Although the possession of marijuana under various circumstances was decriminalized in Canada in 2018, many residential properties were, and no doubt continue to be, used as “grow-ops” to produce marijuana.
Houses that were used to grow marijuana often present the following problems:
- electrical systems are rewired and are not safe;
- moisture from marijuana production can lead to mould and various health concerns; and
- the property may become stigmatized as a “grow-op” property and be worth less.
What Can a Purchaser Do?
The purchaser of a residential property would be well advised to make inquiries of the vendor as to whether the property had previously been used as a marijuana grow-op and to insert terms into an agreement of purchase and sale to provide as much protection as possible.
In Ontario, many residential real estate contracts include what is known as an “illegal substances clause” which reads, in part:
The Seller represents and warrants … to the best of the Seller’s knowledge and belief, the use of the property and the buildings and structures thereon has never been for the growth or manufacture of illegal substances. This warranty shall survive and not merge on the completion of this transaction.
Case Study
In Beatty v Wei, the Court of Appeal for Ontario considered the meaning of this clause in the context of a failed real estate transaction. In this case, the seller and purchaser entered into an agreement of purchase and sale for a residential property in Toronto dated May 15, 2016 (“the APS”).
The APS provided for:
- a deposit of $30,000.00 to be paid by the purchaser;
- a purchase price of $916,000.00; and
- a closing date of August 22, 2016.
The APS also included the illegal substances clause noted above.
About a month after the APS was signed, the purchaser’s real estate agent conducted internet searches and came across information which suggested the subject property had formerly been a marijuana grow-op, which was confirmed by the police. The seller had no knowledge that the property had previously been used to produce marijuana (which had occurred a number of years before the seller had purchased the property). The purchaser refused to close the APS and the seller eventually resold the property for $86,100.00 less than the price in the APS. The seller and purchaser commenced proceedings against each other.
The issue before the Court of Appeal was whether the purchaser was entitled to back out of the APS. The court found that the purchaser was not entitled to get out of the APS and was therefore liable to the seller for damages (i.e. $86,100.00 which is how much less money the property was resold for by the seller once the purchaser refused to close the APS).
The Court of Appeal’s analysis focused on the wording of the illegal substances clause and specifically, when the warranty and representation given by the seller was effective. In reversing the lower court’s decision, the Court of Appeal held that the warranty and representation given by the seller was effective as of the date of the APS (i.e. May 15, 2016). As of that date, the seller had no knowledge that the property had formerly been used to grow marijuana. The fact that information to the contrary was discovered subsequently to May 15, 2016 was irrelevant. The seller did not breach its warranty and representation. Accordingly, the purchaser had no right to get out of the deal and was therefore liable to the seller for damages.
Conclusion
While this result might seem harsh for the purchaser, in this writer’s opinion, the Court of Appeal’s reasoning is sound and in accordance with well established law of contractual interpretation. A purchaser who seeks greater comfort in a real estate transaction may negotiate different terms, such as an unqualified representation and warranty that the property was never used to produce marijuana, or the option to get out of the deal if it is discovered prior to closing that the property was used to produce marijuana. It is not uncommon for contracts to require a “bring down certificate” from the vendor at closing stating that all representations and warranties are true.
Ultimately, contracts, particularly those with respect to the sale of land, are a matter of negotiation and allocation of risk. Each party must consider how much or how little risk it is prepared to accept, and act accordingly.
These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.