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When an offer to purchase is conditional on home inspection, does
the home purchaser have to act honestly and reasonably if he or
she wants to get out of the deal? Or can the buyer arbitrarily
decide to kill the deal even if an inspection shows little or
nothing wrong with the house?
The Ontario Court of Appeal has finally answered these
questions in a case that contains useful lessons for buyers,
sellers and their agents.
In August 1998, Margaret and David Marshall signed an agreement
to purchase a home on Bernard Ave. in Toronto from Bernard Place
Corp. for $1.51 million. At the time of signing, they paid a
deposit of $150,000 to Chestnut Park Real Estate.
A clause in the agreement made it conditional upon inspection
by a home inspector of the purchaser's choice and expense, as well
as receipt of a report from the inspector "satisfactory to
him in his sole and absolute discretion."
At the time of signing the agreement, the Marshalls lived in
New York City and were planning to return to Toronto at some time
in the future. They planned to buy a home and rent it out until
their return.
When their offer on the Bernard Ave. property was accepted, the
Marshalls arranged for a professional property inspection by Steve
Liew, a civil engineer who was then employed by Carson Dunlop
doing home inspection reports. Liew inspected the house and gave
the Marshalls his written report describing it as a
"well-built house."
He noted there were no major repairs indicated, and scored the
house as a seven out of nine, which is above average. He noted a
number of minor deficiencies, and estimated the repair costs at
$2,200.
Perhaps even more important to the purchasers, however, was
their plan to build a rooftop garden and re-design the existing
single patio door to create French double doors leading out to the
garden. When the Marshalls discussed their plans with the home
inspector, they learned that arranging a water supply to the
rooftop garden and redesigning the patio doors would be disruptive
and costly, and involve extensive renovations.
Evidence at the trial showed the Marshalls were concerned about
the roof leak, because they did not want their proposed tenant —
who would be paying a very high rent — to be disturbed by
ongoing remedial work. They concluded that the property did not
meet their expectations and, although the building was a
"well-built house," its construction fell short of
"the most exacting standards" that had been represented
to them.
The Marshalls notified their agent that they would not waive
the inspection condition, and asked for their deposit back.
The vendor corporation was somewhat miffed that the purchasers
would back out of a $1.5 million deal over repairs costing only
$2,200. They refused to return the deposit, claiming the Marshalls
did not act reasonably, honestly or in good faith. As evidence of
the buyers' alleged bad faith, the seller pointed to their refusal
to justify their decision or to hand over a copy of the inspection
report detailing the deficiencies.
The issues the court had to decide were whether there was a
requirement of reasonableness, honesty and good faith on the part
of the buyers, whether the seller was entitled to a copy of the
inspection report, and whether the seller could participate with
the buyers in deciding whether the report is or should be
satisfactory to them.
The court ruled the purchasers were entitled to rely on the
wording of the condition clause and had the right to decide not to
go through with the deal.
The vendor appealed.
A three-judge panel of the Ontario Court of Appeal heard the
case in December and released its decision two weeks ago.
The appeal court agreed with the trial judge that there was an
obligation on the vendors to exercise both an objective and a
subjective standard of reasonableness in deciding whether to
invoke the inspection condition. Based on the evidence, the
justices ruled that the buyers met the requirements of good faith,
honesty and reasonableness.
Based on the clear wording of the clause in the agreement, the
court also ruled the vendor had no right to participate in the
inspection of the property, nor did it have any right to remedy
deficiencies found in the report.
My colleague Merv Burgard in London, Ont., monitors court cases
relating to real estate agents. He points out to his agent clients
that they can draft inspection clauses that might require delivery
of the report to the seller, set a maximum amount for repairs the
purchaser has to absorb, or allow the vendor to remedy the
defects.
In order to avoid the problem, Burgard suggests property owners
obtain a home inspection prior to listing. Then, they can decide
whether to remedy minor problems in advance.
Bob Aaron is a Toronto real estate lawyer. Send questions to
Title Page, New in Homes, The Toronto Star, One Yonge St., Toronto
M5E 1E6, by e-mail to bob@aaron.ca,
phone 416-364-9366, or fax 416-364-3818. |
