Caveat Emptor and Recission of Agreements of Purchase and Sale

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

The centuries-old doctrine of caveat emptor – “let the buyer beware” – continues to play a significant role in real estate transactions in Ontario and beyond.  Buyers are expected to conduct their own due diligence before entering into an Agreement of Purchase and Sale (“APS”).  The buyer is free to avoid running into problems with a property either by choosing not to sign the deal or by negotiating conditions within the APS that will allow the buyer to walk away.  However, there are still circumstances where a buyer may seek to rescind an APS (the remedy of “recission”) in spite of caveat emptor.  For instance, where a buyer purchases a property for an intended use and information arises after the agreement is made that materially affects that intended use, the buyer may still have room to avoid completing the deal depending on the seller’s conduct.  While sellers are not obligated to disclose all potential issues about a property, silence on an issue can in some cases amount to an actionable misrepresentation.

A recent Superior Court decision examined the remedy of recission in connection with a buyer’s disappointed expectations about a property’s development potential.  The buyer entered into an APS in May, 2025 for a vacant lot in Toronto’s Bridle Path community. The property was advertised as a prestigious location to build a custom dream home.  After signing the APS and submitting a $150,000 deposit, the buyer discovered a restrictive covenant registered on title that limited development to a single detached dwelling. This restriction conflicted with his intention to develop the property into a multi-unit townhouse or condominium.  Initially, the buyer had included a due diligence clause in his offers, allowing him to investigate the feasibility of development.  However, he removed this clause in the final, unconditional offer accepted by the seller.

The restrictive covenant had been registered in 2023 and was discoverable through a title search.  It provided as follows:

Only one single detached house may be permitted to be constructed on each of Parcel 1 and Parcel 2, and no application shall be made by the Owners to rezone either of Parcel 1 or Parcel 2 nor shall any of the Owners make application to the Committee of Adjustment of the City of Toronto or such other authorities, municipal or provincial, to permit more than one single detached house to be constructed on each of Parcel 1 and Parcel 2.

These restrictive covenants shall expire thirty-five (35) years from the date of registration of this Application to Annex Restrictive Covenants, and shall have no force or effect thereafter.

After discovering that he would not be able to redevelop the lands for multi-residential use, the buyer applied to the Court to rescind the APS and order the return of the substantial deposit he had paid. The scheduled closing date for the transaction was July 18, 2025.  The application was heard on July 15, 2025.  The buyer argued that the restrictive covenant materially affected his intended use of the property and that the seller should have disclosed it to him.  The evidence was that the buyer had not made his multi-residential intentions known to the seller until after the APS was signed.  The seller had advertised the property as a prime lot for building a single detached house – “Your custom Dream Home”.  The seller made no representations that anything could be built on the property other than a large single home.

Justice Leiper of the Superior Court dismissed the application in a decision issued the day following the hearing and just two days before the scheduled closing date.  She accepted that the buyer was taken by surprise in learning of the restrictive covenant.  However, she disagreed with the buyer’s contention that the seller should have told him of the existence of the restrictive covenant because of the price he paid for the property ($2.3 million), the nature of the property, and the local trends in multi-residential development in that particular area of Toronto.  Justice Leiper noted that the buyer did not ask the seller whether there were any limitations on development: “The Seller was not required to actively inquire into the [Buyer]’s intentions or to divine from the negotiated price that the Seller must have had a certain kind of development in mind.”

In the end, the circumstances of the transaction did not displace the doctrine of caveat emptor.  Justice Leiper explained:

Given the price paid for this land and the Purchaser’s plans to act as the developer of townhouses there, I infer that he is not an unsophisticated party. He could have inserted terms into the APS to protect himself from registered restrictive covenants that might interfere with his plans. His initial offers included a condition that permitted time to exercise due diligence and find out if the property could be developed in a way that was “economically feasible.” He chose to remove this condition, and in doing so, he accepted a measure of risk. Perhaps he thought he was getting a bargain by purchasing this amount of land for the price, making it worth the risk. Having discovered after the fact that there was a registered restrictive covenant on title, he now asks the court to relieve him of the bargain that he made in clear terms, and having turned his mind initially to an alternative means to protect his financial interests. The doctrine of caveat emptor applies: the Purchaser chose not to exercise caution that he knew was available to him to insist upon or forego the purchase.

 Read the decision at: 2025 ONSC 4210 (CanLII).

Buyer (and Seller) Beware! HST on the Sale of Land

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:  

The HST is a potential landmine for real estate solicitors and, consequently, their clients.  In Ontario, the 13% surcharge for the Harmonized Sales Tax applies to all real estate transactions unless the transaction is exempt.  The default position in the Excise Tax Act is that HST will be added to the cost of a transaction and lawyers and their clients should assume that to be the case unless they can show definitively that an exemption applies – that the transaction is an “exempt supply” within the meaning of the Act.

On a real estate transaction, collection of HST and remittance of the tax to the CRA is normally the responsibility of the vendor.  Where HST is payable, CRA will deem HST to have been collected by the vendor.  That’s the landmine: even if the vendor didn’t collect HST, the vendor is deemed to have collected it and must immediately pay the amount owing to CRA.  Therefore, the question of whether HST is “included in” the purchase price or is “in addition to” the purchase price in a deal between vendor and purchaser can be vitally important.  In some cases, a vendor may agree that HST is “included in” the purchase price based on an understanding that no HST is payable.  If it turns out that HST is payable, then the vendor’s anticipated recovery on the sale could come up 13% short.

While there are a number of HST exemptions that can apply to the sale of farmland such as sales by an individual to a related person and sales by a partnership, trust or corporation to a partner, beneficiary, shareholder or related person, situations do arise where HST is payable.  In a case recently decided by the Superior Court of Justice, a vendor and purchasers sued and counter-sued each other over the way HST was handled in the sale of a mixed-use property after CRA reassessed the HST amount after the transaction closed. 

The vendor agreed to sell the purchasers a 14.7-acre property containing a house and equestrian centre.  The purchase price was $1.285 million.  The parties used the standard Ontario Real Estate Association (“OREA”) Form 100 Agreement of Purchase and Sale and agreed that if HST was payable on the transaction, it would be “included in” the purchase price.  As none of the parties to the transaction was an HST registrant, the vendor was responsible to collect and remit any HST payable.  The residential portion of the property was not subject to HST, being exempt as used residential property.  The commercial/agricultural portion of the property was subject to HST.  The vendor and purchasers agreed that 30% of the property would be considered subject to HST, meaning $45,500 would need to be remitted to CRA.  The net purchase price would therefore be $1,239,500.  After closing, the vendor remitted the HST to CRA and received a Notice of Assessment showing no balance owing.

Before closing, the purchasers’ lawyer had communicated to the vendor that the purchasers intended to use the property for residential purposes.  However, the purchasers did not move into the property after closing and instead leased the equestrian part of the property to a commercial tenant and the residential part of the property to a residential tenant.  One of the purchasers then applied to CRA to be registered for HST and also requested input tax credits for the HST paid on the purchase of the property.  She mistakenly asked for credits based on HST being payable for the whole purchase price (i.e. the entire property) rather than just the non-residential portion.

CRA then looked into the situation and reassessed the HST payable on the original sale transaction.  CRA disagreed with the allocation of the purchase price as between the exempt residential portion and the non-exempt commercial/agricultural portion, finding that the commercial/agricultural portion represented 78% of the sale price.  The HST payable for the taxable portion of the property was $130,466.88 rather than the $45,500 that had been remitted by the vendor to CRA.

Where a purchaser is registered for HST, the vendor is not required to collect HST generated by the sale of farmland.  The purchaser reports the HST payable and claims an offsetting input tax credit in the purchaser’s first HST return after the sale, which is what the purchaser in this recent case did.  The problem from the vendor’s point of view was that, had she known that the purchaser would be an HST registrant (which is not what was understood at the time the transaction closed), she would not have had to collect HST and would have kept the full purchase price without the $45,500 deduction.  The vendor sued the purchaser to recover that amount.

The vendor later discontinued her claim because CRA refunded the $45,500 to the vendor on the basis that the purchaser (one of the two joint purchasers) was now registered for HST.  However, the purchasers continued their counterclaim against the vendor arguing that they had suffered the loss of the $45,500 price adjustment on the sale; effectively, the purchasers contended that they had only agreed to pay the vendor $1,239,500 for the property plus any HST payable.  If no HST was payable, then the vendor should refund them $45,500. 

The Superior Court dismissed the counterclaim, finding that the purchasers suffered no loss.  The purchasers agreed to pay $1.285 million for the property and only paid that amount.  The purchaser who was registered for HST received input tax credits for the full amount of any HST that had been paid and suffered no financial loss.  

Read the decision at: 2022 ONCS 919.

Seller's Family's remorse not grounds to set aside farm transaction, says Alberta Court

Several years ago, a young couple purchased farm land from an 86 year old man, a bachelor most of his life (the "Vendor").  The couple had leased the land for a number of years, and paid about $600,000 for two quarter sections (160 acres x 2).  The Vendor's youngest brother more recently commenced an action in the Alberta Court of Queen's Bench on behalf of the Vendor to set aside the land transaction based either on the exercise of undue influence by the purchasers or on the notion that the transaction was unconscionable.  At the time the case was heard, the Vendor was 93 years old and living in a care facility.  He died between the time of the hearing and the release of the Court's decision.

The Vendor's family was upset that the land purchased for $600,000 in 2010 was later appraised at a value of between $1.67 million and $3.9 million.  And, moreover, within two years of purchasing the two quarter sections, the young couple subdivided out a 43-acre parcel and a 79-acre parcel that they then listed for sale at $835,000 and $1.38 million, respectively.

On the issue of undue influence, the Court cited the test set out by the Supreme Court of Canada in the case of Geffen v. Goodman Estate:

What then must a plaintiff establish in order to trigger a presumption of undue influence? In my view, the inquiry should begin with an examination of the relationship between the parties. The first question to be addressed in all cases is whether the potential for domination inheres in the nature of the relationship itself. This test embraces those relationships which equity has already recognized as giving rise to the presumption, such as solicitor and client, parent and child, and guardian and ward, as well as other relationships of dependency which defy easy categorization.

Having established the requisite type of relationship to support the presumption, the next phase of the inquiry involves an examination of the nature of the transaction. When dealing with commercial transactions, I believe that the plaintiff should be obliged to show, in addition to the required relationship between the parties, that the contract worked unfairness either in the sense that he or she was unduly disadvantaged by it or that the defendant was unduly benefited by it. ...

Once the plaintiff has established that the circumstances are such as to trigger the application of the presumption, i.e., that apart from the details of the particular impugned transaction the nature of the relationship between the plaintiff and defendant was such that the potential for influence existed, the onus moves to the defendant to rebut it. As Lord Evershed M.R. stated in Zamet v. Hyman, supra, at p. 938, the plaintiff must be shown to have entered into the transaction as a result of his own "full, free and informed thought". Substantively, this may entail a showing that no actual influence was deployed in the particular transaction, that the plaintiff had independent advice, and so on. Additionally, I agree with those authors who suggest that the magnitude of the disadvantage or benefit is cogent evidence going to the issue of whether influence was exercised. [Emphasis added]

[Emphasis added]

The Court found that the relationship between the Vendor and the young couple was not one in which there was potential for domination of the Vendor by the young couple.  Their relationship was one of lessor and lessees, and of friends and neighbours.  The Vendor was not dependent on the young couple, they were not family, there was no position of trust, and the Vendor was not in a position where he had to sell his land for financial reasons.

And even if the Court had found the relationship to be one in which undue influence could be presumed, the Court would not have found that actual undue influence was exerted in this case.  Instead, the Court found that the Vendor was someone who was not coerced into selling his land.  He had no children of his own and had no family who wanted to purchase or farm his land.  He wanted to sell the land and for the land to remain in agricultural use.  He sold the land at what amounted to a discounted price in relation to the actual market value, but the Vendor had expressed his willingness to sell at a discount knowing that the land would remain agricultural.

Of course, very shortly after the young couple purchased the land, they proceeded to apply for consent from the municipality to subdivide the land.  It appears that the young couple had discussed the possibility of subdivision with the Vendor for the purpose of family planning.  The Vendor provided a letter in support of the application and mentioned that the purpose was for "future ranch planning" for the young couple and their three children.  The decision by the young couple to put two parcels up for sale outside their family at a price that far exceeded the original purchase price of the entire two quarters came as a disappointing surprise to the Vendor's family.

However, the Court did not find that this made the transaction between the Vendor and the young couple unconscionable and subject to being set aside.  The Court found that none of the following elements of the test for an unconscionable transaction were satisfied:

1. a grossly unfair and improvident transaction;

2. that the victim lacked independent legal advice or other suitable advice;

3. that there was an overwhelming imbalance in bargaining power caused by the victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and

4. that the other party knowingly took advantage of this vulnerability.

Cain v Clarica Life Insurance Company, 2005 ABCA 437 (CanLII), 384 AR 11, at para 32.

The action to set aside the transaction was dismissed.  As the Court noted in conclusion: "seller's remorse, or seller's family's remorse, is not grounds to set aside the transaction".

Read the decision at: Burby v Ball.

TransCanada pipeline easement beneath swimming pool nixes property sale

The Plaintiffs in this case wanted to sell their residential property.  They listed the property for sale and the Defendant agreed to purchase it for $1,685,000.  The Agreement of Purchase and Sale was dated August 25, 2014 and the transaction was scheduled to close on November 28, 2014.  The property featured a pool, cabana and patio in the backyard.

After entering into the Agreement of Purchase and Sale, the Defendant discovered that a TransCanada Pipelines Limited ("TCPL") easement ran directly under the pool, cabana and patio.  An agreement provided that TCPL could remove the pool and cabana if necessary, and the agreement and the easement were the subjects of ongoing litigation between the Plaintiffs and TCPL.  The Agreement of Purchase and Sale between the Plaintiffs and the Defendant did not expressly reference the easement or the litigation.

The Defendant discovered the easement on November 6, 2014.  On November 7, 2014, the Defendant advised the Plaintiffs that he would not close the deal, and requested the return of the $50,000 purchase deposit.  The Plaintiffs refused to return the deposit and commenced an action against the Defendant for damages resulting from the failure to close the deal.  The Defendant counterclaimed for the return of the deposit.

As the Court explains in its decision on the claim and counterclaim, the Plaintiffs had constructed the pool, cabana and patio in 2011 without the consent of TCPL.  The TCPL easement dated from 1992, but the Plaintiffs were apparently unaware of it when excavations began (it was actually the second of two TCPL easements on the property).  TCPL permitted the Plaintiffs to encroach on the TCPL easement on certain conditions including:

(a)   The owners agree to sign a formal agreement prepared by TCPL which will be registered against the title of the land and will carry forward with future ownership;

(b)   In the event TCPL’s future operations, new installations, integrity or maintenance programs require the removal of the improvements (the pool and cabana) situated on its easement, the Owner agrees to remove the improvements immediately upon receipt of notice. The Owners and TCPL agree to equally share (50/50) the cost to remove the improvements;

(c)   The Owners covenant and agree that upon the Owner’s sale or disposition of the Lands, the Owners shall fully disclose the restrictive covenant to any prospective purchaser.

A letter containing those terms was registered on title to the property, but the Plaintiffs did not otherwise advise the Defendant of the letter or the subsequent litigation between TCPL and the Plaintiffs.

After the Defendant failed to close the transaction, the Plaintiffs defaulted on their mortgage and the property was sold under power of sale in May, 2015 for $1,730,000.  Although the sale price was higher than the price the Defendant would have paid, the Plaintiffs claimed they received $78,100 less in the power of sale because of the difference in the real estate commission charged (5% vs. 2.5%).

The Plaintiffs brought a motion for summary judgment seeking the damages they claimed from the Defendant.  Instead, the Court dismissed the Plaintiffs' claim and granted judgment to the Defendant for the return of the $50,000 deposit.  The Court ruled that the Defendant was entitled to rescind the Agreement of Purchase and Sale because the (second) TCPL easement and associated encroachment agreement and litigation had not been disclosed to the Defendant in the Agreement of Purchase and Sale.  As the Court noted:

The reference to a single easement in Schedule A of the APS did not provide the defendant with notice or disclosure of the 1992 easement or the June 2, 2011 letter agreement. Schedule A did not referentially incorporate the 1992 easement or make it part of the APS. This is especially true when the wording of Schedule A is compared to the wording of Schedule A in the earlier Purbas APS, which specifically referenced the TCPL litigation. Accordingly, the existence of the 1992 easement, the June 2, 2011 letter agreement, the unexecuted “Agreement To Install Swimming Pool and Cabana”, and the cloud of the litigation in relation to the plaintiffs’ refusal to execute the agreement, all meant that the plaintiffs did not comply with paragraph 10 of the APS which required the title to be free from all registered restrictions except as specifically provided in the agreement.

Read the decision at: Savo and Robichaud v Moursalien.

BC Court: Aborted sale should have proceeded - vendor did not conceal property's propensity to flood

The purchaser of a 60-year-old residential property (Lot A) on Salt Spring Island in BC chose not to complete the purchase on the closing date because of alleged latent defects.  The purchaser alleged that a dam or berm constructed on a neighbouring property encroached on Lot A and also caused Lot A to flood.  He took the position that the dam and the flooding were latent defects not discoverable on reasonable inspection and that the vendor of Lot A knew about the dam and earlier flooding and should have disclosed them to the purchaser.

The purchaser did discover the presence of the dam shortly before the closing date.  The vendor's efforts to satisfy him that the property had no flooding problems were unsuccesful.  So the transaction did not close and the vendor sued the purchaser for loss of value (Lot A was ultimately sold to another purchaser at a lower price) and other losses including loss of rent and interest.

The BC Supreme Court found that the vendor did not fail to disclose a latent defect (i.e. a propensity to flood).  As stated by the Court: "The doctrine of caveat emptor applies in real estate transactions with respect to defects that are discoverable on reasonable inspection.  A vendor does not have to disclose patent defects; rather, a vendor must only disclose latent defects."  On the evidence before it, the Court found that there was only one relevant flooding event and that was caused by vandalism combined with poorly maintained highway ditches - not by the dam encroachment.  This was not a latent defect known to the vendor.

Also, the sale contract provided for an inspection to confirm property boundaries, which would have revealed the actual boundaries and whether there were any encroachments (i.e. the dam).  However, the purchaser did not complete an inspection.  If there was an encroachment, the Court found that it could have been identified by reasonable observation (i.e. a patent defect).  Moreover, the encroachment that did exist was a minor one and in no way rendered the residential premises unfit for habitation.

The purchaser was bound to close the transaction and, as a result of his failure to do so, was found liable to pay damages including the decrease in the sale price obtained by the vendor and various carrying costs incurred when the property had to be offered for sale again.

Read the decision at: Ganges Kangro Properties Ltd. v. Shepard.