When a homeowner states in a sale agreement that — to the best of his knowledge — the property was never used for growing or manufacturing illegal substances, and subsequently discovers before closing that the house was a marijuana grow-op 12 years earlier, can the buyer back out of the deal?

Does a seller’s representation and warranty in the typical illegal substances clause speak to the moment the contract was signed? Or does it carry through right to closing?

Those were the issues in a court decision released last June, and in a hearing before the Ontario Court of Appeal in January 2018. When the appeal decision is released, it will affect every real estate lawyer and realtor in Ontario.

Jonathan and Jacqueline Beatty were the sellers of their home on Stainforth Dr., in Toronto, and Zhong Wei was the buyer. The agreement of purchase and sale was dated May 15, 2016 and contained a standard illegal substances clause that is used thousands of times a year across the province. The typical wording, which was used in this case, stated that the warranty survived closing and did not end when the buyers registered their deed.

Three weeks after the agreement was signed, the purchaser’s lawyer received a letter from the Toronto Police Service confirming the property had, indeed, been a grow-op and that 265 marijuana plants had been seized in 2004. The Beattys bought the house in 2009 but never knew about the grow-op.

Wei refused to close the transaction and the Beattys resold it to another buyer for $829,900 — $86,100 less than the price in the Wei agreement.

Last June, Wei applied to the Superior Court for an order returning his $30,000 deposit and declaring that he did not have to close the deal based on the sellers’ misrepresentation. The Beattys asked the court to declare that Wei breached the contract and that they could keep the deposit.

Justice Peter Cavanagh ruled that the buyer was entitled to back out of the purchase agreement, and was entitled to the return of his deposit.

The judge made a distinction between the words “representation” and “warranty,” both of which were contained in the illegal substances clause.

Cavanagh found that when the seller made a warranty in the agreement of purchase and sale, it was only effective only up to the date of the agreement.

But he also noted that the statement used the word representation. The representation was that, to the best of the sellers’ knowledge and belief, the property had never been used for the growth or manufacture of illegal substances.

The judge ruled that this was a statement of a present fact 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.

He ordered that the buyer was entitled to terminate the purchase agreement and receive back the entire deposit. In a subsequent ruling, the judge also awarded the buyer legal costs of $26,436.43.

In my experience, lawyers and real estate agents generally accept this representation and warranty clause to speak only at the time of the contract – and not later.

At press time, the Court of Appeal had not yet released its decision. Whatever it says, however, the province’s illegal-substance clause is due for an overhaul.

POSTSCRIPT: On May 24, 2018 the Ontario Court of Appeal reversed the trial decision.  A report on the appeal decision appears in this column on June 9, 2018.