When Does the Real Estate Deal Get Done?
Completion of the Real Estate Deal
Recission of a Real Estate Contract for Misrepresentation
Can You Sue for Misrepresentation After Closing?
That was the question that presented itself before the Supreme Court of Canada on 12 December 1923 in the case of Redican v. Nesbitt.
The case was somewhat tricky from a procedural perspective. The legal remedies available were different if we were in the middle of a deal as compared with after the deal.
So, the plaintiff’s argument, in part, was that we were still in the middle of a deal. Ultimately, the Court concluded that that was not the case, and that the transaction had in fact been completed, however, the remedy of rescission was still available, in certain circumstances, and that was what the plaintiff was looking for.
Unfortunately, there was some evidence overlooked at the trial. Proper questions were not placed before the members of the Jury when it came to the applicable law, so, the entire case had to be sent back for another trial.
Essentially, this was simply a real estate deal, but, it was somewhat complicated. It was the purchase of an Assignment of a Leasehold interest in property. That would be routine in the middle ages, but for the 20th century, it was a somewhat complicated transaction.
Sadie Nesbitt owned a cottage on Toronto Island and sold it to Katie Redican on 29 January 1923. Nesbitt owned the cottage, however, it sat on land leased from the City of Toronto. So, while Nesbitt could convey the cottage building, the land underneath needed to be transferred too. That took the place of an Assignment of the Lease including the consent of the City of Toronto. In effect, that was “the deed”, so to speak.
There was a little glitch. No one was anxious to see the property in the middle of winter. You had to cross over Toronto Harbour by ice in order to visit the premises.
The deal was closed on 23 February 1923, and two days afterwards, Katie Redican went over to see the property. She was shocked to find out that it didn’t have 5 bedrooms and there was no electricity. It turned out that there were only 4 bedrooms. She complained that Nesbitt’s real estate agent had advised her that:
- There were 5 bedrooms, and
- There was electricity.
As a result, on 26 February 1923 she arranged to stop payment on the cheque that she had written for the purchase price.
She wanted out of the deal at this point and her lawyer argued that the deal wasn’t completed, it was still in process because payment had not been made.
Nesbitt, while of course denying that any statement whatsoever had been made about the number of bedrooms and the lights, argued that the deal was completed, and that the request for rescission was too late.
Contract and the Closing Sequence
This document was rather hastily put together. There were some irregularities noted by the Supreme Court of Canada, but they really didn’t seem to form the substance of the lawsuit.
Offer Date: 26 January 1923
Acceptance Date: 29 January 1923
Contract Date: 29 January 1923
Closing Date: 15 February 1923
Property: Lots 4 and 5, Plan 336, City of Toronto.
Extended Closing: 23 February 1923 (Friday)
Delivery Cheque: 23 February 1923
Delivery Keys: 23 February 1923
Delivery Assignment: 23 February 1923
Visit Cottage: 25 February 1923 (Sunday)
Discover Issues: 25 February 1923
Stop Payment: 26 February 1923 (Monday)
Notify Payee: 26 February 1923
Indicate Lawsuit: 26 February 1923
Commence Lawsuit: 26 February 1923
Service of Writ: 26 February 1923
You can certainly see that from the sequence of events above, things happened very quickly. Katie stopped payment on the cheque, then called Russell Nesbitt (owner’s husband, to whom the cheque was payable) to advise what she had done and why. He said that he was suing immediately and he did so, that very day.
A Joke by the Supreme Court of Canada
Mr. Justice Idington was surprised how sloppy the paperwork was for this deal. In fact when it came to the date of acceptance, apparently it had not been completed properly, and after commenting upon:
“The loose and unbusinesslike ways of the parties concerned throughout the whole of the negotiations in question is well illustrated…”
“The date of respondent’s acceptance is left a complete blank unless we try A.D. 192 as the true date thereof.”
That would have been 1,731 years ago! So, that’s funny! That’s sarcasm at its best. Sorry, the Supreme Court of Canada is not really known for its joking style, so this is as good as it gets.
Note: when quoting the reasons below, I have changed the paragraphs slightly, added numbers, indenting, and italics.
Mr. Justice Idington said:
I think a difference of a few acres, as therein, is no more important than the four rooms instead of five as misrepresented and electric light in this case to the appellants.
I may, in parting with this feature of the case and the exception thereby created, quote the following from Williams on Vendor and Purchaser, page 578:—
Completion of the contract consists:
- on the part of the vendor in
- conveying with a good title the estate contracted for in the land sold and,
- delivering up the actual possession or enjoyment thereof;
- on the purchaser’s part it lies in accepting such title, preparing and tendering a conveyance for the vendor’s execution,
- accepting such conveyance,
- taking possession and
- paying the price.”
Mr. Justice Duff said:
“If the conveyance has been actually executed by all the necessary parties and the purchaser is evicted by a title to which the covenants do not extend, he cannot recover the purchase money either at law or in equity.
The principle appears to be that, save in exceptional cases to which reference will be made, the maxim caveat emptor applies,
and that the purchaser, if he wishes to protect himself in respect of the absence of title or defect in the title or in the quantity or quality of the estate, must do so by covenants in the conveyance…….
The rule does not apply:
- where there is error in substantialibus,
- where, for example, it turns out that the vendee has purchased his own property;
- nor does it apply where the transaction has been brought about by the fraud of the vendor.
……it may be arguable on principle that until the purchase money is paid or secured by something which is accepted as the consideration for the transfer the transaction is still in fieri…..
In the present case, the cheque was accepted as conditional payment.
There was an implied promise to pay arising out of the delivery and acceptance of the transfer, and the delivery of the cheque was a conditional performance of this promise.
I do not think the subsequent repudiation of the promise can take away from the transaction its character as an executed transaction.
The whole point is: At what stage does caveat emptor apply?
The vendee may rely after completion upon warranty, contractual condition, error in substantialibus, or fraud…..”
And, further stated:
“Representation which is not fraudulent, and does not give rise to error in substantialibus, could only operate after completion as creating a contractual condition or a warranty.
Finality and certainty in business affairs seem to require that as a rule, when there is a formal conveyance, such a condition or warranty should be therein expressed, and
that the acceptance of the conveyance by the vendee as finally vesting the property in him is the act which for this purpose
marks the transition from contract in fieri to contract executed; and this appears to fit in with the general reasoning of the authorities.
All this applies, I think, to a case like the present
where the representation relates to the physical state of the property
as well as to the case where the subject of the representation is the existence or non-existence of some encumbrance or legal burden, such as a right of way.
But I see no escape from granting the application for a new trial.
The learned trial judge overlooked the settled doctrine based upon the plainest good sense that an affirmation of fact made for the purpose of influencing people in the transaction of business involves an affirmation of belief in the existence of the fact stated.
If there is no belief, if the mind of the proponent has never been applied to the question and if he is in truth consciously ignorant upon the subject of his affirmation there is obviously a false statement and, if made with intent that it shall be acted upon in the way of business in a matter involving his own interests, a fraudulent statement.
This ought to have been explained to the jury. Mr. Grant (lawyer acting for the Purchaser) explicitly requested the learned trial judge to do so and his refusal was so decisive as to preclude the necessity of further reference to the matter. There should be the usual order as to costs.”
Mr. Justice Anglin stated:
“In the present case the defendants
plead misrepresentation as a ground both of defence and of counter-claim.
They assert that it was fraudulent and, alternatively, that if innocent it was so material as to afford ground for rescission.
The jury found that innocent misrepresentations inducing the contract had been made by the plaintiff’s agent, and upon them the defendants maintain they are entitled to rescission.
But on the question when a contract will, for the purposes of this rule, be deemed to have ceased to be “executory” and to have become “executed” the authorities are not so clear.
In the case now before us it is probably unnecessary to determine the effect on the right of a purchaser to rescission of his acceptance of a conveyance and taking of possession without making payment.
I am of the opinion that, under all the circumstances of this case, the contract for sale was executed and that, according to a well settled rule in equity, rescission for innocent misrepresentation is not an available remedy for the defendants.
I am clearly of the opinion, however, that a new trial must be directed because the issue of fraud was not properly presented to the jury.
In substance the learned trial judge charged that, in order to establish fraud, the defendants must show that Wing actually knew his representations were false.
He did not tell the jury that the representations would be fraudulent if they were false and were made without belief in their truth, or recklessly, careless whether they were true or false. Derry v. Peek.
The refusal to put to the jury the question whether Wing’s (Nesbitt’s agent) statements were made without caring whether they were true or false coupled with the instruction that, although so made, they were innocent and not fraudulent, unless there was an intention to deceive—to tell a deliberate lie—was clearly misdirection and entitles the defendants to a new trial.”
Mr. Justice Mignault stated:
“The point to be determined in the new trial is whether Wing, the respondent’s agent, was guilty of fraudulent misrepresentation of material facts in connection with the purchase by the appellants of the respondent’s cottage on the island in Toronto bay.
These misrepresentations would be fraudulent if made:
- knowingly, or
- without belief in their truth, or
- recklessly, careless whether they be true or false.
Unfortunately the learned trial judge left the jury under the impression that to be fraudulent the misrepresentations had be to be made wilfully and without belief in their truth, in other words that Wing deliberately lied when he made them.
In my opinion, the transaction was a fully completed one, and therefore rescission cannot be granted unless the misrepresentations were fraudulent, but the burden of the appellants was unduly increased when the jury were told that they must find that “there was a deliberate intention to defraud” to prevent the misrepresentations from being innocent.
This was misleading because if the jury were of opinion that Wing had recklessly, that is to say with indifference to the truth or falsity of his statements, misrepresented the facts which the jury found were misrepresented, they could not answer that these misrepresentations were innocent.
I therefore conclude that the issue in the new trial must be whether Wing’s misrepresentations were fraudulent in the sense I have explained. If, properly instructed, the jury still find that Wing’s misrepresentations were innocent the appellants cannot succeed in their demand for rescission.
If, on the contrary, the appellants succeed because the jury find that the misrepresentations were fraudulent they will have to reconvey the property and obtain the lessor’s consent to the reconveyance.”
Interesting case, if one can get beyond the mechanics of the procedural issues.
There are certainly some important points:
- Caveat emptor applies,
- There are two exceptions to caveat emptor,
- An error in substantialibus (in substance) is an exception,
- Fraud is an exception,
- Misrepresentations would be fraudulent if made:
- knowingly, or
- without belief in their truth, or
- recklessly, careless whether they be true or false,
- Innocent statements which are false do not give rise to the right to rescind a completed contract,
- A contract moves from executory to executed, when the Vendor delivers the conveyance and delivers up possession, AND, the Purchaser receives the conveyance, acquires possession and pays the purchase price.
In this case, we had a completed transaction. Rescission was not available if the statement about the 5 bedrooms and electricity were simply innocent statements. Rescission would be available, if the statements were reckless, that is that they were made carelessly as to whether or not they be true or false.
These Legal Proceedings
Well, you’re never going to find a case like this again. The deal fell apart on 26 February 1923. The lawsuit started that day. It was tried before a Jury and the Nesbitt won. The case was appealed and Nesbitt won again. Then, it was finally appealed to the Supreme Court of Canada, where this time, Redican won. The decision was made on 12 December 1923. That’s a trial and two appeals in nine and a half months!
Would that we still had such a responsive justice system!
Brian Madigan LL.B., Broker