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).

Supreme Court of Canada digs up the dirt on the Sale of Goods Act

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

The Supreme Court of Canada issued a decision at the end of May, 2024 in a case about topsoil.  Of course, the case was not only about topsoil.  Topsoil just happened to be the subject matter of the contract at the heart of the dispute between the parties.  The Supreme Court chose to hear the case because it involved important questions about contracts for the sale of goods and the statutory conditions that are implied through legislation to form part of those contracts.

With the exception of Quebec, all Canadian provinces and territories have a statute governing the sale of goods that is modelled on a 19^th-century law from the United Kingdom – the Sale of Goods Act, 1893.  That UK legislation codified common law (judge-made, non-statutory) that had developed in the English courts throughout the 19^th century.  Passed down to Canadian law were three implied obligations that certain sellers of goods can owe to buyers related to the characteristics or properties of the goods sold even though the contract between seller and buyer might not mention the obligations: 1) fitness for purpose (that where the buyer makes known to the seller the particular purpose for which the goods are to be used, the goods will be reasonably fit for the purpose); 2) merchantability (that the goods sold by description will be of “merchantable” or reasonable quality and fit for sale in the usual course of trade); and, 3) correspondence with description (that goods sold by description will match the seller’s description of the goods). 

According to the Supreme Court in its recent decision, those implied obligations were likely imposed by judges to relieve buyers from the harsh effect of the law of “caveat emptor” (buyer beware) that left all of the risk related to the characteristics or properties of the goods on the buyer where the contract was silent on those matters.  In Ontario, the Sale of Goods Act contains the three implied obligations of fitness for purpose, merchantability and correspondence with description and makes them implied “conditions” rather than “warranties”.  Contractual terms are “conditions” where they are fundamental to the contract: breach of a condition would give the buyer the right to reject the goods from the seller.  Contractual terms that are not fundamental to the contract are “warranties”: breach of a warranty would give the buyer a claim for damages but would not entitle the buyer to reject the goods.  Where a condition is breached, the buyer would actually have the option to reject the goods or keep the goods and sue for damages (as if a warranty had been breached).

In the case that went to the Supreme Court, the issue was whether or not the parties to a contract for the supply of topsoil had “contracted out” of the implied condition in the Sale of Goods Act that the goods sold by description correspond with the description.  Parties don’t have to leave the implied conditions in place – they can use express language in their agreement to say that the implied conditions will not apply.

The buyer in the case was engaged by a municipality to remediate flooding in an area, which involved the removal and replacement of topsoil.  The buyer needed topsoil with a specific composition in order to provide the drainage required to solve the flooding problem.  The topsoil was sourced from the seller on the basis of the seller’s description, which included laboratory reports based on topsoil samples taken six weeks prior to the eventual delivery of the soil.  Although the seller warned that updated test results should be obtained, the buyer had missed project deadlines and wanted immediate delivery of the soil to avoid paying damages to the municipality.  The seller and the buyer agreed to go ahead with the transaction and delivery of the soil, but with exclusions of implied conditions.  The buyer would have the right to test and approve the topsoil before it was shipped to the site, but if the buyer waived that right the seller would not be responsible for the quality of the topsoil once it left the seller’s facility.

It turned out that the topsoil delivered had substantially more clay content than indicated by the earlier test results.  The soil didn’t drain the way it was supposed to and ponding developed on the project site, forcing the buyer to remove the topsoil and replace it with new topsoil that would drain properly.  The buyer sued the seller for damages claiming that the seller failed to deliver topsoil that had the composition of the soil shown in the test results that had been provided.

The majority of the members of the Supreme Court (there was one dissenting opinion) sided with the seller, finding that the parties had contracted out of the implied “correspondence with description” condition in the Sale of Goods Act.  Although the exclusion language used by the seller and buyer in their contract referred to “quality”, which is arguably something different than the matching of “identity” between the description of the soil (the test results) and the soil as delivered, the Supreme Court found that the buyer had chosen deliberately to assume the risk of not having further testing carried out on the topsoil before delivery.  The use of the word “quality” in the exclusion clause didn’t allow the buyer to avoid the objective intention of the exclusion clause – that the seller was not to be held liable for any claim relating to the topsoil.

Read the decision at: 2024 SCC 20 (CanLII).

 

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.

Caveat Emptor - 1978 John Deere 1830 "in very good condition"

In September 2008, the Defendant had advertised for sale in the Western Producer a 1978, 1830 John Deere tractor, indicating, among other things that it was in very good condition. The Plaintiff contacted the Defendant by telephone, who confirmed that it was in good condition. The parties arranged for the Plaintiff to attend at the Defendant’s place to examine the tractor. Having done so, the parties negotiated a sale of the tractor, on September 29, 2008, for the sum of $8,800.00. No written contract or bill of sale was signed by the parties.

In a civil action in the Provincial Court of Saskatchewan, the Plaintiff claimed that between the date of purchase and when these proceedings were commenced, roughly twenty-one months later, the tractor had very light service. In the interim, however, the Plaintiff had been required to spend $593.53 on the hydraulic cylinders. As well, in the spring of 2010, the tractor had been examined by a mechanic who confirmed that the rear of the engine block was cracked, and had been re-welded. As well there was a hole in the side of the engine block that had been patched by pieces of metal and covered up with silicone. Further, the steering mechanism was such that it was too dangerous to drive.

Therefore the Plaintiff claimed that the Defendant had engaged in misrepresentation of the mechanical condition of the tractor at the material time. He sought recission of the contract (cancellation), with a return to him of the purchase price and related expenses.

The Plaintiff, however, was unable to prove that the Defendant had misrepresented the state of the tractor at the time of purchase.  The Plaintiff did not call the mechanic who had examined the tractor as a witness.  On that basis, the Court declined to rescind the contract and found that the principle of caveat emptor (buyer beware) also applied.

Read the decision at: Suwinski v. Wiebe.