QUICK HITS

 

• In Langen v. Sharma, buyers who agreed to purchase a $2.9-million home later discovered discrepancies in the listing’s tax and square footage information, affecting their financing.
• They requested a price reduction and an extension, which the sellers denied, leading to the buyers backing out.
• The court upheld the sellers’ position, citing an “entire agreement clause” that blocked the buyers from relying on listing representations in their legal claims.

When deciding to buy a property, buyers may review various representations in the real estate listing which purport to list the property’s key facts such as the square footage and measurements of various rooms. 

One statement typically found in the listing is the amount of the recent year’s municipal property taxes, which may be relevant to a buyer’s decision as to whether they can afford to own the property. However, if a representation in the listing turns out to be inaccurate, this may not entitle a buyer to back out of a transaction.

In the case of  Langen v. Sharma, the buyers entered into an agreement of purchase and sale (APS) to purchase a home in Brampton, Ont. from the sellers for $2.9-million. The transaction was supposed to close in August 2022.

Pricey mistake

The listing for the property stated that it contained at least 6,900 square feet of living space, approximately 4,800 of which was above ground. The buyers visually confirmed that those dimensions were reasonably accurate but did not make specific measurements.

The listing also stated that the municipal taxes on the property were $7,297.03 for 2021, which was approximately $600 to $700 more than the buyers were paying on their existing home. The stated amount of assessed taxes was a factor in their assessment of whether they could afford the property.

Square footage and taxes

A few weeks before the scheduled completion date, after the APS was signed, the buyers learned from their mortgage broker that they could not obtain financing to buy the property because the municipal taxes were incorrect due to a discrepancy in square footage. 

The sellers had made renovations to the property that were not brought to the attention of the Municipal Property Assessment Corporation (MPAC). MPAC had relied on the pre-renovation square footage for the property in making the assessment for the tax figure stated in the listing. A correction in the assessment would increase the taxes on the property. Indeed, MPAC subsequently reassessed the property and the property taxes became $10,050.

Buyers request concessions as tax liability changes

As a result of being unable to secure financing on the scheduled closing date, their concern about an increase in taxes going forward, and the possibility of back taxes being owed on the property, the buyers requested a three-month extension of the closing date and a $200,000 reduction in the purchase price.

In response, the sellers proposed an extension of the closing date to Sept. 16, 2022, conditional on the buyers paying a further deposit of $25,000 and delivering their mortgage commitment or approval at least one week prior to closing. The buyers rejected these conditions and refused to complete the transaction.

Sellers resell and pursue legal action

Although the sellers eventually re-sold the property to another buyer for $2.5 million and incurred over $25,000 in carrying costs, the sellers brought an application against the original buyers for forfeiture of the $100,000 deposit and damages for breach of the APS.

In response to the application, the buyers claimed that they were entitled to rescind the transaction because the sellers had misrepresented the amount of municipal taxes. They also argued that the sellers had acted in bad faith by refusing to grant an extension to accommodate the buyers’ efforts to obtain financing.

Innocent misrepresentation and the entire agreement clause

The application judge first considered the nature of the alleged misrepresentation by the sellers concerning the municipal taxes. The buyers argued that they were entitled to rescind the APS on the basis of a non-negligent, “innocent” misrepresentation of a fact that was material to their decision to enter into the transaction.

However, the buyers’ position that they relied on the innocent misrepresentation faced an insurmountable hurdle due to the terms of the APS, which included an “entire agreement clause” stating as follows:

This Agreement including any Schedule attached hereto shall constitute the entire Agreement between Buyer and Seller. There is no representation, warranty, collateral agreement, or condition which affects this agreement other than as expressed herein.

In Ontario law, an entire agreement clause operates as a general bar to claims for innocent—as opposed to fraudulent—misrepresentations.

Seller’s duty versus buyer’s expectation

In the case at hand, the buyers did not argue that the misrepresentation concerning the property taxes in the listing was intentional or fraudulent. The application judge therefore concluded that the entire agreement clause in the APS precluded reliance by the buyers on the alleged misrepresentation.

As to whether the sellers had acted in bad faith by failing to accommodate the buyers’ request for an extension, the application judge referred to the governing principles of good faith contractual performance. The duty of good faith does not require that contracting parties serve each other’s interests. However, they may not seek to undermine those interests in bad faith.

The court’s decision

The application of the doctrine of good faith to the facts at hand turned entirely on the application judge’s conclusion that the entire agreement clause in the APS governed the dispute. Since the application judge rejected the buyers’ position that the sellers were obligated to accommodate their request for an extension due to the misrepresentation, the sellers did not act in bad faith in relying upon the terms of the APS.

The application judge therefore decided in favour of the sellers.

The parties did not dispute the quantum of damages that would follow the application judge’s decision on liability. In the circumstances, the buyers will likely be liable to the sellers for the difference in sale prices and the carrying costs.

Lessons learned: Verify listing facts before signing

Given the consequences illustrated in the decision, buyers should attempt to independently verify important information in a listing before entering a binding agreement that contains an entire agreement clause or ensure that the agreement contains terms that confirm any representations which are of concern. 

While there may be situations where a party is not entitled to rely on an entire agreement clause due to fraud or other misconduct, the courts will certainly consider whether such a clause is a bar to any claims for factual representations that could have been verified before entering into the agreement.