Contracts for the sale of land often include both conditions and warranties, which serve distinct legal purposes and aren’t always easy to distinguish. Conditions are essential terms that must be fulfilled for the contract to proceed. If a condition is not met – such as a buyer being satisfied with a home inspection – the non-breaching party may terminate the agreement and walk away. Conditions are often referred to as “dealbreakers” because they directly affect the enforceability of the contract. In contrast, warranties are non-essential promises or factual assurances made by one party, typically the seller, such as confirming the property has not been used for illegal activities. Breach of a warranty does not void the contract but may entitle the injured party to compensatory damages. Warranties are often made “to the best of the seller’s knowledge and belief” as at the time of closing but are intended to continue to be effective after closing.
Correctly identifying what is a condition and what is a warranty in a contract is a vital step for any buyer looking to back out of a deal. Where some deficiency is discovered by the buyer before closing that engages a contractual term, the question will be whether there has been a breach of a condition or a breach of a warranty. For example, a contract for the purchase of a house may contain a clause in which the seller has represented that there are and have been no problems with water penetration into the basement. With the right wording, that clause may constitute a condition that the house has no water penetration problems. If the basement floods prior to the closing date, the buyer might be entitled to walk away from the deal (with the purchase deposit to be refunded). However, if the clause is only a warranty, and the basement flood did not cause “substantial damage”, the buyer probably has to go through with the purchase and can only claim damages for breach of warranty from the seller.
Sometimes buyers make the wrong choice. Confronted with a property deficiency just before the closing date, buyers may take the position that a condition has been breached and that they are no longer bound by the contract. The seller may try to keep the deal alive and fix whatever problem has arisen (e.g. fix the leaking basement) or offer an abatement of the purchase price. The buyer must understand that once he or she walks away from the deal, the seller’s offer to fix the problem or reduce the purchase price is likely off the table. If it turns out that a warranty and not a condition was breached, the seller will likely re-sell the property to a new buyer, keep the original buyer’s deposit, and then sue the original buyer for any shortfall in the new sale price along with any additional costs and damages sustained. By then it is too late for the original buyer to accept the seller’s offer of repairs or an abatement.
The distinction between a condition and a warranty was one of the issues addressed in a recent Superior Court decision arising out of a failed farm purchase transaction. The intended buyer agreed to pay $1.8 million for a 120-acre property that contained two natural gas wells. The buyer paid a $250,000 deposit. The sale did not close and the buyer said that he refused to complete the transaction because the seller had breached an environmental warranty in the contract. The buyer alleged that the warranty covered the status of the gas wells, which the buyer said were not licenced and could not be legally operated. Of course, if the clause on which the buyer relied was only a warranty, it didn’t entitle him to walk away from the deal. The seller sued for the deposit and additional damages. The judge hearing the case found that the clause was a warranty and was not actually breached by the seller. The buyer forfeited his $250,000 deposit and was also ordered to pay the seller’s damages arising from the breach, which consisted of additional costs incurred to carry and re-sell the property.
The case decision explains that after the buyer failed to complete the purchase transaction as required by the contract, the seller still offered to repair any deficiencies identified with the two gas wells to keep the deal alive. However, the buyer refused the seller’s offer. The buyer did not seem to appreciate that the breach of a warranty would only entitle the buyer to damages, not to rescind the contract. This ended up costing the buyer his $250,000 deposit and more on top of that.
The buyer also tried to pin responsibility for the seller’s claim on the buyer’s own real estate agent. The buyer alleged that the realtor had breached his duties to the buyer by failing to follow the buyer’s instructions in drafting the wording of the purchase agreement and in failing to disclose that the realtor was also acting as agent for the seller. The buyer alleged that the realtor preferred the interests of the seller over the interests of the buyer. The judge dismissed this counterclaim by the buyer without much explanation, stating that, “the evidence does not substantiate the claims”.
Read the decision at: 2025 ONSC 5258 (CanLII).
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