March 18, 2022

By Brian Babcock

Never hesitate to ask someone who wants you to sign a contract what the terms actually mean – even if it is your own lawyer or realtor.

Understanding what you are signing is important not only because you are assumed to have understood and agreed, but your questions might clear up ambiguities or misunderstandings that save you a lot of money, time, inconvenience and stress.

Imagine the following scenario:

  • Through your family corporation, you and your spouse own a multi-unit apartment building;
  • The building is not getting any younger. You have deferred maintenance, which makes it harder to attract tenants, and so you accept some tenants who might not pay on time;
  • Despite this, the apartments generate enough income to service the mortgage, pay operating costs and pay you every month;
  • You also own other assets, and have ideas for other business opportunities;
  • The time required to manage the building is getting in the way of pursuing those ideas;
  • Some of those ideas would require a capital investment greater than your cash on hand;
  • You refinanced the mortgage two years ago at $2 million, with an appraised value for mortgage purposes of $4 million;
  • You have paid the mortgage down to $1.6 million, but because you still have only done urgent repairs, you are not sure of the market value;
  • You are confident that you have substantial net equity which you could invest elsewhere if you sold;
  • You have received various offers for the building over the years, but have always said “I’m not going to sell cheap”;
  • A realtor brings you a low ball offer from an out of town buyer, which the realtor says specializes in rehabbing older properties;
  • When you turn it down, the realtor says his client would really like the property and asks you to name a price;
  • So you say $4 million, the two year old appraised value;
  • That price is accepted, but you spend six months with various draft agreements going back and forth between lawyers;
  • Twice, deals were signed but the buyer’s financing fell through. The second time, the deal was extended, with a new form of agreement;
  • You do not notice the warranty clause in which your corporation as seller states that the rental income is $90,000.00 per month;
  • In fact, that is the rental value if all units are full;
  • You have not been full since prior to the appraisal;
  • You have averaged rents due of about $80,000 per month recently, and about ten percent or $8,000 is uncollectable;
  • This is obvious on the financial and tenancy information you provide prior to closing;
  • As a term of the extension, the buyer puts two people – the realtor and a property manger – in to operate the building office until closing, as you and your spouse have made other plans;
  • They know the actual rents;
  • The deal closes;
  • Two years later you are served with a lawsuit alleging breach of warranty and fraud, claiming $10,000,000.00 in damages.

What happens?

This is not a TV lawyer show. In real life many scenarios could follow. In none of them are you in court after the next commercial break.

One plausible version:

  • On legal advice, even though you believe you did nothing wrong, you offer to settle immediately for $20,000.00;
  • The buyer counter offers at $2 million;
  • That ends negotiations and the law suit becomes a war;
  • Your credit is frozen while the lawsuit is pending so you cannot pursue your new ventures;
  • Your time is tied up for four years dealing with lawyers, so you could not pursue those new ventures anyway, plus your existing other businesses suffer from lack of attention;
  • You learn that the summer after they bought, the buyer had the property appraised at $6 million dollars, $2 million more than they paid;
  • They have financed fully to $6 million;
  • The building is the only asset owned by the buyer, a single purpose corporation incorporated just for that purpose;
  • You learn that the second month after closing, the collected rents were over $90,000.00 and have averaged at least that much since. It seems rents were increased;
  • You learn about the warranty, but still do not understand it;
  • Your real estate lawyer tries to explain it, but their understanding is different from your litigation lawyer’s interpretation;
  • You don’t really understand either of them;
  • They jointly inform you that they believe it is ambiguous, thus the interpretation is unclear and up to the trial judge;
  • They do agree that a warranty does not depend upon whether or not you lied, merely whether or not the warranted facts were correct. Because of the ambiguity, they cannot tell you with certainty what the result will be at trial, and furthermore, that they cannot confidently predict a likely result;
  • They also agree that the bigger issue is that the buyer will have a hard time proving any real loses;
  • You proceed to pre-trial, having spent $200,000.00 in legal fees;
  • The pre-trial judge generally favours your position, but because of the warranty clause, recommends settling at $50,000.00;
  • The Plaintiff agrees;
  • You are faced with paying $50,000.00, even though you did nothing wrong, or paying another $200,000 in legal fees, facing the risk of trial, and being unlikely to collect your costs, even if you are successful;
  • Trial is at least 18 months away;
  • A reserved judgment plus appeal might add another two years of uncertainty and cost.

 

What might have happened instead if you had asked about the warranty clause before signing?

Any number of possible scenarios, all better than the nightmare above, including:

  • The clause is amended to something unambiguous which reflects reality, so there is no law suit.
  • The clause is amended but the buyer sues anyway. The amended clause is clear enough to lead to a summary judgment motion, saving you time, money and stress.
  • The clause is amended, but the buyer sues anyway. Your lawyers and the pre-trial judge all agree you have a strong case. You push to trial quicker, with confidence you will win, and collect what you can in costs.
  • The deal falls through, you wait for another buyer who makes a cleaner offer. You have to wait, but it is quicker than the lawsuit, less stressful, and less costly.

This may read like fiction, but lawsuits like this do happen, even in Thunder Bay. Those of us who enjoy complex commercial litigation see them all too frequently.

At Weilers Law, our corporate and commercial real estate lawyers have experience interpreting unusual clauses in agreements, and do our best to make sure our clients understand them, but in order for that to work, our clients need to be open with us about their understanding of the terms, and of course, need to read the fine print.

If you are dragged into a complex commercial lawsuit, Weilers Law has lawyers well suited to represent you at a realistic cost, with realistic advice and strong representation. We work closely with our own commercial real estate colleagues within the firm to provide clear and concise opinions. We are able to share the same cooperation with many outside lawyers who appreciate our commitment to our mutual clients.

And at Weilers Law, we love it when clients ask “What does it mean?”