The Court Case That Changes The Grow-Op Landscape

This is hot off the press!

Hotter than the bright-red cherry on a blunt, or the flame being sucked into the stem of a hand-blown, glass bong.

Last week, the Ontario Court of Appeals overturned a court ruling regarding a marijuana grow-op, and the rule of caveat emptor, or “buyer beware.”

Is this a sign of things to come?

Marijuana

I took Latin in high school.  Did you?

Latin was described as a “dead language” because nobody spoke it.  But I think I learned more about the English language by taking Latin, than I did in any other course outside of, well, English.

Latin is everywhere.

It’s in everything we say.

And in Grade 11, one of the projects was to pick an industry or occupation, and research words and phrases associated with that industry, that are either rooted in Latin, or Latin themselves.

I chose the law, since my father was a lawyer, and I had access to his thousand-some-odd criminal code books, and case summaries.

I can actually remember the five Latin phrases that I used in my project, circa 1996.  I know that’s weird, but so am I.  That, and I have an insane memory…

Mens rea

Actus reus

Ipso facto

Par delictum

And last but not least, caveat emptor.

Caveat emptor translates directly as “let the buyer beware.”  Many people leave out the “let the,” but without the first two words, it doesn’t sound quite like the direct warning, for which it is intended.

Caveat emptor has always held true in the courts, specifically when it comes to real estate matters.

But a case from June of 2017 challenged all of that, when a judge sided with the buyer in a lawsuit regarding the non-disclosure of a marijuana grow-op.

 

 

You can read the entire case HERE.

But allow me to summarize…

Jonathan Beatty and Jacqueline Beatty sold 39 Stainforth Drive to Zhong Wei on May 15, 2016.

Re/Max Premier Inc. held a $30,000 deposit in trust for the sale.

After the Agreement of Purchase & Sale (APS) was made and before closing, the Purchaser learned that in 2004 the Property was used to grow marijuana. The Purchaser’s lawyer notified the Sellers’ lawyer of this discovery by letter dated July 8, 2016 which attached a letter dated June 27, 2016 from Toronto Police Service that confirmed that the Property was used to produce marijuana and that the Police attended at the Property in 2004 and seized 265 marijuana plants.

The Purchaser’s lawyer’s letter advised the Sellers’ lawyer that the Purchaser is not willing to complete the transaction. The Purchaser demanded a return of his deposit. The Sellers refused to agree to termination of the APS and they brought their application against the Purchaser for remedies resulting from the refusal of the Purchasers to complete the sale and purchase transaction.

In order to mitigate their damages, the Sellers sold the Property to another purchaser. The purchase price was $86,100 lower than the purchase price under the APS.

Schedule A includes the following representation and warranty:

The Seller represents and warrants that during the time the Seller has owned the property, the use of the property and the buildings and structures thereon has not been for the growth or manufacture of any illegal substances, and that to the best of the Seller’s knowledge and belief, the use of the property and the buildings and structures thereon has never been for the growth or manufacture of illegal substances. This warranty shall survive and not merge on the completion of this transaction.

The Sellers applied for declarations that:

a.      The APS is a firm and binding contract;

b.      The Purchaser has breached the APS;

c.      The Deposit has been forfeited to the Sellers;

d.      The Purchaser is liable to the Sellers for damages for breaching the APS.

The Purchaser applied for declarations that:

a.      The Purchaser is not required to complete the transaction contemplated by the APS;

b.      Alternatively, if the Purchaser is required to do so, that the purchase price be adjusted to reflect a fair market value which takes into account that the Property was previously used for a marijuana grow operation;

c.      The Sellers have breached the APS;

d.      The Sellers are liable to the Purchaser for all damages suffered by the Purchaser from the Sellers’ breach of the APS and an order directing a reference for determination of such damages or, alternatively, damages in the amount of $250,000;

e.      The Purchaser is entitled to the return of the Deposit;

f.      The Purchaser is entitled to termination of the APS resulting from the misrepresentations of the Agent and that the Agent is liable for the damages suffered by the Purchaser resulting from such misrepresentations.

That’s the gist of it, but feel free to click on the link and read the whole case.  It’s not long, and it’s in plain (enough) language.

Ultimately, the judge sided with the buyer in the case, which I think surprised a lot of legal experts.

Caveat emptor has always applied, but this was the first challenge we had seen specifically as it pertains to marijuana grow-op clauses.

The judge’s analysis is quite lengthy, but let me highlight a few important paragraphs:

In my view, however, there is an important distinction between a warranty and a representation when one considers a contractual provision such as this. A warranty is a contractual promise, usually made in the context of a sale, that the thing being sold has some particular quality. In respect of the Illegal Substances Clause, the qualifying words mean that there is no contractual promise, or warranty, that the Property has never been used for the growth of illegal substances. I accept the Sellers’ submission that, without clear language such as the words “on completion”, or “on closing”, to show that the parties intended that the content of the warranty could change with changing circumstances after the date of the APS when the warranty was given, the content of the warranty does not change. The warranty that survived completion of the transaction was the warranty that was given on the date of the APS.

The statement in the Illegal Substances Clause is, however, also a representation. The representation is that, to the best of the Sellers’ knowledge and belief, the use of the Property has never been for the growth or manufacture of illegal substances. In my view, this representation is a statement of a present fact, to the best of the Sellers’ knowledge and belief, that was intended to be relied upon when made and one upon which the Purchaser was entitled to continue to rely, at least until closing, while the APS was an executory contract.

Had the Sellers, themselves, discovered after the date of the APS and before closing that the Property had been used to grow marijuana, they would have been required to disclose to the Purchaser that their representation, made to the best of their knowledge and belief when the APS was made, was not true. The Purchaser’s rights are not affected by the fact that he was the one who discovered this information and communicated it to the Sellers. Upon acquiring knowledge that the Property had been used to grow marijuana, the Sellers could no longer honestly give the representation in the Illegal Substances Clause.

The fact that when the Property was sold on the open market, with full disclosure of the information that it had been used for the growth of marijuana, the purchase price was almost $87,000 less than the purchase price that the Purchaser had agreed to in the APS, supports my conclusion that the Sellers’ representation was substantial and material.

I therefore conclude that the Purchaser is entitled to the remedy of rescission in respect of the APS and to treat it as void ab initio. The Purchaser is entitled to the return of the Deposit, and is not liable to the Sellers for damages for breach of the APS.

I’m not a lawyer, but to me, this whole thing is crazy.

Bottom line – the sellers did not know that the property was used as a marijuana grow-op.

They purchased in 2009, and the grow-up pre-dated their purchase.

They signed a clause that read “….to the best of their knowledge.”

And in the end, the Ontario Court of Appeals agreed.

Three major points were discussed in the appeal, below:

The application judge’s differentiation of the “representation” from the “warranty” in the Clause. When he considered the legal effect of the Clause, the application judge applied different analytical approaches to the same contractual term: he interpreted the “warranty” language as a term of the contract, while he looked at the “representation” language through the lens of the principles concerning pre-contractual representations. That approach contained several errors: It failed to consider the inter-related nature of the “representation” and the “warranty” in this particular contract. It failed to address the real interpretive issue of what the representation in the Clause actually meant. It was problematic to view the “representation” in the Clause as a pre-contractual or collateral representation. Finally, to treat the “representation” contained in the Clause as something other than a term of the contract would ignore the language of the entire agreement clause in the APS. Instead, the application judge should have interpreted the Clause as a term of the parties’ contract in accordance with the standard rules of contractual interpretation.

The application judge’s reliance on a duty to disclose to inform his interpretation of the Clause. The application judge erred in his reasoning, as he posited that if the Sellers had discovered after the execution of the APS, that the property had been used as a marijuana grow-op before they acquired it, their silence  or failure to disclose such information to the Purchaser  could found an action for misrepresentation. From this, he concluded that the Purchaser’s rights are not affected by the fact that he was the one who discovered this information and communicated it to the Sellers. This reasoning is not persuasive, as the representation and warranty the Sellers gave about the use of the premises was limited, not absolute. It was a representation or warranty “to the best of [their] knowledge and belief”. The Purchaser’s discovery that a previous owner of the house had used it for a grow-op was a complete surprise to the Sellers. While liability may attach where a vendor knew about a major latent defect but concealed the information from the purchaser, these are not the facts of the present case. Therefore, the application judge improperly applied principles concerning a vendor’s concealment of material information about the condition of a property to a situation where no such concealment had occurred.

The meaning of the Illegal Substances Clause: The Sellers’ representation and warranty that the use of the property had never been for the growth or manufacture of illegal substances was limited to their knowledge and belief as it existed when they executed the APS. This conclusion is reached for three reasons: (1) The plain language used in the clause; (2) The absence of any language in the Clause that speaks of the Sellers’ knowledge and belief at the date of closing, in contrast to the use of such language in other provisions of the APS; and (3) The effect of the “survives closing” language at the end of the Clause does nothing more than clarify that whatever the content of the representation or warranty given by the Sellers, it did not merge with the deed on closing. The representation and warranty survived closing to offer a basis for a post-closing action of breach. However, that language does not assist in ascertaining the content or meaning of the representation or warranty given.

The sellers were permitted to keep the $30,000 deposit.

And now they have an action against the buyer for the balance of the loss on the resale (they sold for $86,100 less), as well as all court costs, which they will likely win.

So in the end, we’ve come full circle, back to where we started: caveat emptor.

And what does this mean for the future of houses sold which had formerly been marijuana grow-ops?  Especially when you consider that it will be legal to grow marijuana in Canada later this year?

I’d hate to be cynical, but I think it means more ligitation!  More confusion, more dissatisfaction, and more grey area.

If the lawyers want to weigh in on this one, I’m all ears…

20 Comments

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  1. David (Not the david who runs this website) says:

    Isn’t this similar to it being legal brew your own beer or wine at home in small quantities but it’s quite another matter if you setup your own brewery at home and then tried to sell beer to the public? You’d be shut down for sure if you did and I suspect that it’s going to be the same for marijuana.

  2. craijiji says:

    It might be ok to grow some weed at your place once legalization goes through, but it’s certainly not going to be legal to run a grow up. Big difference, but I think you know that.

    1. Ralph Cramdown says:

      Not a lot of nuance in OREA’s/CREA’s position — if your tenant got busted for one plant a few years ago, they’d like to see your property on a national registry, condemned under building code until remediated and tested, and branded on title.

      I’ve spent time trying to figure out the reason for their vitriol, haven’t come up with much. They seem willing to burn a lot of property owners (their natural constituency) for reasons that are unclear to me. I wasn’t around for the UFFI wars — were families rent asunder and lives destroyed? If you ask me, cat piss is probably a bigger hazard for the typical real estate buyer, but I could be wrong…

      1. Not Harold says:

        UFFI was crazy. Potential cancer, plus formaldehyde is embalming fluid. Not great PR.

        The realtors are willing to burn a few homeowners at the stake to protect confidence in the market. UFFI, like grow ops, affects a tiny percentage of all houses but creates fear in all buyers. Lower velocity of transactions, lower prices, bad for everybody.

        So, like the British Navy back in the day, hang a few pour encourager les autres.

        Makes lots of sense as long as you’re not the poor bastard who serves as the example that encourages everyone else!

      2. Jennifer says:

        what do you mean? have you seen a picture of a grow-up house? it’s a mould-infested disaster, HVAC tampered with, electrical played around with, plumbing, and on and on. even if it is rare, i wouldnt want to be that person buying that house. the lesson here is always google the house you are buying – you’d be suprised what comes up (a murder on logan, fires, etc). wonder why they didnt.

        1. Ralph Cramdown says:

          Thank you Jennifer! I think you’ve helped me understand CREA/OREA’s campaign. Thanks also to Not Harold, you have Not Helped either 🙂

          I’ve looked at* a bunch of homes; even lived in a few. I’ve seen mould, screwed up electrical, structural, plumbing and HVAC. These weren’t former grow-ops. Most of it boils down to Not Harold’s observation that “people are cheap.” Plus mine, which is “…and stupid.” Home systems maintenance isn’t rocket science — a lot of people figure they can do it themselves, and many of them are right… Then there are the rest.

          The genius of OREA’s grow-op campaign, you’ve made me realize, is that it divides homes for sale into “former grow-ops” and “not former grow-ops” and puts the assumption of all the bad stuff in homes onto the former grow ops side. Brilliant! I’ve seen much crap electrical, structural, plumbing and HVAC — and almost all of it was due to lame-ass idiots who weren’t growing any of the demon weed, or in houses doing same.

          Google the “Base Rate Fallacy.”

  3. Ralph Cramdown says:

    At its core, this case has nothing to do with Mary Jane, and the issues of grow op stigma and habitability are not even addressed in the decisions. It is a case of shitty drafting and sloppy language, in a clause proposed by BOTH the buyer and seller, whence upon the discovery of long green, long gone, neither side knew whether they still had a live deal or not. As it turned out, the language was so bad that it also confounded the judge of first instance, saddling the parties with costs of a trial and an appeal, and the buyer with a “stigmatized”* property about which he can no longer claim ignorance. It is possible that the buyer wouldn’t have found himself in this pickle if he hadn’t agreed (on whose counsel?) to strike his original home inspection clause. Maybe he would have been able to escape the deal if he’d had a well drafted financing clause. Possibly he wishes his agent had never googled the property after (!) he’d executed the APS.

    Once again, OREA and TREB agents are discovered practicing law, badly, without a license, and their clients bear the brunt of it. Personally, I think both the buyers and the sellers in this case have grounds for a negligence suit against their respective brokers. And “caveat emptor” has nothing to do with it.

    * – as claimed by his lawyer

    1. Condodweller says:

      I don’t know about the correctness of the legal interpretation of this case, however, in these situations I revert back to logic and common sense. If the fact a property was used to grow illegal substances must be disclosed by the seller, it would stand to reason that the previous seller who used it as a grow op would have disclosed it to the “current” seller in which case he/she would have known about it and therefore should have disclosed it to the “current” buyer. The only way the current seller would not know about the grow op is if the previous seller did not disclose it or perhaps the current seller developed amnesia. To me, either the current seller knows but withheld the fact or the previous seller withheld the fact.

      I wonder if there is a statute of limitation on this and whether or not even the grow op owner or the current seller may be liable. It should be fairly straightforward to determine who was responsible for the misrepresentation by looking at original APS to see if it was disclosed or not.

      1. Ralph Cramdown says:

        “I don’t know about the correctness of the legal interpretation of this case…”

        That’s my whole point. If you get to the point where you have to pay someone $500 an hour to argue in front of a judge whether your interpretation of a poorly written clause is correct, or the other guy’s is, you’ve already lost a lot of time, money, certainty and sleep. Both the buyer and the seller in this transaction had professional representation who charged fat commissions and who recommended the clause in question as protecting their respective interests. Two years and probably well north of $100,000 in legal fees later, David with latin flair blames the buyer with “caveat emptor, baby!” What, aside from hiring incompetent Realtors, did the buyer, or the seller, do wrong to deserve this lengthy and expensive trip through the courts?

        1. Libertarian says:

          It hasn’t been brought up on this blog in a long time, but this case is another example of why real estate agents as a group don’t have the best reputation. Hence, the CBC did that undercover investigation some time ago.

          Has it really come to the point that each buyer and seller has to show up with a team of lawyers, accountants, financial analysts (after all, every one calls real estate the best investment there is), private investigators etc., in addition to a real estate agent?

          I agree with you. ..how does this situation happen?

          1. Not Harold says:

            Yeah, that’s the exact team you should show up with, and that’s how everyone I know deals with real estate.

            You can choose Lionel Hutz as your attorney, or someone more expensive and more competent. You can use a realtor who does one transaction a year or someone with a real business and competence (and a massive insurance policy and a desire to avoid bad press). You can waive off due diligence or you can get sophisticated people on it (yourself or some hired CPAs.. it’s not that hard to pull title, do some googling, and look at spreadsheets).

          2. Condodweller says:

            The interesting thing is that I would guess the majority of buyers/sellers use a lawyer for their RE transactions (I knew someone who bought a house without a lawyer and agent) but what percentage of them had their lawyer actually review the APS BEFORE signing it? I mean everybody is super focused on winning the bid on offer night, how many would stop and say to their agent “let me send this to may lawyer to review first”. And how many agents would tell their clients to have their lawyer review it prior to signing? When I used an agent to sell my first place he actually pressured me to sign because he was worried that the buyers might leave.

            For a buyer it is manageable to vet the agent’s clauses with his/her lawyer, however, in a competitive environment it quickly becomes a problem for a seller.

            I always used a lawyer for my transactions but it had never occurred to me that the language used may not be enforceable. I took it for granted that the agent was a professional and even if he wasn’t a lawyer, the brokerage’s lawyer would have approved clauses they might include. I watched an agent once simply copy/paste clauses into an offer from a list.

          3. Not Harold says:

            Condo – any agreement where you’re spending that much money, you should have it reviewed. Just like how you should have the status certificate reviewed by a lawyer when buying a condo.

            Yeah it basically can’t happen in a market where houses sell within 4 hours of listing unless you have a really good existing relationship with a lawyer. Big risk to take, especially if you have to give a totally unconditional offer.

        2. Condodweller says:

          @Ralph You raise a valid point. I was looking at it from the “what now?” point of view. Presumably, RE agents have to carry some type of E&O insurance which means it should be doable to recover some losses through insurance if it is due to their negligence. The question is when the legal proceedings began was it even a consideration to go after the agent. The nice thing about insurance companies is that they like to limit their losses, therefore, they may opt to payout the downpayment or even the seller’s loss to avoid having to cover legal fees later.

    2. Sarah says:

      I know that most of the offers I draft have verbatim that says “the real estate agents/brokerage are not legal council & you should seek the advice of a lawyer before signing this agreement” applying to both the buyers and sellers

      1. Sarah says:

        *** All the offers I draft.
        (not most)

        1. Jennifer says:

          Empty language. How many transactions have you or other agents worked on that have not used the OREA standard APS or how much modification to it is there? Are you able to even use another one?

      2. Not Harold says:

        People are cheap. They’re also massively overleveraged.

        Transaction costs are terrifying when you’re putting 5% down. Though I’m not sure how you can actually execute a transaction if you can only afford 5% down.. but it’s probably because they’re somehow getting a loan for taxes and closing costs..

        Normal people who pay cash for houses have lawyers on retainer and get everything reviewed.

  4. Ralph Cramdown says:

    Why you linkin’ to and quotin’ from the flawed Superior Court judgment when you should be linkin’ to and quotin’ from the Court of Appeal beatdown of same?

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