Real Estate Law: What the Difference is Between a Condition and a Warranty and Writing the Agreement of Purchase and Sale
One of the most important things I stress to Realtors and purchaser clients is to make sure it is very clear in the agreement of purchase and sale that everyone knows exactly what is being bargained for and the agreement is structured and contains clauses towards that intent. An older case, Jorian Properties Ltd. v. Zellenrath (1984 CarswellOnt 1376; 46 O.R. (2d) 775, 26 B.L.R. 276) (“Jorian”) is a helpful guide that illustrates some these issues.
In Jorian, the Purchaser entered into an agreement of purchase and sale with the vendor to purchase a legal five-plex (“Property”). Upon the Purchaser’s lawyer’s search to the relevant zoning authority, it was discovered that the Property was only a legal triplex. The Vendor who had represented that the property was a legal five-plex did not know that the Property did not comply with zoning. After some negotiation with respect to an abatement of the purchase price, the Purchaser refused to close the transaction and then sued the Vendor for damages. Evidently the Purchaser strongly desired the Property because the Purchaser wound up purchasing the same Property from a subsequent purchaser that the Vendor sold the Property to for a higher price, .
The Court in this case went at length to properly define the terms “condition” and “warranty” and how the two terms have particularly different outcomes in the context of contract and real estate law. The Court held that a condition is a term which is essential to the contract whereas a warranty is subsidiary or collateral to the contract. Essential to the contract means that it goes to the root of the contract meaning that the contract would not have been achieved otherwise. A breach of warranty does not entitle a purchaser to rescind the contract, the purchaser is required to complete the transaction and sue for damages that resulted from the breach of the warranty. Conversely, if a condition is breached, the innocent party is entitled to rescind the contract and get their deposit back or if they wish, complete the transaction and sue for damages. Further, whether a term is labeled as a condition or warranty is not determinative and the courts will look at the overall construction of the contract and intention of the parties.
The majority of the Court found that acquiring a triplex instead of a five-plex, which was initially bargained for, produced the Purchaser with substantially what they had bargained for and the representation that the property was a five-plex is a mere warranty and not a condition. The dissenting Judge disagreed and found that a five-plex was a condition of the agreement and would have found in favour of the Purchaser. One of the major reasons the majority found against the Purchaser was because of the circumstances of the case. For example, counsel for the Purchaser argued during the trial and the appeal that the action was a breach of “warranty”. Further, the Court found that even the Purchaser, a somewhat sophisticated real estate investment company, perceived the representation as a warranty and that the Property was so important to the Purchaser that it ended up buying the Property from a subsequent purchaser for even more money knowing that it was a tri-plex. This subjective element weighed into their decision finding that that purchasing a tri-plex rather than a five-plex would not have substantially deprived the Purchaser of substantially the whole benefit which the parties intended it should obtain pursuant to the contract due to the conduct of the Purchaser and the overall construction of the contract under the circumstances.
This case illustrates the court’s willingness to decide a matter based on the overall circumstances of the particular situation rather than just adhering to the strict letter of the law. On the surface, you could easily make the argument that getting a tri-plex when bargaining for a five-plex is a breach of a condition entitling the Purchaser to rescind the contract or complete it and sue for damages. However when taking into consideration the circumstances, it is also evident that the Purchaser desired the Property for more reasons that then how many legal units it consisted of.
If your purchasing or selling a property in Ontario, call the lawyers of Levy Zavet and speak to them about your potential purchaser and help with your agreement of purchase and sale.