Buyer on the hook for $213,000 after court dismisses zoning misrepresentation claim

FAST HITS

• A buyer made a $557,000 offer on a property in Ontario without making her agreement conditional on financing, despite knowing before making the offer that the property’s zoning had been changed from residential to W2.
• The day before closing, she tried to walk away by claiming the MLS listing had misrepresented the zoning, but text messages showed she had already researched the zoning herself.
• An Ontario court rejected her defense and ordered her to pay $213,175 in damages to the sellers.
  

For a buyer considering a major renovation after closing, the purpose of a property may be a relevant consideration. Although a listing for a property may contain statements about its permitted current or potential uses, a buyer should take steps to independently verify the information. In most cases, zoning studies for the intended future use of the property must be conducted before entering into an agreement to purchase the property, otherwise the buyer may not be able to withdraw from the transaction.

This situation was illustrated in Mino et al. v. Foster.

The transaction

During the height of the Ontario real estate market in 2022, the plaintiffs listed a single detached home in LaSalle, Ontario for $299,000. The plaintiffs received at least five offers ranging from $350,000 to an offer of $557,000 received from the defendant. The defendant’s offer was accepted and constituted a binding agreement of purchase and sale (APS).

The APS included a standard condition stating that “the Seller and the Buyer agree that there is no representation or warranty of any kind that the future intended use of the Property by the Buyer is or will be lawful except as specifically provided in this Agreement.” The APS did not contain any conditions regarding the future intended use of the property and was not dependent on financing.

The zoning conflict

The initial closing date was extended to June 30, 2022, at the defendant’s request. However, the defendant declined to complete the purchase on the grounds that its offer was based on the MLS listing, which designated the property’s zoning as “residential.” The property was actually zoned ‘W2’ under a comprehensive zoning ordinance for the entire city of LaSalle that went into effect in 2021. The W2 zoning provided for additional uses, including residential, and specifically “single-family dwellings existing prior to the date of this ordinance.”

The plaintiffs then resold the property to another buyer in December 2022 for $329,000. A lawsuit ensued, with the plaintiffs seeking damages from the defendant for the lower sales price, additional mortgage payments, taxes, lost rent and utilities.

The plaintiffs took the position that they could convey good title to the property and that the APS reflected the deal the parties wanted to make.

Note that the defendant’s real estate attorney had sent a demand letter within the deadlines set by the APS that did not mention zoning issues. On June 29, 2022 – the day before the extended closing date – the defendant’s lawyer announced that the defendant no longer wanted to purchase the property “due to the fact that it had been wrongly presented as a residential property in the purchase and sale agreement and that the property is zoned W2.”

This letter was incorrect, as such representation in the APS did not in fact exist. Instead, the APS determined that the current use was residential and could continue, which was correct. The only source of the misrepresentation that defendant would rely on was the MLS listing.

The mini process

The court ordered a mini-trial to determine whether the defendant relied on the representation in the MLS regarding the residential zoning plan.

To be successful in its defense, the defendant would have to prove that the plaintiffs, or their attorney, made a false statement; that she relied on the statement when she entered into the contract to purchase the property; that the reliance was reasonable in the circumstances; and that the representation was material.

The defendant’s evidence was that she suffered from autoimmune diseases and was planning to downsize her home to one that was wheelchair accessible. She planned to renovate the property, but claimed that W2 zoning may not allow the renovations.

The proof

The defendant’s evidence was that, after her offer was accepted, she sought the advice of a mortgage broker to arrange financing and was told that the land was not zoned residential but rather zoned commercial. As a result, down payments, mortgage interest, insurance, and mortgage payments would be significantly higher than expected. However, the APS was not dependent on financing.

The suspect’s broker has made witness statements about the events surrounding the APS. The agent’s evidence was that although the listing identified the zoning as residential, he did his own investigation and discovered that the zoning had been changed to W2, an enhanced form of rezoning. He went to the municipality’s website and found a description of the W2 zoning plan. He then relayed the information to the buyer by phone and email on the day of the listing presentation. His evidence was that the buyer did not want to include conditions in the offer and that financing was not an issue.

The agent further stated that the defendant contacted him before the closing date and asked him to arrange an extension until June 30, which was accepted as she was having difficulty with her financing. The agent arranged for her to meet with a mortgage broker who presented three different financing options. None of the options were acceptable to the suspect. He then requested that the plaintiffs be released from the APS, which was denied.

The judge noted that there was clear animosity between the defendant and her agent, and that she had complained about the agent to the Real Estate Council of Ontario – a complaint that was dismissed.

The decision

The judge found that although the plaintiffs and/or their agent had made a false statement by identifying the zoning in the MLS listing as residential rather than W2, the defendant had not relied on the statement when entering into the APS. Contemporaneous text messages indicated that the defendant did her own research into the zoning of the property and learned that it was zoned W2 on the day she viewed the property and before she made the offer. The judge noted that this was not surprising, as the opportunity to renovate the existing home and build a second home on the property was important to her.

In addition, the defendant was an experienced real estate buyer, having previously been involved in thirteen real estate transactions. Accordingly, the trial judge concluded that she did not rely on the zoning information in the MLS listing; she knew the area was W2 and was satisfied with this information, at least before exploring her financing options.

The plaintiffs’ claim was therefore allowed and the defendant was found liable for damages totaling $213,175.41, after crediting the $20,000 deposit.

Takeaway meals

While financing issues may have been the true reason for defendant’s refusal to complete the transaction, the zoning issue is one that should have been fully assessed before a binding offer was made. During heated real estate markets, buyers may not want to include certain terms or take the time to conduct due diligence before entering into a transaction. This decision illustrates the possible consequences if this is not done.