The Purchaser acquired a property in Etobicoke which was zoned and used for industrial purposes. The purchaser, in fact, owned a property nearby, so he was quite familiar with the neighbourhood.
The Purchaser wanted to rezone the property and develop residential condominiums. In structuring the Offer, it wasn’t made conditional on rezoning and the purchaser basically undertook no “due diligence”.
As it turned out, the property was contaminated. The Vendor was aware but didn’t disclose. Presumably, that would have lowered the price. The Purchaser didn’t disclose that he was a “condo developer” or include any development conditions because that would have increased the price. So, all in all, both parties played these negotiations pretty “close to the chest”.
The deal was closed, the Purchaser became aware of the contamination about one year later, and then 5 years after the purchase, he wanted to “rescind” the deal. That would have meant giving the property back in exchange for the purchase price.
You will appreciate that rescission in these circumstances is a rather rare remedy.
But, the Purchaser’s argument was that the Vendor knew and withheld the information about the contamination, and that made all the difference.
The case of Tony’s Broadloom & Floor Covering Ltd. (Trustee of) v. NMC Canada Inc., 1996 went to the Ontario Court of Appeal for consideration.
The Timeline
In 1987, the Vendor owned a property zoned industrial in Etobicoke on which he operated a factory.
Before 1987, “varsol” had been dumped on the ground behind the factory until, as a result of a complaint, the Ministry of the Environment investigated.
Shortly thereafter, “varsol” and other solvents were classified as registrable hazardous waste material under regulations passed under the Environmental Protection Act.
The Vendor retained a consultant to investigate and monitor the problem, and wells were installed on the property to capture the contaminant.
Late in 1987, the Purchaser, who operated a business nearby, became interested in purchasing it to develop a condominium.
On January 8, 1988, the parties entered into an agreement for the sale of the property for a price of $1,250,000.
The Vendor was unaware of the proposed condominium.
The Purchaser was unaware of the existence of the contaminant.
Before the closing, the Vendor did not tell the Purchaser that the consultant had advised that there had been an increase in the amount of contaminant being captured and that the current system might not be adequate.
The transaction closed in September 1988.
The Purchaser did not investigate the property before having entered into the agreement, nor did they inspect it before the closing.
In November 1988, the Purchaser was told of the presence of the contaminant in the soil and groundwater of the property, by officials from the Ministry of the Environment.
The Purchaser attempted to develop the property and brought a re-zoning application in June 1989.
The Purchaser continued with plans to develop the property until 1991, when the plans were abandoned for economic reasons.
In February 1993, the appellants sued for rescission.
Court of Appeal
I have set out below the reasoning by the Court. Underlining, headings and Italics are mine, and are included for ease of reference and are not part of the written reasons of the Court.
Comments made by Mr. Justice Doherty on behalf of the Court:
Defect is to be Determined with reference to the Particular Land
A defect is generally understood to mean something that constitutes a failing, short-coming, fault, or imperfection. This is obviously a subjective concept. To adopt a phrase, one person’s defect may be another person’s ideal.
Obviously to make a determination of whether something is a defect in the quality of land, the intended use of the land must be taken into account.
In this case, the Vendor agreed to sell, and the Purchaser agreed to buy industrial property.
Unlike the situation in 688350 Ontario Ltd., supra, the respondents were not told of the appellants’ intention to use the property for a very different purpose.
The Vendor had no reason to believe that the Purchaser would use the property for any purpose other than an industrial one.
Contamination not a Defect for Industrial Land
The question of whether the contaminant constituted a defect in the property must be considered in this context.
This record offers no support for the contention that the contaminant impaired the continued use of the property for industrial purposes. The Purchaser got exactly what he bargained for — industrial land.
The undisclosed intention to use the property for residential purposes does not alter the bargain the Purchaser made, or create a latent defect in the industrial property.
Alternative: If it was a defect it was “Patent”
If, I am wrong and the presence of the contaminant was a defect….. it was a patent one.
It would have been readily discoverable by the Purchaser had he exercised reasonable vigilance in the circumstances.
In deciding whether the Purchaser exercised reasonable vigilance, it must be remembered that the Purchaser was buying industrial land on which they proposed to build a residential condominium.
A reasonable inspection of the property, reasonable inquiries of the respondents, and reasonable inquiries of the local and provincial authorities would have put the appellants on notice of the existence of the contaminant.
Indeed, had the Purchaser pursued the taking of soil samples with reasonable diligence after the Vendor…..he would have learned of the existence of the contaminant before closing.
Instead, the Purchaser chose not to disclose their intended use of the property and to take no steps to satisfy themselves that the property could be used for that purpose.
Test: exercise of reasonable vigilance
The Purchaser submits that the question of whether the contaminant could have been discovered by the exercise of reasonable vigilance can only be properly decided after a trial. I disagree.
The standard to be applied is an objective one and the motion record fully revealed the factors relevant to that assessment.
Bad Faith Bargaining
The Purchaser also submits that apart from the characterization of any defect as latent or patent, the Vendor had a duty to bargain in good faith and breached that duty when they failed to advise the appellants of the information provided by Monenco in the spring and summer of 1988.
The existence of a duty to bargain in good faith in an arms-length commercial transaction involving the sale of real property is debatable.
In any event. I can see no evidence …… of bad faith against the Vendor.
Vendor made no misrepresentations.
The Vendor gave ready access to:
- information concerning the property and
- full physical access to the property, even to the extent of permitting investigations which were not required by the agreement of purchase and sale.
The Vendor had no knowledge that the Purchaser intended to radically change the use of the property.
I cannot agree that the failure to disclose information which did not affect the continued use of the property for industrial purposes, and which could have been obtained by the Purchase through his own reasonable efforts, constitutes bad faith.
Duty to warn a purchaser of dangers
Apart entirely from any contractual obligation arising out of an agreement of purchase and sale, a vendor of real property may have a duty to warn a purchaser of dangers in or on the property which pose a risk of physical harm to persons or property.
As indicated above, there is no evidence that the contaminant posed a risk of harm such as to render the use of the property for industrial purposes dangerous.
Obligation to assist with environmental cleanup
I would also stress that this action is not about the obligation, if any, of the respondents to contribute to, or fund exclusively, any cleanup of the property which may be undertaken by the appellants or ordered by the appropriate governmental authorities.
The appellants have taken no steps to remove the contaminant and no cleanup has been ordered.
If and when the Purchaser undertakes a cleanup, or a cleanup order is made, the respondents’ liability for costs attributable to that cleanup may have to be addressed in the appropriate forum. This action does not address those potential obligations.
Decision
Appeal dismissed with costs.
COMMENT
It is important to be aware of the fact that this claim was instituted by a Trustee, likely, the Trustee in Bankruptcy since the Purchaser ran out of money during the development. If the Purchaser were that upset, legal proceedings would have commenced early, not 5 years later.
What are some of the “take aways” from this case:
Defect is to be Determined with reference to the Particular Land
In one situation, we might have a defect, and in others not. One has to look that that particular property.
Agreement of Purchase and Sale
You can’t be silent, and have your silence impose obligations.
Set issues out in the Agreement. Require and demand disclose in the agreement from the vendor. This will work. Say nothing, and we have caveat emptor.
Contamination not a Defect for Industrial Land
This level of contamination may have been a defect for residential purposes. Include a clause stating that there is no known contamination of any kind.
“Patent” Defect
There was evidence, the purchaser just had to look, so don’t pass on any inspections. That’s part of the due diligence process.
Test: exercise of reasonable vigilance
This is just a slightly difference manner of expressing the due diligence obligation on the part of the purchaser. Again, conditions and inspections and information from files are all part of this process. The test is “objective”, and not subjective, meaning that the Court could decide itself without hearing from the Purchaser.
Bad Faith Bargaining
It’s important to note here that the Court doesn’t even acknowledge that it exists. This is the part prior to the agreement, namely we are still in the negotiation phase. The Supreme Court of Canada brought in “good faith, honest performance” in Bhasin v. Hrynew 2014, but that’s after we have a deal, not before.
Duty to warn a purchaser of dangers
In this case, there was no duty. Had this been residential, then, perhaps, there would be.
Obligation to assist with environmental cleanup
In some cases, under environmental legislation an owner including a previous owner may have an obligation to clean up the contamination. This is why some mortgagees will not go “into possession” and why some companies with contaminated properties will never sell them.
This case was reviewed because it is frequently cited as a leading precedent.
Brian Madigan LL.B., Broker