Canadian Appeals Monitor Information and Commentary on Upcoming and Recent Appeal Court Decisions

Buyer & Seller Beware: Zoning Irregularities in Real Estate Transactions Across the Country

Posted in Case Comments, Construction and Real Estate, Contracts
Kate Findlay

In decisions recently released from the Ontario Court of Appeal and the British Columbia Court of Appeal, the courts identify which party bears the burden when zoning irregularities materialize following the close of a real estate transaction.

In Lee v. 1435375 Ontario Ltd., the purchaser of a dry cleaning business was prohibited from relying upon the doctrine of equitable mistake where the rezoning of the leased premises had taken place, unbeknownst to the vendor, and the purchaser failed to investigate the status of zoning prior to closing. In contrast, 0759594 B.C. Ltd. v. 568295 British Columbia Ltd., the purchaser of land intended for use as a big box store was permitted to rely upon a warranty where the zoning of the property differed from the representations made by the vendor.

Background

Lee is an appeal from a summary judgment motion brought by the purchaser of a dry cleaning business. The vendor and purchaser entered into an agreement for purchase and sale of the vendor’s dry cleaning business. The agreement contained an entire agreement clause and a statement acknowledging that the parties should seek independent advice regarding, inter alia, zoning changes.

Unbeknownst to the vendor, almost two years prior to entering into the agreement, the zoning for the premises had changed such that it no longer expressly permitted the operation of a dry cleaning facility. The vendor continued to run his business and obtain a business license from the City following the change in zoning every year. Following the execution of purchase documents and delivery of funds to be held in escrow pending certain deliveries, the purchaser’s lawyer learned of the change in zoning. The purchaser immediately requested the return of funds and took the position the transaction had not closed.

The purchaser commenced an action for rescission and return of the purchase price. The Vendor counterclaimed for breach of contract. The judge dismissed the Vendor’s motion for an order staying the judgment pending the hearing of the appeal and the purchaser’s funds were returned to him. The motion judge, while acknowledging that there was no misrepresentation by the vendor, found that the parties shared a common mistake, fundamental to the agreement, upon which the contract could be rescinded and the claim dismissed. The motion judge concluded that it would not be equitable to force the purchaser to proceed with the purchase where there was uncertainty regarding the property’s zoning and permitted use.

In 0759594 B.C. Ltd., the parties entered into an agreement whereby the purchaser agreed to purchase 60 acres of land for the purposes of development. The agreement contained a clause whereby the vendor agreed to purchase a portion of the lands provided it was rezoned within two years, the price was reflected in an abatement of the purchase price of the property. The transaction closed.

The property was not rezoned within two years as agreed and the vendor demanded the return of the outstanding purchase price. Subsequently, the vendor sued the purchaser for the amount outstanding. In their counterclaim, the purchaser raised three issues: (1) there were limitations on the development of the property due to legislation and regulations; (2) the City had failed to rezone the property despite the vendor stating that there was “agreement in principle” for rezoning; (3) the existence of strong opposition to the development of lands for commercial purposes.

The judge below held that the vendor had not been aware of limitations on the development of the property in accordance with existing legislation, that the vendor’s statement that there was “agreement in principle” for rezoning was not material, and that the vendor’s obligation was limited to a duty to disclose material facts of which he was aware. Judgment was awarded to the vendor.

Decisions

In Lee, the Court of Appeal allowed the appeal finding that the motion judge made three errors: (1) a palpable and overriding error that the parties had a common assumption that a dry cleaning business was a “permitted use” under the zoning by-law; (2) an error in law by putting an onus on the vendor to demonstrate the business was able to operate as a dry cleaning business; and (3) an error in law by reversing the rule of caveat emptor and placing the risk of mistake on the vendor, rather than the purchaser. The court found that these errors cumulatively affected the motion judge’s conclusions on both common mistake and equitable mistake.

The court found that if the purchaser had a technical understanding of the term “permitted use” it was a held unilaterally and so was a unilateral, rather than common, mistake. The court found that the motion judge erred and that the onus should have been on the purchaser, seeking rescission, to prove that the parties’ common assumption was wrong and that the premises could not be used as a dry cleaning business.

Further, the court found that the motion judge erred in placing risk on the vendor when the contract had allocated risk to the purchaser undermining the principle of caveat emptor. Finally, the court concluded that there was no scope for the application of the doctrine of equitable mistake as there was no common misapprehension of the facts and the purchaser failed to take reasonable measures to protect himself by investigating zoning before signing the agreement.

In 0759594 B.C. Ltd., the Court of Appeal found the judge below erred in using extrinsic evidence to interpret the warranty provision in the agreement. The appeal was allowed and judgment in favour of the vendor set aside. The court found that the trial judge erred in misinterpreting the contract which was drafted such that the vendor warranted the disclosure of material facts known and unknown to the vendor. The court overturned the trial judge’s finding that this term was ambiguous. Further, the court found that the vendor could not rely upon a clause regarding waiver contained in the contract which was for the benefit of the purchaser.

The court also found that the judge erred in finding that it was not material that existing legislation prohibited development on 1/3 of the lands, particularly when both parties were aware that the purchase and sale of land was for development. The court found that the judge erred in finding the vendor’s statement that the City had confirmed “agreement in principal” for the rezoning of the land to be both accurate and not significant. Instead, the court found the statement to be material to a potential purchaser and not true.

Potential Significance

These decisions serve as a reminder to those entering and closing real estate transactions of the importance of turning your mind to zoning issues before the close of a transaction. As a vendor, any representations made should be truthful and careful attention should be paid to any warranties provided. On the other hand, purchasers are not permitted to act blindly and should investigate a property fully before completing a transaction.

Case Information

Lee v. 1435375 Ontario Ltd., 2013 ONCA 516

Ontario Court of Appeal Docket: C56363

Date of Decision: August 15, 2013

0759594 B.C. Ltd. v. 568295 British Columbia Ltd., 2013 BCCA 381

BC Court of Appeal Docket: CA040183

Date of Decision: August 28, 2013