Legal Blog

Late Changes

Real estate practitioners often dispute the wording of documents that are exchanged on closing. Sometimes, one practitioner, either intentionally or not, manages to slip in wording, or an entire document, that is not called for in the agreement of purchase and sale. What happens? The answer is set out in Melko v. Lloyd Estate (2002), 61 O.R. (3d) 150 (S.C.J.).

Warranty

The agreement contained a warranty in which the vendor, the executor of an estate, represented that “to the best of his knowledge and belief, all sewage systems serving the property are wholly within the limits of the said property…”

In the statutory declaration delivered on closing, the vendor warranted that “all sewage systems serving the property are wholly within the limits of the said property…” The concept of the vendor’s knowledge was deleted.

The purchasers found that the septic system bed was situate on the neighbouring lands and, for one reason or another, the municipality insisted that the septic system had to be replaced. The replacement cost was $16,350, a sum for which the purchasers looked to the vendor.

Which standard

The judge determined that the statutory declaration given on closing was void for lack of consideration. In doing so, he relied on the decision of the Court of Appeal in Gilbert Steel v. University Construction (1976), 12 O.R. (2d) 19. Since there was no statutory declaration on which to rely, the purchasers had to rely on the representation contained in the agreement of purchase and sale. It contained a standard of knowledge and belief, rather than the absolute standard contained in the statutory declaration.

The judge then found that the vendor did not give the warranty recklessly. The vendor believed that the warranty was true by virtue of previous conversations with his father before his father’s death.

Accordingly, the judge dismissed the purchasers’ action.

Damages

Just in case the judge incorrectly decided the liability issue, he assessed damages. He decided that if he had allowed the full amount of the replacement cost for the septic system, the purchasers would have been overcompensated. Septic systems do not last forever and the septic system was already 15 years old at the time of sale. The purchasers had replaced the old system with a new, better system. Accordingly, the judge reduced the damages to 50% of the replacement cost for the new system.

We have seen cases in which, to allow for betterment, the judge awards the present value of the interest on the capital cost for the new system from the date of replacement to the date of the expected demise of the system. At today’s rates, that might result in a damage award that would be less than the 50% broad-brush determination that the trial judge made.