allows realtors in Ontario to incorporate Personal Real Estate Corporations (“PRECs”) and establishes the regulatory framework with respect thereto. Realtors now join other professionals, such as medical doctors, lawyers and accountants, who are permitted to earn income through a professional corporation. This post provides an overview of Regulation 536/20 and addresses some of the potential benefits of a PREC to a realtor.

Regulation of PRECs

Pursuant to Regulation 536/20, a PREC must be incorporated under the Ontario Business Corporations Act, RSO 1990, c B.16. The PREC’s sole director, sole officer and the controlling shareholder must be registered under REBBA 2002, or exempt from registration, and must be employed by a real estate brokerage to trade in real estate. The PREC itself cannot carry on the business of trading in real estate other than by providing the services of its controlling shareholder to the brokerage. The PREC is only permitted to receive remuneration pertaining to trading in real estate from the controlling shareholder’s brokerage. Likewise, the controlling shareholder is only permitted to receive remuneration pertaining to trading in real estate from the PREC or from the brokerage by which the controlling shareholder is employed.

Benefits of PRECs

If used correctly, a PREC can assist a realtor with tax planning. Instead of all annual income being taxed at the realtor’s personal marginal income tax rate, income retained in a PREC will initially only be taxed at a corporate tax rate. Presently, the combined federal and Ontario personal income tax rate is over 53% on income over $220,000 whereas for Canadian controlled private corporations entitled to take advantage of the small business tax deduction, the current combined federal and Ontario tax rate is only 12.2% on income up to $500,000. Thus there is the potential for considerable deferment of taxes.

Retaining earnings in a PREC may allow for personal income to be “averaged” over several years. The real estate industry can be volatile and realtors are usually only paid on commission. As such, a realtor may have a sizeable income one year and less income in the following years. If one year results in particularly high earnings, those earnings can be retained in the PREC and paid out to the realtor over the following years, rather than being paid to the realtor by the brokerage in the year in which they were earned. This may result in the earnings being taxed at lower marginal income tax rates over several years. The realtor also has the option of being paid by the PREC through dividends rather than through wages, which may provide additional tax advantages.

The PREC also allows real estate agents the ability to income-split with the realtor’s spouse, child or parent, subject to the more comprehensive rules regarding tax on split income (which are relaxed for persons over age 65). Therefore, it may be possible to pay amounts from the PREC to those family members, who will presumably be taxed at a lower marginal tax rate than the realtor.

Is a PREC Right for You?

In order to take advantage of the benefits that a PREC can offer, proper planning is essential. A realtor must consider the extra administrative costs associated with incorporating and maintaining a corporation and weigh these costs against the potential benefits of a PREC.

To further discuss whether or not a PREC is appropriate for your situation or to learn more about incorporating a PREC, please contact Elisabeth Colson, a partner and the head of Devry Smith Frank, LLP’s Corporate Commercial Group, at 416-446-5048 or at elisabeth.colson@devrylaw.ca.

By Justin DominicBlog, Corporate Law, Real EstateOctober 28, 2020November 4, 2020

Title Insurance Providers Introduce Increased Protection for Lenders from Super Priority Liens and Deemed Trusts

The recent decision of the Federal Court of Appeal in Toronto-Dominion Bank v Canada, 2020 FCA 80 (“TD v Canada”), created a new cause for concern for lenders. The facts of the case are as follows:

In 2007 and 2008 the debtor, before becoming a customer of the Toronto-Dominion Bank (“TD”), failed to remit to the Receiver General of Canada over $67,000 worth of GST in relation to his business. In 2010, TD extended a loan and a line of credit to the debtor, both of which were secured against a property owned by the debtor. In 2011 the debtor sold the property in question and repaid the loan and line of credit. TD then discharged all charges registered against the property. Two years later, the Canada Revenue Agency (the “CRA”) commenced a deemed trust claim under Section 222 of the Excise Tax Act, RSC 1985, c E.15 (the “Act”) on the basis that the unremitted GST amounts constituted a deemed trust and the proceeds from the sale of the property should have been paid to the Receiver General before they were paid to anyone else.

At trial, the Federal Court (2018 FC 538) held that the unremitted GST amounts were indeed subject to the deemed trust provisions of Section 222 of the Act, and, because the deemed trust existed before TD registered its security interest against the property, the CRA had a super-priority lien on the sale proceeds of the property. TD was therefore obliged to remit the amount of the GST debt to the CRA. The Federal Court of Appeal upheld this decision.

Outcome

This decision is worrisome to lenders for several reasons. First and foremost, amounts covered by the deemed trust provisions in the Act, as well as other amounts that result in a deemed trust, such as pension deductions that an employer fails to remit under Section 227 of the Income Tax Act, RSC 1985, c1, are not registered on title to a property. Therefore, it is often very difficult to determine if a deemed trust exists at the time a lender seeks to register a security interest against a property. Despite this, if a deemed trust is later found to have existed before a security interest was registered against a debtor’s property, the amount subject to the deemed trust will form a super-priority overpayment made to the lender. This includes payments made from the proceeds of the sale of the secured property. The amounts in question can be significant, and these claims can be brought forward many years after a property has been sold and the security interests discharged.

Title Insurance

While title insurance has, for some time, offered protection against these types of super-priority claims, there is a caveat. Traditionally, coverage under a lender’s title insurance policy ends once the mortgage to which it applies is discharged and therefore, there was no protection for lenders with respect to super-priority claims made following such discharge. In response to TD v Canada, title insurers have begun to introduce new types of coverage for super-priority claims made up to ten years following the discharge of a mortgage. This coverage, with certain exceptions and limitations, gives lenders peace of mind that they are protected from super-priority claims made against them long after they have discharged their security interests against a property. The new coverage is available for both residential and commercial properties.

For more information on title insurance protection for deemed trust amounts and super-priority claims, or on title insurance in general, please contact Justin Cooper, Commercial Real Estate Lawyer at Devry Smith Frank LLP, 416-446-3343, justin.cooper@devrylaw.ca

By Justin DominicBlog, Real EstateSeptember 30, 2020November 4, 2020

Four things you need to know about “Time shall be of the essence” in real estate transactions (especially in a pandemic!)

A contract of sale for a piece of real estate property will almost always expressly provide that time is of the essence. This clause means that you and the other parties in the agreement must be punctual and fulfill their obligations promptly. Otherwise, if you fail to perform in a timely fashion, the contract may end and you may be liable for damages.

For example, if you change your mind about purchasing the property or cannot attain suitable funding in time for the closing date, you may be in breach and liable to the other parties. In other words, the deadlines are very important; missing them could cost you. You may need to pay for the other parties.

Here are four things you need to know:

Proceed diligently and in good faith

Stay true to your word, secure funding, fulfil your obligations with diligence. Complete your obligations faithfully and do not interfere with the other party’s ability to fulfil their responsibilities. If you are uncertain about your obligations, obtain legal advice.

How to rely on the clause

If you want to rely on the clause to accuse another party of failing to live up to their obligations, you must demonstrate that you are ready, willing, and able to complete the agreement. In other words, if both parties are not ready to close on a real estate transaction, neither party can rely on the clause to bring an action for specific performance, damages, or termination of the contract.

When the clause is negated

By waiver. For example, if both parties agree to extend the closing date by two days then there is a waiver. In general, if one party in a contract takes action(s) to make it clear that the strict contractual provisions will not be enforced, the clause is waived in that instance.

By-election: For example, if the buyer does not have the requisite financing completed on the closing date, the seller could agree to extend the closing date. In general, when one party breaches the contract and the other parties’ consent, the clause is negated by-election.

How the clause is impacted by the Coronavirus pandemic (COVID-19)

COVID-19 has disrupted the economy and caused some aspects of the institutions which help real estate transactions move along have temporarily scaled back or suspended their operations. Further, COVID-19 has caused financial hardships which also have the potential to delay real estate transactions. Delays may cause deadlines to be missed, and you do not want to be on the hook due to a delay caused by COVID-19.

To ensure that your real estate deal is not held up by the pandemic, obtain legal advice to ensure you either:

enter into agreements properly drafted with COVID-19 in mind, or
that your existing agreement completes without delays caused by COVID-19.

For more information or any other questions regarding real estate transactions, please contact our real estate lawyers today. Don’t delay, time is of the essence.

By Justin DominicBlog, COVID-19, Real EstateAugust 18, 2020September 29, 2020

Questions Your Landlord Should Not Ask You

As a tenant you have rights including the right to privacy and the right to notice upon a landlord’s entry into your premise. As a renter, you should be aware that there are questions that a landlord simply cannot ask you, be it once you have occupied the property or in the stages of completing a rental application.

Nationality – A landlord cannot discriminate against you based on your nationality, citizenship or anything related to your ethnic background. This question should never be asked.
Sexual Orientation – A landlord cannot ask you if you are straight, gay, lesbian, queer bisexual, etc., and they cannot deny you a rental unit based on your gender identity or orientation.
Religion – A landlord cannot ask you about your religious affiliation or if you are religious in general.
Public Assistance – While a landlord has the right to know if you are employed, they do not have the right to know where all of your money comes from. If you are employed but on public assistance for example, your landlord cannot treat you differently or deny you the unit.
Family Status – Though a landlord has the right to ask you how many people will be living in the unit, they cannot ask if you are pregnant or plan to have children in the future. In that same vein, landlords cannot turn applicants away based on their relationship status.
Age – Landlords also cannot discriminate against a renter or applicant based on age. This includes people who are 16 or 17 years old and no longer living with their parents. However, note that a landlord is entitled to verify that an applicant is of age to enter into a legally binding contract. For the purposes of housing, age is defined under the Ontario Human Rights Code as 16 years of age or older as long as the applicant has withdrawn from parental control.
Physical Disability – A landlord cannot ask you if you have a physical disability. Such disabilities are protected under human rights legislation and can be viewed as a form of discrimination.
Mental Disability – Much like a physical disability, a landlord cannot ask you if you have a prior or current mental disability. Such disabilities are also protected under human rights legislation and can be viewed as a form of discrimination.
Notice – As mentioned above, landlords must give proper notice before entering the premise. This question cannot merely be asked at the time of entry but must rather be obtained withing 24-hours minimum of the desired entry time.
Repairs – Your landlord is responsible for maintaining the appliances in your rental unit. They are not allowed to ask you to make the repairs yourself.
Arrest – A landlord may be able to ask you if you have ever been convicted of a crime, but a conviction is much different that an arrest. If you have been arrested in the past but not convicted, there is no obligation to disclose, and the landlord should be refraining from such questions.
Pets – Ontario’s Residential Tenancies Act does not permit landlords to include “no pet” clauses in rental agreements and landlords should usually refrain from asking a renter or applicant if they have pets. The only exception is if the rental property is a condominium and the condominium corporation’s declaration, by-laws or rules prohibits pets.
Smoking – The Residential Tenancies Act does not address matters relating to individuals before they become tenants, so if a landlord refused to rent to a person on the basis of smoking or insists on a “no smoking” clause, an applicant has no recourse and can be refused tenancy. However, while a landlord may refuse an applicant for smoking, a landlord is not able to amend an existing lease to add such a provision, or legally evict someone once they become a tenant merely because they committed the specific act of smoking in violation of a “no smoking” clause in the rental agreement. If a landlord wants to evict someone for smoking, they have to prove more than just the act. The key to evicting someone for smoking is if the smoke damages the property or infringes on the rights of other tenants.

If you have been asked any of the following, your rights under the Residential Tenancies Act may have been violated and you may have standing to bring an application before the Landlord and Tenant Board of Ontario. Contact Robert Adourian at Devry Smith Frank LLP to have your rights assessed and protected.

By Fauzan SiddiquiBlog, Real EstateApril 22, 2020September 30, 2020

5 Tips to Keep in Mind When Buying your First Home or Condo

Congratulations, you have decided to purchase your first home. Although this milestone can be very exciting, the home-buying process can also be a daunting experience. Mapping out the journey beforehand can help a great deal. It is essential that you retain a lawyer who specializes in real estate and who can guide you throughout the process.

YOU WILL NEED TO PAY CLOSING COSTS

Remember, upon the closing of your property, a buyer is required to pay certain closing costs. You must be able to access sufficient funds to pay these closing costs.

Closing costs include:

Legal fees and disbursements;
Land Transfer Tax (Municipal and Provincial Land Transfer Tax);
Title Insurance;
Property and Fire Insurance;
Home inspection costs;
Appraisals;
Interest adjustments; and
Other adjustment costs.

MORTGAGE PRE-APPROVAL

If you intend to fund your new purchase with a loan from a mortgage lender, ensure you obtain preapproval before or during the home-buying process. An agreement of purchase and sale can be conditional on a buyer obtaining satisfactory mortgage funds to complete the transaction. Failure to pay the purchase price on closing can result in the vendor terminating the transaction, seek forfeiture of the deposit monies and commence an action for damages suffered.

YOU MAY BE ELIGIBLE FOR THE FIRST-TIME HOME BUYER INCENTIVE

The First-Time Home Buyer Incentive enables first time home buyers the opportunity to reduce their monthly mortgage payment without increasing their deposit.

You must meet the following criteria to qualify:

must meet the minimum down payment requirements;
your income cannot be more than $120,000
your total borrowing is limited to four times the qualifying income

IF YOU ARE A NON-RESIDENT OF CANADA, DON’T FORGET THE NON-RESIDENT SPECULATION TAX

Non-residents of Canada that purchase property are subject to a 15% Non-Resident Speculation Tax (“NRST”) on the purchase of a residential property if they live in the Greater Golden Horseshoe Region. This includes the City of Toronto, York Region, and Peel Region, in addition to other regions in Ontario.

There are exceptions for some non-residents, where they would be exempt from paying the NRST. If the non-resident is not eligible for an exemption to the NRST, there are also rebates for which some non-residents can apply. However, obtain legal advice first to ensure you are staying compliant.

FIND A REAL ESTATE LAWYER THAT YOU TRUST TO DECREASE THE RISK OF POTENTIAL PROBLEMS

Retaining the services of a real estate lawyer will help reduce the risk of potential problems on closing. Among other things, a real estate lawyer will clarify your obligations as expressed in the agreement of purchase and sale, search title to the property for any unwanted encumbrances and explain the contents of all documentation to be signed on closing.

Ultimately, lawyers who specialize in real estate can offer you peace of mind during the home buying process.

If you would like more information or legal advice regarding the home buying process, please contact real estate lawyer, Louis Gasbarre at 416.446.3318 or louis.gasbarre@devrylaw.ca

By G63tEGnX1EBlog, Real EstateMarch 11, 2020September 30, 2020

I’m Interested in Purchasing My First Property. What Are Some of The Common Reasons Real Estate Deals Fall Through?

The process of buying your first home can be both an exciting and overwhelming experience. Often, it is the largest investment a person will make in their lifetime and a transaction that can come with a lot of legal and financial risk. With that being said, with good communication, meticulousness and compliance with the process, a real estate deal should proceed without any drawbacks along the way.

Nevertheless, it is best to be prepared for the worst-case scenario should it transpire. Many buyers and sellers may be taken aback when they learn a transaction falls through between signing the Agreement of Purchase and Sale and the closing date. Here are some of the possible reasons why:

HOME INSPECTION CONCERN ARISES

Obtaining a home inspection from a reputable company is a must-do during the home buying process. If the existing survey is outdated and/or you plan to make some major changes to the home, hiring a qualified surveyor to complete an updated survey is recommended.

Unexpected discoveries about the condition of the property can impact the sale or rather the non-sale of the property in question. The best-case scenario is the buyer is able to negotiate a discount off the price, and worst-case scenario, the buyer withdraws their initial offer completely if the offer was conditional upon a home inspection.

THE BUYER UNEXPECTEDLY CANNOT SECURE FINANCING

A pre-approval from the bank does not always guarantee financing. This situation can go one of two ways. At best, there will be a delay or extension of the closing date until finance is secured.

Alternatively, and maybe the most straightforward remedy, is the seller to accept the breach of contract, terminate the agreement and keeps the deposit. As the seller, you then have the benefit of walking away and selling to another buyer.

THE BUYER CHANGES THEIR MIND

It is common to have second thoughts when purchasing what you thought was your dream home. However, once an Agreement of Purchase of Sale has been signed with no conditions, the situation can get complicated.

Check your Agreement – for pre-construction condominiums, often there is a 10 day “cooling off period” clause where buyers can walk away from the deal within that time period. In other circumstances, you are legally bound to follow through with the transaction or be subject to a penalty.

If you are a buyer or a seller in the sale of a property in Ontario and have questions regarding the transaction, contact real estate lawyer Jennifer Hetherington a 416-446-5838 or jennifer.hetherington@devrylaw.ca

By Fauzan SiddiquiBlog, Real EstateSeptember 27, 2019September 30, 2020

The Home Inspectors Act to Provide more Protection for Homebuyers

This blog is co-written by our former articling student, Janet Son.

The weather is cooling down but the Toronto housing market saw double digit growth this past month. During the frenzy of home buying, due diligence is necessary and hiring the right home inspector could be forgotten from the long list of to-dos. This can be a costly mistake as a negligently conducted home inspection could cost the buyer thousands of dollars in unexpected repairs.

The Ontario Association of Home Inspectors does regulate its approximate 500 members, however membership is voluntary. In total, there are approximately 1500 home inspectors in Ontario; however anyone can call themselves a home inspector and buyers could rely on them to make the biggest financial purchase of their lives.

Ontario has recently passed the Home Inspection Act, 2017 (the “Act”) to regulate home inspectors and is predicted to come into force in 2020 after the regulations have been drafted and proclaimed. The Act will create minimum standards when it comes to the licensing and regulation of home inspectors in Ontario.

Once in effect, individuals cannot conduct home inspections without a registered license and liability insurance. Requirements will include education, training and adherence to a code of ethics. Formal contracts with the buyer or seller will also be required prior to conducting a home inspection. And once the inspection is concluded, a report must also be provided.

The Act also provides for a complaints and disciplinary mechanism so that clients can report a negligent licensee. The registrar will have the authority to mediate in order to resolve complaints, provide written warnings, require licensees to take further educational courses or refer the matter to a discipline committee. Once at the discipline committee stage, the licensing body will have further powers to impose a maximum fine of $25,000 if a licensee has failed to comply with the code of ethics.

As a home buyer, once you have the building inspector’s report, it is advisable to bring it to a lawyer for review. If there is a leaky basement, there are a number of different courses of action that can be taken. You can insist that the repairs be made before closing, negotiate an abatement, prepare a repair fund in advance, or move on to the next home.

If you would like more information on how to protect yourself as a home-purchaser, please contact Jennifer Hetherington at 416-446-5838 or at jennifer.hetherington@devrylaw.ca.

By Fauzan SiddiquiBlog, Real EstateSeptember 27, 2019September 30, 2020

What happens when a party to a real estate transaction fails to close?

The Agreement of Purchase and Sale (APS) has been signed and any conditions waived or fulfilled. All that remains is for the closing itself to take place. What happens when a party to a firm APS fails to close the deal? This may happen, for example, if the buyers find out that they are unable to obtain financing for the property, as was common around the Greater Toronto Area (GTA) two years ago during the market correction. The answer will obviously depend on the particular circumstances, however case law provides us with some generalizations:

1) SELLER FAILS TO CLOSE

If the buyer is ready to close, and for whatever reason the seller has a last minute change of mind and refuses to close, the buyer may be entitled to damages and/or specific performance forcing the seller to close. In Semelhago v Paramadevan [1996] 2 SCR 415, the Supreme Court of Canada held that whether or not a buyer is entitled to specific performance depends on how “unique” the property in question is. Courts will take into account both objective and subjective factors when determining whether the test for uniqueness is met (see, for example, Marvost v Stokes, 2011 ONSC 4827, aff’d 2012 ONCA 74).

2) BUYER FAILS TO CLOSE

This was a common situation following the market correction in areas around the GTA that resulted from the introduction of Ontario’s Fair Housing Plan (Ontario Ministry of Finance, 20 April 2017). Unless the seller can sell the property for an amount greater or equal to what the buyer had agreed to pay, the seller will be entitled to damages, amounting to the difference between the agreed upon price for the property in the failed APS and the amount that the seller ultimately sold the property for.

3) REALTOR LIABILITY

Occasionally we are asked whether a realtor can be held liable for a failed APS, particularly if, for example, a realtor did not advise an inexperienced buyer to make an offer conditional on financing. Case law on this topic is somewhat mixed. There is a line of cases in which buyers were successful in third party claims against realtors who failed to advise the buyers about the risks of not making their offers conditional on financing or another event taking place, such as a satisfactory home inspection (see, for example, Krawchuk v Scherbak, 2011 ONCA 352 and Pitter v Ha, 2005 CarswellOnt 10310 (Sup Ct J), aff’d 2007 CarswellOnt 4271 (Sup Ct J (Div Ct)). On the other hand, there are cases in which courts have determined that the parties to an APS were experienced in trading in real estate and should have been aware of the risks of making an unconditional offer to purchase a property, and therefore third party claims against the realtors did not succeed (see, for example, Shields v Broderick, 1984 CarswellOnt 1251 (H Ct J).

4) RETURN OF DEPOSIT

One final item to consider regarding a failed APS is what happens with the buyer’s deposit. A deposit will only be refunded if the buyer and seller agree to execute a mutual release or if one of the parties obtains a court order.

If you have further questions about failed real Agreements of Purchase and Sale and your legal rights, please contact Christopher Statham at Christopher.statham@devrylaw.ca or 416.446.5839

By Fauzan SiddiquiBlog, Real EstateAugust 2, 2019September 30, 2020

The House I Recently Purchased Was Used to Manufacture Illegal Substances: What Now?

You’ve just signed an agreement of purchase and sale, and you’ve discovered that drugs were illegally manufactured on the property years before the seller bought it. Can you get your deposit back?

A recent Ontario Court of Appeal decision dealing with an “Illegal Substances Clause” in an Agreement of Purchase and Sale (“APS”) says: ‘it depends.’

ILLEGAL SUBSTANCES CLAUSES

In Beatty v Wei 2018 ONCA 479, the parties had entered into a standard form APS under which the purchaser agreed to purchase a residential property in Scarborough for the purchase price of $916,000. The Purchaser submitted a deposit of $30,000.

The purchaser discovered prior to closing that the property has been used as an illegal marijuana grow-op before the sellers had acquired it. The purchaser stated he was entitled to terminate the agreement prior to closing and get his deposit back; the sellers disagreed. Instead, they sued the purchaser claiming forfeiture of the deposit to them, and damages for any loss they might suffer as a result of the delayed re-sale of the property.

The main analysis centred around the Illegal Substances Clause, which stated, in part (emphasis added):

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…

Upon interpretation of the Illegal Substances Clause, the court found that the Sellers’ representation and warranty that the use of the property had never been for the manufacture of illegal substances was limited to their knowledge as it existed when they executed the APS. Since the seller did not know at the time of executing the APS that their house was formerly a grow-op, the court found for the sellers rather than the purchaser.

In essence, the Court of Appeal concluded the sellers had to know at the date the APS was signed that illegal substances were previously manufactured on the property. If the sellers found out one day later, the APS would still be valid, and it would accordingly be a breach of contract for the purchaser to terminate the agreement. Since the purchaser unilaterally terminated the APS well after both parties signed it, the purchaser was found to have breached the contract.

WHAT DOES THIS MEAN FOR ME AS A HOME PURCHASER?

This case tells us that home purchasers should be careful to negotiate agreements of purchase and sale on terms that are favourable to them. If a significant desire of a home purchaser is to ensure their new house was never used to manufacture illicit substances, then the agreement should reflect that desire as closely as possible.

If you would like more information on how to protect yourself as a home-purchaser, please contact Jennifer Hetherington at 416-446-5838 or at jennifer.hetherington@devrylaw.ca

By Fauzan SiddiquiBlog, Real EstateJuly 9, 2019September 30, 2020

LAWYER SEARCH

Category: Real Estate

Involved in a Commercial Real Estate Transaction? Make Sure You Complete Your Due Diligence with Respect to Environmental Issues

Ontario Introduces the Personal Real Estate Corporation (PREC)

Title Insurance Providers Introduce Increased Protection for Lenders from Super Priority Liens and Deemed Trusts

Four things you need to know about “Time shall be of the essence” in real estate transactions (especially in a pandemic!)

Questions Your Landlord Should Not Ask You

5 Tips to Keep in Mind When Buying your First Home or Condo

YOU WILL NEED TO PAY CLOSING COSTS

MORTGAGE PRE-APPROVAL

YOU MAY BE ELIGIBLE FOR THE FIRST-TIME HOME BUYER INCENTIVE

IF YOU ARE A NON-RESIDENT OF CANADA, DON’T FORGET THE NON-RESIDENT SPECULATION TAX

FIND A REAL ESTATE LAWYER THAT YOU TRUST TO DECREASE THE RISK OF POTENTIAL PROBLEMS