Canada: Terminating An Agreement Of Purchase And Sale: Warranties Vs Conditions

Virtually every real estate transaction is carried out by way of a written contract. The contract is composed of various terms. Often one party is in breach of one of the terms of the contract. Whether the non-breaching party may properly terminate and refuse to close depends on the nature of the term that is being breached.

Generally speaking, there are two types of contractual terms or promises: conditions and warranties.

Condition

A condition is a term essential to the contract and goes to the root or foundation of it. A breach of a condition substantially deprives the innocent party of that for which it bargained. A term requiring payment of a deposit, for example, would typically be classified as a condition. 

Warranty

A warranty, in contrast, is a subsidiary or collateral term of a contract. A term requiring that a property be left in broom swept condition or that garbage be removed would typically be classified as a warranty.

Condition vs Warranty

The distinction between condition and warranty is critical for a party considering terminating an agreement of purchase and sale because the other party has breached a term. The breach of a condition usually entitles the innocent party to lawfully terminate the contract. The breach of warranty does not entitle the innocent party to terminate the contract. In fact, the innocent party must continue to carry out its obligations under the contract but may sue the other party for breach of warranty.

If one party refuses to close an agreement of purchase and sale because of the other party's breach, it should be reasonably confident that the other party is breaching a condition and not a warranty.

In the context of aborted real estate transactions, it is not uncommon for purchasers to attempt to escape liability by arguing the vendor failed to perform a certain obligation. There have been a number of cases in which a purchaser refused to close a deal because the vendor failed or refused to provide a survey of the property. The success of this argument depends upon whether the provision of a survey by the vendor is a condition or a warranty of the contract. In the case of the former, the purchaser is entitled to refuse to close the transaction. In the latter, the purchaser is not entitled to refuse to close (and exposes itself to a claim for damages and likely will have its deposit forfeited to the vendor).

In Hatami v 1237144 Ontario Inc., 2018 ONSC 668, the court provides useful analysis on the issue of surveys in agreements of purchase and sale. If the purchaser's ability to close the transaction is contingent upon a survey being provided, for instance, to obtain mortgage financing, the term calling for a survey will likely be classified as a condition. If, however, the purchaser is otherwise able to close the transaction, a term requiring a survey be provided will likely be classified as a warranty.

Take Away

A purchaser should think carefully before deciding not to go through with a real estate transaction. A refusal to close should be based on the breach of a condition. Refusing to close based on the breach of a warranty (which is often in reality motivated by some other concern, such as falling real estate prices) is a risky decision, as it exposes a purchaser to a serious risk of liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.