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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.