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).

Zombie Deeds (yes, Zombie Deeds)

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

Imagine the following scenario: Party X has entered into an Agreement of Purchase and Sale to sell her property to Party Y; all of the conditions of the sale have been fulfilled or waived; title searches have been completed; the closing date is next Monday; Party X comes into her real estate solicitor’s office on Thursday and signs all of the required closing documentation including an Authorization, Acknowledgement and Direction to her solicitor authorizing the solicitor to register an electronic Transfer/Deed in the Land Registry conveying ownership of the property to Party Y once the purchase funds have been received; Monday arrives and, sadly, Party X passed away over the weekend.  Party X wanted to complete the sale to Party Y and, indeed, was obligated to complete the sale to Party Y.  She already authorized her solicitor to register the Transfer/Deed to make that happen.  Can Party X’s solicitor not register the deed in accordance with the client’s wishes and obligations?

The answer is “no”.  If the real estate solicitor went ahead and attempted to register the Transfer/Deed on the basis of the Authorization, Acknowledgement and Direction signed by Party X before her death, the solicitor would be attempting to register what is commonly (and maybe a bit flippantly) referred to as a “Zombie Deed”.  For several years now, the Land Registry in Ontario has expressly prohibited the registration of such deeds on the basis that the authorization to register terminates when the vendor dies.  The late Director of Titles for Ontario, Jeffrey Lem, issued a bulletin in May, 2020 titled “Zombie Deeds are Dead!” with the following introduction:

As most of you know, the Director of Titles has always been opposed to the so-called “Zombie Deeds” – transfers registered by owners who have already died. Well, there is finally a case dead on point (pun intended) confirming that Zombie Deeds are improper in all circumstances.

Mr. Lem went on to discuss the decision of Madam Justice MacLeod-Beliveau of the Superior Court of Justice in Thompson v. Elliott released in March, 2020.  Justice MacLeod-Beliveau had confirmed that it is never appropriate for a solicitor to register a Zombie Deed:

I find the lawyer erred by registering the "zombie" deed/transfer severing the joint tenancy in the property after Ms. Elliott's death based on his erroneous understanding that her instructions survived her death. A court application for a declaration of an interest in land is the proper legal procedure to follow by the lawyer to correct the error made by the lawyer after her death.

The proper course of action to be taken by a lawyer in these circumstances upon the discovery of such an inadvertent error, is for the lawyer to bring an application in the Superior Court of Ontario requesting a certificate of pending litigation and a declaration of an interest in land and for a vesting order under s. 100 of the Courts of Justice Act, R.S.O. 1990, c. C.43 to be made, setting out all the material facts in support of the application for an interest in land to be determined by the court.

Despite the clear statements from Justice MacLeod-Beliveau and the Land Registry about how solicitors should handle Zombie Deed scenarios, problems still arise.  In April this year, Justice Myers of the Superior Court made an interim decision in a case that calls into question the direction to seek a vesting order as the alternative to attempting to register a Zombie Deed.  A woman on her deathbed transferred title to herself and her nephew as joint tenants.  The woman’s solicitor visited her in the afternoon and had her sign the transfer documentation.  She passed away before the documents were submitted for registration the following morning.    Following the direction of Justice MacLeod-Beliveau in Thompson v. Elliott, the aunt’s estate applied to the Court for a vesting order to permit the registration in the Land Registry of the conveyance of title from the Estate to the nephew.

Justice Myers identified a unfortunate problem with the vesting order request: “Here, the nephew holds title to the property at law. There is nothing for me to vest in him. … I do not understand a request for a court to vest title in the person who already holds it.”  By law, the nephew had become joint tenant with his aunt when the documents were signed and he took title by operation of the law of survivorship when his aunt passed away.  The vesting order was sought as a way to deal with the requirements for registration of the conveyance of ownership and the prohibition of the registration of Zombie Deeds.  If a vesting order is not available, what is the solution?

Justice Myers ended up adjourning the application before him to allow counsel to provide further legal authorities and also perhaps to serve the Director of Titles with the application.  Real estate solicitors across Ontario will no doubt await with bated breath the solution to this difficult situation.

Read the decision at: 2025 ONSC 2661 (CanLII)

Farm bridge collapses beneath sprayer - who is at fault?

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

In 2017, a custom sprayer operator from a local farm supply company was crossing a private bridge on a farm with a self-propelled sprayer when the bridge broke.  The sprayer fell into the river that ran beneath the bridge.  The operator was trapped underwater but managed to escape his machine.  The sprayer sustained very significant damage.  Over the course of 11 days in 2023 and 2024, a trial was held in the Superior Court of Justice to determine who was at fault for the incident and what compensation might be owing for damage to the sprayer.  A decision was rendered at the end of March this year.

The sprayer involved in the case weighed over 15 tons when empty and had 100-foot booms.  It had been purchased in 2014 for just under $343,000.  The operator of the sprayer was a long-time employee of the farm supply company and had operated the sprayer (and only that sprayer) for four years.  He had finished spraying one field on the customer’s farm and was moving to another field across the bridge when the collapse occurred.  The sprayer was about two-thirds of the way across when wooden planking broke beneath the sprayer’s front right tire.  The sprayer rolled completely and landed upright in the deep river below.  The cab was submerged and quickly filled with water, but the operator found a way out.  He escaped with cuts to his hands from broken glass.

The farm bridge had originally been constructed in the early 1900s by the same family that owns and operates the farm today.  In 1980, the bridge was rebuilt with concrete abutments placed at each end of the bridge.  The river was spanned using five steel beams spaced to create a supporting structure 10-feet-wide.  A wooden deck was placed over the beams with wooden planks running parallel with the beams on each side of the deck to hold the deck together.  In all, the wood deck stretched 57 feet from one side of the river to the other.  The deck extended in an overhang of approximately 3 feet beyond the edge of the steel beams on each side of the bridge.

No building permit was required for the bridge; the only legal requirement for the private bridge was that it be high enough above the river to allow water to pass under the bridge if the river flooded.  The unchallenged evidence of the farm family was that the bridge was crossed between 40 and 50 times a day by large-sized farm equipment weighing from 15 to 40 tons. 

After the bridge collapse, the sprayer sat mostly submerged in the river for 10 hours.  It was extricated from the water and taken back to the equipment retailer for an assessment of the damage to the machine and an estimate of the cost of repair.  A consultant engaged by the insurer for the farm supply company didn’t believe the sprayer was a write-off; he thought the unit could be repaired for roughly $332,000 including taxes.  The cost of a new replacement sprayer was over $435,000.  The insurer gave the farm supplier the following options: 1) repair the sprayer; 2) purchase a replacement sprayer of similar value to the damaged sprayer; or, 3) take the estimated cost of the repairs and apply it to the purchase of a new sprayer.  The farm supply company chose the third option and purchased a new sprayer.

Having paid out the estimated cost of repairing the damaged sprayer, the insurer for the farm supply company had a right of subrogation meaning that it could now pursue a claim to recover the money it had paid out.  The insurer sued the farm corporation that owned the bridge, claiming that the farm was at fault for the collapse because: the overhang was unsupported; the bridge was in a state of disrepair including rot; the wooden deck was free to shift over the steel beams; and, there was no warning that the overhang of the wooden deck was unsupported.  The farm corporation defended the action arguing that the incident was caused by driver error.  Provided that a vehicle was kept centered over the steel beams, the farm corporation contended that the bridge could support equipment much heavier than the sprayer had been at the moment of the collapse. 

The Court sided with the farm corporation and ruled that driver error was the cause of the incident and of any losses suffered by the farm supply company.  Although there was evidence of some rot in the wooden deck of the bridge, the bridge did not break at the point of the rotted wood.  Instead, the bridge broke only where the sprayer tire reached a point two-thirds across the overhang.  If the tires had been centered on the beams, the bridge would not have collapsed whether the wood on the overhang was rotten or brand new.  The Court found that the likely explanation for the sprayer veering toward the edge of the bridge was driver inadvertence.  A warning to keep the machine in the centre of the bridge and off the overhang wouldn’t have helped: the sprayer operator already knew he needed to keep the vehicle centred when crossing the bridge.  The insurer’s subrogated action for damages was dismissed.

Read the decision at:  2025 ONSC 1996 (CanLII).

 

Resulting Trusts Part 2: Joint Tenancy and Estate Planning

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

Last month’s article explored the legal concepts of resulting trusts and beneficial ownership of land.  There is a presumption that a “resulting trust” arises when property is held in the name of a party who provided no value for it.  The “legal owner” in whose name the property is held is considered to hold the property in trust for the true “beneficial owner” who actually did provide the value by which the property was acquired.  Prime examples of circumstances giving rise to resulting trusts are where a parent provides the purchase money for a property held in the name of an adult child or where the parent adds the child to title for no consideration.  The presumption of a resulting trust is rebuttable.  The child could demonstrate, for instance, that the transfer of the property interest was intended as an outright gift by the parent.

This month’s article is Part 2, because it just so happens that the Ontario Court of Appeal decided a case last December dealing with questions of beneficial ownership and resulting trusts in the context of estate planning that is worthy of attention.  In his reasons for the initial application decision that led to the appeal heard in the Court of Appeal, Justice Charney of the Superior Court of Justice had noted that the case was “a cautionary tale for persons who might be tempted to use joint tenancy as an estate planning mechanism to avoid the payment of probate fees.”

The case involved the residence of a Mr. J. that he had purchased in 2011 using the proceeds from the sale of another property that he had previously owned jointly with his former partner, Mr. T.  Mr. J. and Mr. T. had owned the other property as “joint tenants”, meaning that if one owner died, the other would receive the deceased owner’s interest by right of survivorship without the property interest entering the deceased owner’s estate and without requiring the payment of estate taxes or “probate fees”.  Mr. T. passed away and Mr. J. became the sole owner of the property by right of survivorship.  Mr. J. sold that property and used the proceeds to buy his new residence.

Mr. J. and Mr. T. had also made mirror wills in which they both named the other as sole beneficiary of their respective estates and named Mr. T.’s great-niece, Ms. R., as their alternate beneficiary.  Although the will didn’t apply to the property that was sold by Mr. J. (because Mr. J. and Mr. T. had owned the property as joint tenants), it was a relevant part of the factual background to the court case.  The year after he purchased his new residence, Mr. J. added Ms. R. to the title to his new residential property as a joint tenant.  Ms. R. didn’t live in the residence, but she would become the sole owner of the residence if Mr. J. predeceased her (similar to the way in which Ms. R. had been named as alternate beneficiary in the mirror wills made by Mr. T. and Mr. J.) and no probate fees would be payable.

Unfortunately, the relationship between Mr. J. and Ms. R broke down.  Based on a conversation with Ms. R.’s husband, Mr. J. came to believe that Ms. R had plans to sell Mr. J.’s residence and to buy another property where she and her husband and Mr. J. could live together.  In response, Mr. J. instructed his lawyer to “sever” the joint tenancy.  A transfer was registered by which Mr. J. conveyed his interest in the property to himself, with the result that he and Ms. R. were now co-owners of the property as “tenants in common” and not joint tenants.  Mr. J. and Ms. R. then each held separate 50% interests in the property. 

Justice Charney in the Superior Court and the Court of Appeal on appeal were tasked with determining whether Mr. J. had the right to sever the joint tenancy and what ownership situation currently exists.  Justice Charney found that Mr. J.’s transfer of an interest in his residence to Ms. R. involved a gift only of the right of survivorship.  Otherwise, Ms. R. held her interest in the property in trust for Mr. J. by way of resulting trust.  Justice Charney also found that Mr. J. was entitled to sever the joint tenancy.  The Court of Appeal agreed with Justice Charney’s decision on these points. 

However, the Court of Appeal did not agree with Justice Charney’s depiction of the resulting ownership situation.  Justice Charney’s opinion was that the right of survivorship that Mr. J. had gifted to Ms. R. still remained in effect as to a 50% interest in the property.  Mr. J. held a 50% interest as tenant in common in the property free and clear of any right of survivorship for Ms. R.  Ms. R. held a 50% interest as tenant in common in trust for Mr. J., but with a right of survivorship so that she would take over full legal and beneficial ownership of that 50% interest when Mr. J. died (if he still owned the property by then).  The Court of Appeal found instead that any right of survivorship disappeared when the joint tenancy was severed.  It could not continue to attach to the 50% interest that was held in the name of Ms. R.  By severing the joint tenancy, Mr. J. had effectively revoked the entirety of his gift of a right of survivorship, something that he was entitled to do while he was still alive.

Read the decision at:  2024 ONCA 875