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).

FRACKED: A PERSONAL ACCOUNT OF LIVING ON THE SHALE

From theclean.org:

FRACKED: A PERSONAL ACCOUNT OF LIVING ON THE SHALE

October 26, 2011: Nothing can prepare a person for the reality of high-volume "fracking"; certainly not the coaxing of suave salesmen who convince landowners to sign leases by telling them that they've won "the natural gas sweepstakes." And certainly not their description of benign completed gas wells that stand in green meadows, silently pumping money out of the ground.

When the frackers come, they arrive like an invading army:

Trucks by the hundreds, tankers, dump trucks, drilling rigs, fracking rigs. Five-acre drilling pads were bulldozed in the middle of farmers' best fields, million-gallon ponds were installed, roads were built, woods and fields were trenched and bulldozed for tie lines. Drilling rigs went up at an unbelievable rate. From one spot on our farm, I counted eight rigs.

Then the generators started. You could hear them a half-mile away.

Then the pumping stations - small, industrial sites with buildings and pipes sticking up out of the ground.

This is the scene as described by Libby Foust. Her family farm was the site of some of the first Marcellus wells in Bradford County, Pennsylvania.

Read the rest of the blog post at: theclean.org

Environmental Bill of Rights Registry - Regulating Private Gas Wells in Ontario

Licensing Existing Private Natural Gas Wells

The Oil, Gas and Salt Resources Act requires that all wells for oil and natural gas be licensed by the Ministry of Natural Resources (MNR). Newly constructed wells are currently authorized (or licenced) under the requirements of the Ontario Provincial Operating Standards (per Regulation 245/97), however many private natural gas wells pre-dated the Provincial Operating Standards.

Using a risk-based approach, an internal operating policy directive is proposed to define the licensing criteria that MNR staff will use to evaluate licence applications for existing private natural gas wells.

• The proposed policy elements include the following:
• Definition of “private” gas wells
• Restricted areas and setbacks from receptors
• Qualified person requirements
• Acceptable well conditions (and associated equipment requirements)
• Exceptions
• Term of the licence (i.e. 10 years)
• Other safeguards (signage, barriers, detectors, etc)
• Transfer of licences
• Administration

Public Consultation:

The proposal has been posted for a 29 day public review and comment period starting June 09, 2011.  All comments received prior to July 08, 2011 will be considered as part of the decision-making process by the Ministry of Natural Resources if they are submitted in writing or electronically using the form provided in the notice and reference EBR Registry number 011-2981 (see: Notice).

The Draft Internal Operating Policy Directive is available at the following link: Directive.

Canadian Natural Resources Limited appeal dismissed by Alberta Court of Appeal

The Alberta Court of Appeal has dismissed the appeal of Canadian Natural Resources Limited (CNRL) of a Court of Queen's Bench surface rights decision made in favour of landowners.  The most important ground of appeal revolved around criticisms which the Court of Queen’s Bench made of one of the CNRL’s witness’ expert evidence. There is case law which was not disputed on the appeal. It holds that if a pattern of dealings has been established, then compensation for compulsory imposition (or renewal) of a surface lease for an oil or gas well may be based on the negotiated amounts in those prior contracts between others. The Court of Queen’s Bench concluded that no such applicable pattern of dealings had been proved here (paras. 89, 118 and 155). That was a rejection of most of the evidence of this expert witness.

The Court of Queen's Bench had summarized the reasons for its rejection of the pattern of dealings evidence:

a) There was no definition, precise or general, of the area to which this pattern was said to apply.

b) There was no information with respect to how many sites, overall, are within the area.

c) There was no indication of how many sites were reviewed in order to ascertain the comparables, nor any indication of why other sites reviewed were not comparable.

d) There was no explanation of why this pattern was applicable to a certain area.

e) There was no information provided with respect to the number of parties, either operator or landowner, represented within the comparables.

f) There was no information with respect to the negotiation process.

g) With respect to the chart showing CNRL irrigation and dryland leases, almost half of the leases do not fit the compensation pattern.

h) There was no explanation of why leases that were presented as comparables but that did not fit the compensation pattern supported the pattern of dealings.

i) There was no explanation as to why initially only new agreements were considered appropriate comparables, but why later, rent reviews were also considered to be properly included.

The Court of Appeal found that the Court of Queen's Bench, as finder of fact, was entitled to reject the expert evidence of pattern of dealings.  There was no reversible error in the lower court decision.

Read the Alberta Court of Appeal decision at: 2010 ABCA 91 (CanLII).

Read the Alberta Court of Queen's Bench decision at: 88 Alta. L.R. (4th) 298

CBC News - Calgary - Oil and gas drilling to rise: forecast

CBC News - Calgary - Oil and gas drilling to rise: forecast

According to the Petroleum Services Association of Canada, western Canadian landowners can expect an increase in the number of gas and oil wells being drilled on their properties in 2010. 6,095 new wells are estimated for Alberta this year. British Columbia should see an additional 630 drilled. Saskatchewan and Manitoba should expect to see 1,935 and 300 new wells, respectively.