Sellers Oblivious to Former Grow-Op – Sale Still Void

The Ontario court recently voided an Agreement to sell a home that –unbeknownst to the sellers – had formerly been used for a marijuana grow operation.

The Agreement called for the intended buyer to submit a $30,000 deposit to the sellers, which he did. It also contained representations and warranties assuring the buyer that the property had never been used to grow marijuana or other drugs. Specifically, its “Illegal Substances Clause” stated: (1) that while the sellers owned the property, “the use of the property and buildings and structures thereon has not been for the growth or manufacture of any illegal substances;” and (2) that to the best of the sellers’ own “knowledge and belief, the use of the property and the buildings and structures thereon has never been for the growth and manufacture of illegal substances.”

At the time the sellers signed off on these two statements, they were both true: In the seven years they owned the home, they never operated a grow-op themselves, and understood it had never been used for this purpose before they purchased it.

Shortly before closing, however, the buyer did some research, and learned from the Police that the property had indeed been used to grow 265 marijuana plants some 10 years earlier. After informing the sellers of his discovery, the buyer promptly advised that he was no longer willing to complete the deal. He demanded the return of his deposit.

The sellers sued, asking the court to affirm the validity of the contract, to declare the buyer’s deposit forfeit to them, and to award them damages for the buyer’s breach of the deal. In the meanwhile, they managed to sell the property to a new buyer, but for $87,000 less.

The court refused to make the buyer liable for the seller’s losses, and declared the Agreement void.

Legally, the Clause had two aspects: It was both a “warranty” (i.e. a contractual promise that the item sold has a particular quality), and a “representation” stating the sellers’ own beliefs about the property.

The warranty part of the Clause turned out to be false; this alone jeopardized the Agreement’s validity. The representation aspect was also troublesome. True, the Clause reflected only the sellers’ “knowledge and belief,” so it was not a guarantee. But once the sellers learned (ironically, from the buyer) about their own home’s history, they could no longer claim to believe it had never been a grow-op, as they stated in the Clause.

Admittedly, the sellers’ misrepresentation was not fraudulent in nature. Still, the innocent buyer was entitled to rely on both the warranty and representation in the Clause, and had the right to rescind the whole Agreement if: (1) these turned out to be untrue; and (2) he could show that the misinformation was a material term of the contract, and one that induced him to enter into the deal in the first place.

The court found all these elements were present here. The buyer – a father of two who was reasonably concerned about the health of his family – had entered into the Agreement partly on the strength of the Clause, as any buyer would. The court noted that grow-ops were known to lead to mould and other health risks; the fact that the property was later sold for $87,000 less, with full disclosure of its history, proved that the sellers’ misrepresentation as to the property’s character was substantial and material.

The buyer was entitled to rescind the Agreement, and treat it as void. The sellers were ordered to return the deposit, with interest. See: Beatty v. Wei, 2017 ONSC 3478.