March 30, 2021
We see all too many cases where after a real estate deal closes, the buyer sues the seller (and often the realtor, home inspector etc.) because the basement flooded. These cases turn on evidence regarding disclosure, representations and duties.
But it is different when the flood occurs before closing. This is more unusual, and the law has been less clear. The outcome turns on the interpretation of the “insurance clause” in the Agreement of Purchase and Sale – one of those preprinted provisions that both buyers and sellers largely ignore at the time the deal is signed, but nonetheless is part of the contract. The Ontario Real Estate Association (OREA) clause read:
All buildings on the property and all other things being purchased shall be and remain until completion at the risk of the Seller. Pending completion, Seller shall hold all insurance policies, if any, and the proceeds thereof in trust for the parties as their interest may appear and in the event of substantial damage, Buyer may either terminate this agreement and have all monies paid returned without interest or deduction or else take the proceeds of any insurance and complete the purchase. [Emphasis added].
There does not appear to be an Ontario Court of Appeal decision interpreting this clause. One earlier Supreme Court of Canada case involved a similar, but not identical clause. The Ontario Court of Appeal has recently considered that situation, and given some direction as to expectations.
Their ruling tells us that:
- the standard insurance clause in an Ontario Real Estate Association (OREA) form of Agreement of Purchase and Sale includes implied terms associated with the clause, beyond the not so simple wording of the clause
- under the wording of this particular form of clause, the agreement may only be terminated if the damage to the property is substantial, which is a question of fact
- the buyer is entitled to time to make an informed decision whether to complete the purchase or terminate the agreement
- this includes the buyer having information as to the insurance coverage
- how much time, and how much information, depends upon whether or not it is obvious whether or not the damage is substantial (in this case, it was obviously NOT substantial)
- if the damage is obviously not substantial, the buyer has no choice but to accept the insurance proceeds and close the purchase
- the seller must give the buyer notice of the damage promptly, but this does not necessarily mean immediately – in the case in question, delay of twelve days was allowed, even though the deal was scheduled to close the day after notice was given.
- the reasonableness of the conduct of the parties may affect the result of any lawsuit
- an extension of the closing date may be reasonable, where more time is required for fairness
- if the buyer unreasonably refuses to extend or close, the seller may terminate the contract, resell the property and sue for the difference in the purchase price, plus associated expenses.
This case is an important reminder of the significance of the standard terms of an agreement; of complying with insurance requirements; of acting in good faith if damage occurs; and that the courts will generally follow and apply the terms of the contract – parties cannot unilaterally try to simply ignore the terms of the contract and try to get a better deal.
If you are a buyer or seller of real estate and have any questions about an agreement of purchase and sale, it is best to discuss with a lawyer before signing. Realtors generally do a good job explaining things, but they are not trained in contract law like lawyers.
If you are unfortunate enough to have something go sideways in your deal before closing, remember to let your lawyer know right away and act reasonably, but follow the terms of the contract.