The “Right” to Inspect Before Closing

Dozen Eggs - Beach Basket Belize

Chaston v. Este

Is there an opportunity to view the property before closing? After all, real estate contracts are executor contracts. The property transaction might close months after the deal was struck. How would a Buyer know if the property is in the same condition on closing.

The following is a British Columbia Supreme Courtcase which dealt inspecting a property before closing. Margaret Elizabeth Chaston, the Seller sued Donna Este, the Buyer for failing to complete the purchase. The Judgment of the Court was delivered on January 8, 2014.

The plaintiffs allege the defendants failed to complete the transaction.  On that basis, the plaintiffs purported to terminate the contract and now claim entitlement to the deposit of $500,000.

The plaintiffs offered for sale a 3,300 square foot condominium, making up the entire 11th floor of a 15-storey apartment building in West Vancouver.

The defendant, Rosa Este, is a retired dentist and has been a real estate agent since 2008.  She viewed the property on April 12, 2012.  The suite appeared to be in excellent condition: it had been professionally staged and freshly painted.  There was no evidence of water or mould damage.  Ms. Este intended to live there with her mother and other family members.

While the suite appeared sound, the building itself was in the midst of significant remediation work.  Ms. Este was told by Kim Hambling, the plaintiffs’ real estate agent, that repairs to the building envelope were underway.  Ms. Este was told that the building had suffered water ingress because of cracks in the brick veneer.  The entire brick veneer was being re-caulked.  The strata corporation was also installing new windows, balcony tiles and railings in all the suites. 

From her discussions with Ms. Hambling, Ms. Este understood that there was no significant water damage or mould/fungal growth in the apartment. 

The offer was submitted on a standard form contract of purchase and sale and included the following terms:

“7.         INCLUDED ITEMS: The Purchase Price includes any buildings, improvements, fixtures, appurtenances and attachments thereto, and all blinds, awnings, screen doors and windows, curtain rods, tracks and valances, fixed mirrors, fixed carpeting, electric, plumbing, heating and air conditioning fixtures and all appurtenances and attachments thereto as viewed by the Buyer at the date of inspection…

8.         VIEWED: The Property and all included items will be in substantially the same condition at the Possession Date as when viewed by the Buyer on April 12, 2012.

12.      TIME: Time will be of the essence hereof, and unless the balance of the cash payment is paid and such formal agreements to pay the balance as may be necessary is entered into on or before the Completion Date, the Seller may, at the Seller’s option, terminate this Contract, and, in such event, the amount paid by the Buyer will be absolutely forfeited to the Seller in accordance with the Real Estate Services Act, on account of damages, without prejudice to the Seller’s other remedies.

16.      RISK: All buildings on the Property and all other items included in the purchase and sale will be, and remain, at the risk of the Seller until 12:01 a.m. on the Completion Date.  After that time, the Property and all included items will be at the risk of the Buyer.”

Analysis

This is the analysis by the Trail Judge:

[69]        I agree with the defendants that they had a right to inspect the apartment before closing and that the plaintiffs were in breach of clause 8 of the purchase contract.

It is therefore unnecessary for me to consider the defendants’ case with respect to misrepresentation.

[70]        In my view, the right to inspect the apartment in these circumstances was implicit.  The defendants referred me to Harkness v. Cooney (1979), 1979 CanLII 2720 (ON SC), 131 D.L.R. (3d) 765 (Ont. C.C.), a decision of the County Court in Ontario. 

The circumstances in that case concerned a residential conveyance where the purchaser requested an inspection at closing.  The vendor disputed this and the parties appeared on a summary motion to determine their rights.  The court ruled in the purchaser’s favour and stated at 767:

I raised the matter of executory and executed contracts.  It seems ridiculous that the purchaser should have to move from his rights under the executory contract to the fewer rights he would have under an executed contract without having the right to inspect the premises while he was still in possession of such rights as the law gives him in an executory contract.  

It also seems ridiculous that he should have to complete the transaction and pay over his money before ascertaining whether or not he had been entitled to terminate the agreement prior to completing it.

[71]        If this principle is not of universal application, it certainly is in the circumstances of this case: the parties knew that there was significant remediation work being done to the apartment and the building before occupancy. 

The parties also anticipated when they entered into the contract that the work would be complete well before the closing date.  In fact, the closing date had been chosen specifically for that reason.  Then, after the contract was signed, Ms. Este learned that there might be substantial water damage and mould issues in the apartment. 

The mould issues were particularly important because of the health concerns they raised.  By the closing date, Ms. Este had received conflicting information about the condition of the apartment.  The vendors’ counsel told them on Friday, July 27 that the work in the apartment would be finished by approximately August 15.  However, on the following Monday, the same lawyers told Ms. Este that the premises were ready to “move in tomorrow”, being July 31, the possession date under the contract.

[72]        Under these circumstances, I agree with the defendants that they should not be expected to hand over approximately $5 million without a closing inspection. 

This would be analogous to purchasing a dozen eggs without an opportunity to first open the carton to ensure none are broken.

[73]        I turn now to clause 8 of the contract:

8.         VIEWED: The Property and all included items will be in substantially the same condition at the Possession Date as when viewed by the Buyer on April 12, 2012.

[74]        This is a very odd term in the context of this property.  Both parties were aware of the ongoing remediation work in the building which was continuing, likely until at least December 2012. 

The defendants knew that the windows were to be replaced, new balcony tiles and railings were to be installed, and the brick veneer was being re-caulked. 

[75]        However, there was no express term that the remediation be finished by the possession date or, for that matter, the completion date. 

There was only the standard term that the property be “in substantially the same condition at the Possession Date as when viewed by the Buyer on April 12, 2012.” 

[76]        The evidence before me discloses that the property was plainly not in substantially the same condition on July 31 as when it was viewed.  Mr. Scouten deposed:

15.      When we arrived at the Property on the afternoon of July 31, 2012 for our inspection, I was surprised to see that the interior of the property was in a far less completed state than I expected.  While the carpet had apparently been cleaned, it appeared to me that construction inside the Property was very much still underway and, in many respects, far from completed. 

16.      Among other observations that I made during our inspection, none of the windows, so far as I could see, were finished and all still had exposed wood and drywall surrounding them.  There were large squares cut out of the drywall of the walls at various points, with arrows written in pencil beside them, suggesting that further sections of drywall were to be removed.  The balcony off the main living room area was also in the midst of active construction work.

[Emphasis added.] [77]        In addition:

•         one window and one patio sliding door were missing completely.  The patio door opening was covered with plywood; 

•         none of the window coverings present at the time Ms. Este viewed the property on April 12 were in place on July 31;

•         the large patio beside the living room was still being used as a work platform for work in other suites; and

•         sections of baseboard trim were missing in various locations of the suite. 

[78]        Several reports prepared by Pacific Environmental Consultants disclosed in the course of this litigation are also relevant to the condition of the apartment at or near the closing and possession dates. The first report is dated August 3, 2012, and relates to an inspection in unit 11 on July 27, 2012. This report makes mention of several interim measures regarding suspected fungal growth in the living and dining room as well as the master bedroom. In short, the report recommended additional wall cut outs and chemical treatment in five rooms on the Friday before the closing date.

[79]        The second report is also dated August 3, 2012 and describes a further inspection in unit 11 on July 30, 2012, the closing date. The observations on this date included “significant” fungal growth in the dining room and recommended further, larger wall cut outs and chemical treatment in the five principal rooms in the apartment.

[80]        As well, Mr. Chaston said in his examination for discovery that there were still approximately 14 days of carpentry work left to be done as of the middle of August.

[81]        After the sale collapsed, the plaintiffs rented out the apartment.  The tenant wrote an email on August 22, 2012, to Ms. Hambling and stated:

We haven’t moved in yet as work is still in progress in #11.

[82]        It follows then that the plaintiffs were not in a position to insist on completion by the defendants when they themselves were not in a position to deliver possession of the property in the condition required. In my view, the sellers were not “ready, willing, and able” to complete the sale on the closing date due to their inability to meet the criterion contained in clause 8 of the contract.

[83]        The plaintiffs argue that none of the pending “touch up” work entitled the defendants to fail to complete.  The obligation to deliver possession in substantially the same condition did not arise until the possession date, the day after the completion date.  The plaintiffs argue the defendants were required to complete the purchase and then, if they chose, bring an action for damages if they felt that clause 8 had not been complied with.

[84]        Common sense prevents me from acceding to this argument. 

Using the same analogy of a dozen eggs, this would be akin to insisting the buyer purchase the eggs, sight unseen, and sue for damages later if the carton contains broken eggs.

[85]        The defendants brought the case of Baker v. Warshawski2010 ABQB 219, to my attention. There, the contract in question contained a clause similar to clause 8 in this case. At paras. 63-75, Madam Justice Romaine analyzed the “repudiatory breach” of such a clause. In that case, the unexpected rebuilding of a wall in the courtyard resulted in an adversely affected view. She concluded:

[71]      One is to consider the proportional effect of the breach on the total value of the performance being rendered by the party at fault, the “gravity” of the breach. As previously indicated, this breach was substantial with respect to the aesthetics and utility of the main floor of the home. …

[72]      While the cost of rebuilding the courtyard was not substantial in terms of the value of the property, the character and consequences of the breach must also be considered: Cassie v. Bazilwich2007 MBQB 277. …

[73]      Another guideline is the consideration of the breach in light of the known purposes for which the contract was entered into by the party not at fault. This was the sale of a private residence that was marketed in part for its attractiveness to a family and as a home suitable for entertaining. The destruction of a key feature of the main floor substantially undermined those purposes.

[75]      I find that, as a result of the breach of the innominate term that the property be in substantially the same condition at closing as it was when the contract was accepted, Ms. Baker was entitled to treat the contract at an end and claim restitution of her deposit.

[86]        The evidence as a whole in this case discloses that the work was still weeks away from completion as of the closing and possession dates. In my view, the plaintiffs’ breach of clause 8 was substantial with respect to the livability of the apartment, particularly in relation to the mould issue and the specific health concerns it raised for Ms. Este and her mother.

Conclusion

[87]        Under these circumstances, the defendants were implicitly entitled to inspect the apartment before closing.

[88]        I further find that the plaintiffs were in breach of clause 8 of the purchase agreement in that the apartment was not in “substantially the same condition at the Possession Date as when viewed by the Buyer on April 12, 2012.”

[89]        In the result, the defendants are entitled to terminate the contract. Accordingly, the plaintiffs are not entitled to the deposit.

[90]        Costs may be spoken to.

Kelleher J.

COMMENT

This case is not binding in Ontario. Nevertheless, it reinforces Harkness v. Cooney (1979) Ontario County Court. This Court was one level below the BC Supreme Court.  It may not be binding here, yet it is actually more persuasive than Harkness since that only involved a motion under the Vendors and Purchasers Act.

If you buy a dozen eggs you get to see whether any of them are broken, yet if you buy a $5 million condo under renovations, you don’t get to check it out. That would be rather preposterous!

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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