Legally Speaking - November 2013 (466)
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Legally Speaking (466, November 2013)

 

Number 466, November 2013

WORDS COUNT IN A WARRANTY

Mike ManganA warranty is a minor term in a contract and does not go to the root of the agreement between parties. It expresses some lesser obligation. Breach of warranty permits the innocent party to sue for damages, but not to repudiate or rescind the contract.1

When negotiating a real estate purchase, a buyer may ask the seller to warrant in the contract that all the seller’s earlier representations are true. This device converts earlier pre-agreement statements into promises in the contract and the selected wording determines the extent of these promises.

The 0759594 B.C. Ltd.Case2
In 2007, the parties entered a Contract of Purchase and Sale (CPS) to sell 60 acres of land in Salmon Arm to the buyer for $16,700,000. The seller knew that the buyer planned to create a mixed residential and retail development, including a Walmart. Some of the land was in a floodplain and the city had to rezone the property before the buyer could proceed.

Before the parties entered their CPS, the seller provided a document with basic information about the property. The document stated that environmental studies had confirmed that there were no areas of environmental concern and, in principle, that city hall staff supported the necessary re-zoning. As it later turned out, the provincial Riparian Areas Regulation imposed setbacks that significantly limited the site’s development.

In the CPS, the seller gave this Disclosure Warranty, promising that they had disclosed all material facts about the project to the buyer:

3.1 Representations of the Vendor. The Vendor covenants, represents and warrants to and in favour of the Purchaser that ...:

(t) Full Disclosure.
... All material information pertaining to the Purchased Lands is set out in this Agreement or contained in [all of the seller’s documents].

At completion, the buyer held back the last $2,000,000 of the purchase price which would only be payable if the buyer’s rezoning application was denied. After purchasing the property, the rezoning application failed, apparently because of lack of support at city hall and strong public opposition to the proposed Walmart store.

When the buyer failed to pay the remainder of the purchase price, the seller sued the buyer. The buyer counter-claimed, arguing the seller breached their Disclosure Warranty, causing a loss of $3,300,000.

At trial, the court interpreted the Disclosure Warranty to mean that the seller was only required to disclose material facts of which they were aware. The buyer failed to prove that the seller knew about and withheld the information about riparian setbacks and opposition to the proposed Walmart. The court also found that the seller’s remarks about city hall support were not material, given the early stage of matters at the time. The trial court ordered the buyer to pay the unpaid balance of the purchase price and dismissed its claims.

However, the Court of Appeal took a broader view, finding that the Disclosure Warranty promised that all material facts were contained in the seller’s present and future disclosures, even those the seller did not know about. The Disclosure Warranty was not qualified by the phrase, “so far as the Vendor is aware.”

While this may seem harsh, the court said that warranties allocate risk and the parties are free to allocate risk as they see it. The Disclosure Warranty promised that all information to date and any disclosed afterwards would include all material facts, whether the seller knew about them or not.

The Court of Appeal found that the seller breached its Disclosure Warranty. The court set aside the trial judgment in favour of the seller and sent the matter back to trial.

In land deals, the parties are free to distribute risk as they might agree. If a party is willing, as the seller was here, to broadly promise disclosure of everything material, whether the seller knows about it or not, then the courts will enforce that promise even if it might seem unfair to some. REALTORS® can limit such broad assurances with qualifying words, such as, “As far as the party is aware” or “To the best of the party’s knowledge.”

Mike Mangan
B.A., LL.B.

  1. Fraser-Reid et al. v. Droumtsekas, [1980] 1 S.C.R. 720, (1979), 9. R.P.R.121 at 137 (S.C.C.).
  2. 0759594 B.C. Ltd. v. 568295 British Columbia Ltd., 2013 BCCA 381.
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