Rescission, Representations and Real Estate Deals
January 8, 2021
Where the actual size of the house is much smaller than represented, a real estate purchaser may have the agreement of purchase and sale declared to be void, and their deposit returned. The remedy of rescission of a contract may be obtained on the basis of misrepresentation where the seller or their realtor made a false statement that was material and induced the plaintiff to enter into the contract. Although an action for damages after closing is not usually possible if the misrepresentation was innocent, rescission does not require negligence or fraud.
Typically, however, sellers have been able to rely upon the proposition that where a purchaser inspects a property their reliance on a misrepresentation as to the size of the property will be displaced. As a result, rescission would not be available.
This usually makes sense, because the buyer is getting exactly what they saw with their own eyes, and they decided that it was suitable.
The Ontario Court of Appeal, in Issa v. Wilson, has ruled that this is not an “absolute proposition of law”, and that, if the surrounding facts support the buyer’s argument that, despite seeing the house, they relied on the misrepresentation, rescission may still be available.
In this case, the buyer was looking for a home of at least 2000 square feet for his family of six adults. The realtor showed him the home in question. The MLS listing described the house as being between 2000 and 2500 square feet. The realtor, who had not measured the home, but relied on a previous listing, told the buyer that the house was 2100 square feet. The seller said that it was about 2000 square feet.
After the agreement to purchase was signed, the buyer required an appraisal for mortgage purposes. The appraiser discovered that the actual measurements were 1,450 square feet- a discrepancy of at least 27 percent from the lowest represented size, and 42 percent of the high end of the MLS figures.
As soon as the buyer discovered this issue, he sought to get out of the deal. The seller refused, and they ended up in court.
The Court of Appeal decided that the misrepresentation was material to the buyer’s signing the contract because:
- the realtor made explicit misrepresentations, and admitted that they were negligent in having not confirmed the measurements;
- the seller also admitted to giving inaccurate information;
- the discrepancy is substantial;
- the buyer’s reliance was confirmed by his conduct – being prepared to close until learning of the misrepresentation, at which time he immediately tried to get out of the deal; and
- the buyer’s youthful age and inexperience made his belief in the information provided, as opposed to what he saw with his own eyes, more reasonable.
Not even the fact that the seller’s misrepresentation was innocent saved the deal.
As the court points out, these cases are fact specific. What this case illustrates is precisely that – “rules” in law, particularly those related to equitable remedies such as rescission, only apply to the fact situations that fit the rule, and exceptions will occur. Over time, if enough exceptions are found, the rule may have to be rethought.
Not every buyer who experiences remorse before closing will be as fortunate as Mr. Issa, but if you find yourself in a similar situation, it is worth knowing that rescission might be available.
On the other hand, if you are a realtor or seller, this case emphasizes the importance of only supplying correct and verified information to prospective purchasers.
Although this case dealt with a home buyer, similar principles would apply to commercial real estate.