Don’t mistake a warranty for a condition

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

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).

Built on your neighbour's property? All may not be lost.

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:  

Everyone knows that you should not cut trees down on your neighbour’s property without permission.  You also shouldn’t build structures on your neighbour’s property without permission.  In fact, even with a neighbour’s permission it wouldn’t seem to make much sense to build a structure that is located in whole or in part on your neighbour’s property.  Fixtures to the land belong to the owner of the land.  Why build a structure that you don’t fully own?

Sometimes, though, structures are built which unintentionally encroach on a neighbour’s property.  The exact boundary lines between properties may not be apparent; without having a surveyor identify a boundary line, mistakes can be made.  In some cases, the property owner having the structure built is mistaken about the actual location of the property boundary.  In some cases, the mistaken understanding of the location of the boundary is shared by both neighbouring owners.  Think of an old boundary fence that has always been there – it’s just that it was never actually on the boundary. 

When some encroachments are discovered, the answer is simply to move the encroaching structure.  But there are some structures which cannot be easily moved or cannot be moved without great expense.  What then?  The structure that is encroaching on the neighbour’s property may have been in place for many decades.  Perhaps it is a house that was built long ago in the wrong position.  It may be that the current legally recognized property boundary is incorrect and based on a historical mistake and an order from the Court or the Director of Land Titles can be obtained to correct the boundary. 

There might also be a case for adverse possession.  Depending on how long the structure has been in place, the owner of the structure might actually have obtained legal ownership of the land beneath the structure through the process of adverse possession.  Where a person has possessed someone else’s land continuously for a period of ten years or more with the intention of excluding the registered owner (or other persons entitled to possession of the land), the ownership interest of the registered owner may be extinguished and lost to the person actually in possession.  The acts of possession must be “open, notorious, peaceful, adverse, exclusive, actual, and continuous having regard to the nature of the disputed property.”  Building a house or other building on land and having exclusive occupation of it could very well meet the requirements for adverse possession.

However, adverse possession cannot arise once property becomes part of the Land Titles system of land registration.  In Ontario, most properties are now part of that system.  While it is still possible that adverse possession could have taken place prior to the date when a property became part of the Land Titles system (if more than ten continuous years of adverse possession were by then completed), no adverse possession of lands after that date will be effective to extinguish the ownership interest of the registered owner in favour of the encroaching party.

So what happens if you accidentally build your structure on your neighbour’s property and adverse possession is not an available solution?  What if your neighbour won’t agree to sell you the land or enter into an encroachment agreement with you?  There may be another fix available.  In a case recently decided by Madam Justice Doyle of the Superior Court of Justice, owners whose garage was accidentally constructed in part on the neighbours’ property were granted an order entitling them to the encroachment lands upon payment to the neighbours of $18,500.  The order was made pursuant to Section 37(1) of the Conveyancing and Law of Property Act, which provides:

Where a person makes lasting improvements on land under the belief that it is the person’s own, the person or the person’s assigns are entitled to a lien upon it to the extent of the amount by which its value is enhanced by the improvements, or are entitled or may be required to retain the land if the Superior Court of Justice is of opinion or requires that this should be done, according as may under all circumstances of the case be most just, making compensation for the land, if retained, as the court directs.

The circumstances of the case before Justice Doyle arose from an unfortunate error.  Prior to 2006, the owners of what became two adjoining lots built a garage on one of the lots.  In the summer of 2006, those owners sold one lot to one purchaser and the other lot to another, but it was discovered before closing of the transactions that the garage on the one lot encroached onto the other lot.  The owner-vendors fixed the situation by tearing down the portion of the garage that crossed the property boundary.  Unfortunately, as was discovered in 2015 when the garage lot owners decided to sell their lot, the tear down in 2006 didn’t go far enough – the parties were wrong about the actual location of the property boundary.

By 2015, the cost of tearing down the garage and rebuilding it entirely within the lot where it was supposed to be located was understood to be more than $117,000.  Justice Doyle granted the order requested to retain land under the Conveyancing and Law of Property Act because the garage lot owners had an honest belief that the land being encroached upon was theirs and they had made a “lasting improvement” to the land (something “not easily removable”).  The significant cost quoted for the removal of the garage satisfied the “lasting improvement” requirement.

Justice Doyle determined that the “balance of convenience” was in favour of the garage owners to permit them to retain the encroached land in part because there was no evidence showing that the value of the neighbours’ property would be decreased by the conveyance of the area of the encroachment.  Based on appraisal evidence as to the per square foot value of comparable land, the price for the land was set at $18,500.

Read the decision at: 2022 ONSC 105.

Court decides ownership interest in land had been transferred to Railway; ownership did not revert to surrounding owners when railway discontinued

What happens when a railway is abandoned or discontinued?  More specifically, what happens to the rail line property itself?  In a recent decision, the Superior Court in Ontario had to decide whether a Railway had acquired the land for its now discontinued rail line as a full fee simple parcel (ownership of the land) or simply as an easement or right-of-way.  The line had been acquired in 1871 and discontinued in 2002.  In 2004, the Railway agreed to sell the rail line land to the County in which the line was located.  The neighbouring landowners, the successors in title to the original landowners from whom the rail line land had been acquired, challenged the sale.  They took the position that the Railway had acquired nothing more than a right to use the land for a railway; once the railway was discontinued, the land reverted to the neighbouring owners and could not be sold to the County.

The case came to court because the County alleged that the neighbouring landowners had interfered with the County's attempted use of the land (to be incorporated into a recreational trail).  The neighbouring owners intended to use the land for agricultural purposes, and made a counterclaim for a declaration that they were the rightful owners of the land.  The question was whether the original grant in 1871 was a grant of a fee simple interest in the land or of something less, such as a limited grant of rights to use the land.

Registered in 1871 in the Land Registry was a "Conveyance of Line of Way".  As stated in the conveyance, in consideration of the payment of $345.80, the original owners did "hereby ... grant and confirm to the [Railway Company], its successors and assigns for ever" an 8.67 acre portion of the owners' property.  Was that registration sufficient to transfer ownership of the land, such that no interest in the land would revert to the original owners or their successors?  The Court decided the issue on a motion for partial summary judgment brought by the neighbouring landowners.

Justice Grace reviewed the applicable railway legislation in place at the time of the conveyance and determined that the conveyance was a transfer of the fee simple ownership of the land:

The statutory provisions applicable in this case are, in my view, similar to those considered in Lowe.  As long as the acquisition of real property was for a purpose related to the establishment, maintenance and/or operation of a railroad, Canada Southern was statutorily empowered to acquire a fee simple interest in land.  The company could do so by negotiating an agreement with a land owner or in the event of an unwillingness to sell, through a process akin to expropriation. 

Although the conveyance document itself did not specify that fee simple ownership had been "sold" to the Railway, that was the effect of the language in the document in the context of the applicable legislative regime.  

And Justice Grace did not accept the alternative argument of the neighbouring landowners that, even if a fee simple ownership interest in the land had been transferred, that interest would be subject to reversion in the event that use of the rail line was discontinued.  There was no language to that effect in the conveyance document.

Read the decision at: Corporation of the County of Oxford v. Vieraitis.

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.

Grain Farmers of Ontario v. MOECC decision now available

Grain Farmers of Ontario ("GFO") has now posted a copy of the decision dismissing its challenge of Ontario's new neonicotinoid regulations at its website: 2015 ONSC 6581. GFO alleged that the regulations in their current form would cause irreparable harm to Ontario corn and grain farmers, and asked for a stay of the regulations until May, 2016 or "such time as the requirements of the Regulation can be met."  Justice S.A.Q. Akhtar of the Superior Court heard the case and declined to order a stay.  He also allowed the cross-motion by the Ontario Ministry of the Environment and Climate Change ("MOECC") ruled that GFO's application disclosed no reasonable cause of action. The application was dismissed on that basis.

On review of the GFO application, Justice Akhtar was "of the view that the application is concerned with the economic interests of the affected farmers rather than any property rights.  Prior to the Regulation, the farmers did not have an unrestricted right to use their lands as they wished but were subject to a highly regulated pesticide regime. ... If there is no constitutional challenge or allegation of ultra vires, then what is GFO's aim in making the application? ... In my view, GFO is not asking for a determination of rights that depend on the interpretation of the Regulation but a re-writing of that Regulation in a manner that would permit the effects of the Regulation to be delayed to its advantage.  It is not the job of this court to pronounce on the efficacy or wisdom of government policy absent the aforementioned constitutional or jurisdictional challenges, neither of which are made here...".

Thankfully for GFO, the MOECC did not seek any costs of the court proceeding against GFO (though GFO will most likely have incurred its own legal costs in the matter).  According to its website, GFO is evaluating its options and says that it has not conceded on this matter.