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Appeal Court Clarifies Meaning of "To the Best of the Seller's Knowledge and Belief"

In the appeal of a significant case we reported on previously in our last Newsletter (see Vol. 24, No. 3 (June 2018)), the Ontario Court of Appeal examined the meaning of "to the best of the Seller's knowledge and belief", in the context of a real estate deal where the sellers unwittingly sold property formerly used as an illegal marijuana grow-op.

The phrase appears in the "Illegal Substances Clause" found in the Ontario Real Estate Association (OREA) standard-form Agreement of Purchase and Sale. That Clause states that the seller "represents and warrants" that "to the best of the Seller's knowledge and belief, the use of the buildings and structures thereon has never been for the growth or manufacture of illegal substances."

The interpretation of that wording was the focus of the dispute between the buyer and sellers, who had used the standard form Agreement in their now-aborted real estate deal. About a month after they signed it "but before closing" the buyer discovered from internet searches that the property had been used as a marijuana grow-op before the sellers had even acquired it.

The buyer claimed this terminated his obligations under the Agreement entirely.  The sellers disagreed; they asserted the buyer had unjustly reneged on the deal, and felt justified in keeping his $30,000 deposit.  Shortly after, they sold the property to another party for $86,000 less than the buyer had agreed to pay, and sued him for this amount as well. The lower court judge sided with the buyer, declaring him entitled to have his deposit on the now-void deal returned.

On later appeal, the Court of Appeal reversed, concluding that the lower court judge had erred in several respects.

First, the judge incorrectly divided the Illegal Substances Clause into two parts " a representation" and a "warranty" and then mis-casted each by applying different slants to how the phrase "to the best of the Seller's knowledge and belief" operated in both.

When that phrase was applied to the "representation" part of the Clause, it did not stand alone; it had no lasting resonance beyond the date on which the Agreement was signed, and could not be relied on by the buyer as being true until closing. The lower court judge's misinterpretation also overlooked the interrelated nature of the "representation" and the "warranty" portions of this Clause, which worked together and were to be given meaning in accord with standard rules of contractual interpretation.

The Appeal Court concluded that the Clause's proper interpretation was this:  Since the sellers' representation and warranty statement referred only to information "to the best of [their] knowledge and belief", they were not giving absolute information about the property. The representation about the grow-op use was limited to their knowledge and belief as it existed when they executed the Agreement. As the Appeal Court explained:

" [G]enerally speaking, a contractual representation is a statement of present or past fact, while a warranty is a contractual undertaking or guarantee that the fact is true"

This is reinforced by the plain-language of the Clause which the Court noted had no reference to the closing date, as some of the Agreement's other clauses did.

Here, the sellers were completely unaware of the property's history when they signed, so they did not breach the Clause.  The Agreement remained valid and enforceable against the buyer, and they were entitled to keep his $30,000 deposit when he later failed to close.  The Court ordered certain issues to be remitted back for trial, including a determination on whether the sellers had suffered additional damages.  See Beatty v. Wei, 2018 ONCA 479.