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?

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…

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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.

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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:

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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.

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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:

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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.

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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…