Misrepresentations Made During Negotiations: What you Need to Know

When is a misrepresentation actionable?

Finding a new home in today’s world has become an extremely stressful process which in many cases is conducted under time pressure and with competing offers for the same property on the table. These competitive pressures have in recent times led many purchasers to make a “bare bones” offer just to be considered by the vendor with little or no contractual protection. Unfortunately in some cases, the purchaser discovers he or she was told something, shown something, or not told something as part of the negotiating process that is later discovered to be untrue. This article discusses this issue in a real estate purchase context, but the principles discussed in this article apply to all contracts.

A vendor makes a misrepresentation to a purchaser when he or she makes a promise, false statement, or omits to disclose facts that would have caused the purchaser to act differently if the whole truth were known. However, to pursue legal recourse with respect to a misrepresentation, several preconditions must be met.

The first hurdle is that the misrepresentation in question must be factual, and must be material in the context of the subject matter of the contract. If on objective evaluation the representation did not materially affect what the receiving party expected to receive on the completion of the contract it will not be actionable. However, the term “misrepresentation” is interpreted broadly and can include the concept of silence as to a material fact or representations implying a fact is true.

Statements of “opinion” do not constitute statements of fact. For example, a statement such as “you’ll love this car” would generally not be considered a statement of fact. Statements like this have been described as “sales fluff” by the courts. However if a purchaser can prove that the vendor has expressed an opinion intended to induce the purchaser to enter the contract and the vendor knew or ought to have known that this expressed opinion was untrue based on objective facts within the knowledge of the vendor, then the statement of opinion may be treated as an actionable misrepresentation.

Also, statements made by a vendor about the “future” do not constitute statements of fact but are considered speculative in nature. However, if a vendor makes a statement to a purchaser relating to an event that the vendor advises will occur in the future and which will materially affect the property in question, which the vendor knows or ought to know is false, the purchaser may have recourse against the vendor for misrepresentation.

Lastly, you need to consider whether the Agreement has an “entire Agreement” clause, which is sometimes referred to as an “exclusion clause”. The purpose of these clauses is to limit legal recourse for representations not included in the “four corners” of the written Agreement.
Click here for a discussion of these clauses and how the existence of such a clause in your Agreement may limit your recourse.

What is an innocent misrepresentation and what rights does it generate?

Assuming a checkmark can be placed beside all the above boxes, the recourse available to the purchaser who was induced to enter an Agreement by a misrepresentation of the vendor will depend on how the misrepresentation is characterized by the courts.

An “innocent misrepresentation” occurs when a vendor makes a statement in the context of negotiating the contract that turns out to be false, but at the time of making the representation the vendor reasonably believed that the statement was true. If the purchaser discovers that the representation was not true before closing, he or she can assert the “right of rescission” to terminate the contract. The aim of rescission is to return the parties back to their pre-contract positions. This effectively means the vendor would have to return the deposit and the contract would be at an end. However, this right must be exercised before closing. If the purchaser closes, he or she will lose this right, and will not be able to sue for damages.

In one of the leading cases on this issue, an Ontario court upheld the right of recision in favor of a purchaser where the purchasers clearly described their dream home to the Sales Manager of a builder as being a “French country-style home with a one or two step entry”. However, this representation did not make it into the final Agreement.

At the time the Agreement was negotiated, the purchasers were shown a sales brochure that showed the finished house as having the requested entry. During the framing stages of the build, however, the purchasers were informed that because of grading issues, a four-step entry was required. As a result, the purchasers exercised their right of recision, refused to close on the transaction, and requested the return of their deposit. The vendor refused to return the deposit and the matter proceeded to court.

The judge hearing the case found that the representation made by the Sales Manager was an innocent misrepresentation. At the time it was made he reasonably believed it was true. It was only discovered later that the builder could not deliver the requested entrance. However the judge also found that at the time the Agreement was negotiated, the purchasers made it clear that a one or two-step entry was extremely important to them. The builder’s failure to build a home with this characteristic gave the purchasers the right to rescind and return their deposit. This decision was confirmed by the Ontario Court of Appeal.

What is a negligent misrepresentation and what rights does it generate?

A negligent misrepresentation occurs when a vendor makes a representation to a purchaser but does not take care to ensure that it is true. This is a violation of the concept of “reasonable care” that is applied in negligence cases. In the contractual setting the following elements must be shown for a pre-contract misrepresentation to be deemed “negligent”:

• a representation made by a vendor which was untrue, inaccurate, or misleading
• the vendor acted carelessly in making the representation in that he or she had no objective basis for making the representation
• the purchaser relied on the negligent misrepresentation to enter the contract; and,
• the purchaser suffered a loss because he or she relied on the negligent misrepresentation.

An example of a negligent misrepresentation would be a vendor of a rental property in which the vendor has never lived but tells the buyer in pre-contract negotiations that “the roof on this home doesn’t leak,” when in fact this is not true as the purchaser discovers after closing that the roof does leak. As the vendor had not lived in the house, he has no objective basis to advise the purchaser that the roof does not leak.

The key factor is that the statement made by the vendor was made without the vendor having knowledge of any objective grounds to establish it was true. The remedy for negligent misrepresentation is contract rescission and possibly damages.

What is fraudulent misrepresentation and what rights does it generate?

A vendor makes a “fraudulent misrepresentation” when he or she makes a representation to a purchaser in the context of negotiating an Agreement knowing that the statement was false, or reckless as to whether the statement was false or not. To determine whether the misrepresentation was fraudulent, the following elements must be shown:

• a representation was made by a vendor to the purchaser;
• the vendor knew the representation was false or was indifferent to the truth or falsity of the statement to point of being reckless. In this context, recklessness is considered a state of mind where a person ought to have known that the representation was false, but deliberately and unjustifiably made the representation while consciously disregarding any risks flowing from making the misrepresentation. As such recklessness is a “step beyond” simply being careless.
• the vendor made the representation with the intention to deceive the purchaser;
• the statement was material and induced the purchaser to enter the Agreement; and
• The purchaser suffered damages as a consequence.

The remedies available to a party induced to enter a contract by a fraudulent misrepresentation are broader, and include the right to seek an order rescinding the Agreement even if the transaction has closed, and recover damages from the vendor as well.

Key Takeaway

As noted in this article, if you have been induced to enter a contract as a result of a misrepresentation made by the other party, legal recourse is available.

However, without a doubt having written contractual protection is much better. To that end, in the context of making an offer for a house, the following are some common sense ideas to keep in mind:

• Consider whether there are any issues that are “deal breakers” for you. In other words is there anything that you have been told that if not true would result in you not wanting to proceed with the purchase? Reduce these facts to a written list. If you are employing a realtor to assist you, provide this written list to your agent.

• Request your agent include your list as “representations and warranties” you have relied upon in signing the contract, with a further clause stating that if you discover that any of these facts are not true within a reasonable due diligence period you will the right to terminate the contract and receive the return of your deposit.

• Specify in the Agreement what information must be provided to you by the other party to allow you to do your due diligence.