Legal Blog

Breath of Fresh Air

It is not often that we review a decision of the Ontario Court of Appeal and say to ourselves: “Finally, a little sanity.” This is how we felt when we read the unreported 1999 decision in Wong v. 407527 Ontario Ltd.

Normal Real Estate Deal

As is often the case, a realtor drafted an agreement, the parties executed it, and the purchasers gave it to a lawyer to close. The property was mixed use residential and commercial. The realtor added a clause in which the vendor warranted that the rents for the property would attain a set level in the first year. The deal closed without incident. Unfortunately, some tenants moved out and others did not pay; as a result, the first year’s rental income was $74,000 less than that warranted. In the meantime, the vendor had gone bankrupt. The purchasers sued the realtor and their lawyer. “Their lawyer?” I hear you cry. Why?

At Trial

The trial judge held that the realtor was negligent for failing to insert a clause in the agreement that provided security for the vendor’s warranty. She therefore decided that this failure was negligence and that all of the purchasers’ damages flowed from this negligence.

The trial judge held that the lawyer was also negligent. She decided that although the lawyer was retained after the agreement was signed, he still had a duty to attempt to negotiate a better deal. She also held that the lawyer failed to protect the interests of his clients in six other ways. She uttered her now famous statement: “no lawyer should presume that no rights can be negotiated.”

On Appeal

The court held that the realtor was negligent for failing to insert in the agreement a clause providing security for the warranty. There was expert evidence to support this conclusion.

However, the court held that there was no reason why the realtor should be liable for all of the rental losses of the purchasers. Just because the realtor inserted a clause regarding security in the offer did not mean that the vendor would have accepted it. In the “hot market” climate at the time of the agreement, it was unlikely that the vendor would have accepted the clause. The court valued the probability of acceptance at only 20% and therefore awarded the purchasers only 20% of their damages.

The court then proceeded to decimate all of the grounds on which the trial judge had founded liability against the lawyer. The trial judge’s findings are set out first, followed by the court’s comments on them.

1. The lawyer did not supervise his clerk well enough and, accordingly, the warranty received on closing was poorly worded. We assume the warranty on closing dovetailed with the warranty in the agreement. However, the trial judge found that the warranty was good enough to do the job against the vendor. Accordingly, what was the problem?

2.   The lawyer did not enquire to confirm whether the residential rents were legal. However, the purchasers’ loss was not caused by illegal rents.

3.   The lawyer did not explore income tax possibilities with the purchasers. Again, the losses had nothing to do with income tax problems.

4.   The lawyer did not conduct a bankruptcy search on the vendor. The vendor went bankrupt after the closing and, therefore, a search would have revealed nothing.

5.   The lawyer failed to investigate the credit worthiness of the vendor. This is outside of the scope of a lawyer’s duty.

6.   The lawyer failed to analyse the leases and discuss the option of not closing or of negotiating an abatement because one of the commercial tenants had given notice prior to closing that it was vacating. The lawyer did obtain acknowledgements from all of the tenants and the purchasers knew that the commercial tenant was leaving. The commercial tenant’s early departure did not allow the purchasers to refuse to close the transaction; at best, they had to close the transaction and sue for breach of warranty. The purchasers also did not want to abort the deal; the property had already gone up by $70,000.

7.   The lawyer ought to have tried to negotiate security for the warranty. The court’s response bears quoting. “The trial judge was not sensitive enough to the limitation on (the lawyer’s) retainer implicit in his being consulted after the agreement had been signed. Mr. Lamont’s opinion may represent a counsel of perfection, but I find it hard to admonish (the lawyer), let alone make a finding of negligence against him, for failing to try to negotiate something to which his clients had no legal entitlement.”

Worry

We have only one cause for consternation. The court also stated “Cases may arise where a duty of this kind may be imposed upon a lawyer, but the court should at least take into account the timing of the lawyer’s retainer.” We would like to interpret this statement to mean that a lawyer could be liable if the lawyer receives the agreement before it is executed. However, the court footnoted the Vaz-Oxlade decision (see our April 1999 newsletter) as part of its quotation. In that case the lawyer had also received the agreement after its execution. The judge in the Vaz-Oxlade case had relied on the trial decision in this case. The court did note that the Vaz-Oxlade case was under appeal and that it did not want to pre-judge the case.

Our Guess

The lawyer in the Vaz-Oxlade case will be successful on the appeal.

By the way, Mr. Justice Laskin wrote the decision of the court of appeal.