Canada: When Selling Without Warranty Does Not Mean Selling Without Warranty

On October 23, 2018, the Superior Court of Quebec rendered a judgment¹ that could have significant impact on interpreting "as-is" sales in Quebec.

Facts

In 2006 Foncière St-Jacques Inc. (the Buyer) acquired a building from George Weisz and Robert Wasserman (collectively, the Sellers). The building sold for $3,125,000 and without warranty, "except for warranty as to title." After the sale, the Buyer alleged work done in 2001 and 2006 by a tenant (the Tenant) on the building prior to the sale was not in conformity with the Cultural Heritage Act (Act). The Buyer instituted an action in damages against the Sellers and the Tenant for $800,000 in order to execute the work required to render the property compliant with the Act.

It should be noted that during the Buyer's due diligence, reports showed the property was subject to Ministry of Cultural Affairs regulations and any work on the building would cost more than usual because it was subject to such regulations.

Analysis

In making its claim, the Buyer principally relied on article 1725 of the Civil Code of Quebec (CCQ), which provides that:

The seller of an immovable warrants the buyer against any violation of public law restrictions affecting the property that are exceptions to the ordinary law of ownership. 

The seller is not bound to that warranty where he has given notice of these restrictions to the buyer at the time of the sale, where a prudent and diligent buyer could have discovered them by reason of the nature, location and use of the premises or where such restrictions have been registered at the registry office.

The court's interpretation of article 1725 CCQ was that a buyer knowing there could be a public law restriction affecting a property does not automatically exonerate a seller if there is, in fact, a violation of public law. 

However, where a buyer would have good reason to suspect a public law restriction was contravened, the second paragraph of article 1725 CCQ could exonerate the seller. The court goes on to say that if a buyer discovers a violation of public law, it must advise the seller within a reasonable time, but the seller may not invoke the tardiness of such notice if it was aware of the claim (article 1738 CCQ). Moreover, the court goes on to recognize that a non-professional seller may sell a property without any warranty whatsoever at the buyer's risks and perils.

Decision

The court quickly rejects the Sellers' argument that the notice sent by the Buyer regarding the violation of public law was too late, concluding the Sellers were well aware of the building's non-conformity issues before the sale. The court also concludes that when purchasing the property, the Buyer had no way of knowing all of the public law violations relating to the work executed in 2001, notwithstanding the fact it knew the property was subject to certain public law restrictions. 

It therefore held the Sellers were responsible for the non-conforming issues resulting from the 2001 work. As for the 2006 work, the court found the Tenant responsible for the non-conforming issues as it breached the terms of its lease regarding the execution such work. The court held the Sellers were not responsible for the irregularities resulting from the 2006 work, as it was not established that the work was completed before the sale.

Now the interesting part of the decision: the court breaks down the meaning of "a sale without warranty, except for warranty as to title" and concludes that under such a sale, while the seller does not warranty the quality of the property, it does warranty the "right of ownership." 

This goes beyond the Seller's interpretation (and which, in this author's view, is shared by most real estate practitioners in Quebec), which is the exclusion is meant to solely guarantee the seller has good title to the property. The court questions how one may warrant "good title" without warranting "valid ownership" and refuses to separate the two. The court highlights the unclear intent of the exclusion and states that in cases of ambiguity, the interpretation of a provision that restricts any warranty should benefit the buyer. Consequently, the court finds the "law of ownership" mentioned in article 1725 CCQ was covered by the "warranty as to title" given by the Seller.

Commentary

Unfortunately, the court does not elaborate on how a warranty as to title specifically applies to a violation of the Act. While it's true the deed of sale in this case does not provide much detail on the "as-is" nature of the transaction (a copy of which was reviewed for this article), it would have been interesting to see if the court's decision would have been the same if the deed was more specific on the scope and intent of the "as-is" provision. 

We were not able to review the original offer to purchase, but it is quite common to see Quebec real estate practitioners include very detailed "no warranty" language in their contracts. This decision would seem to justify what some consider to be lawyers' excessive language in specifying the "as-is" nature of a transaction.  

What is particularly concerning about this decision is we now need to be cognizant that a warranty as to title only may go far beyond what is intended. With the court concluding in this case that it includes "the right of ownership," what else could be covered? Could it include zoning issues, violations of building code/fire code requirements or other matters that we would typically believe are not covered when only a warranty as to title is given? 

The lesson from this decision is that when selling a property "as-is" except for title, the scope of the title warranty should be clearly limited to the seller's title to the property and exclude all other matters relating to the right of ownership, such as conformity to public law restrictions. Ideally, the title warranty should provide that it is limited to the seller's registered title to the property and the transaction documents must specify that no other warranty is given the seller, including, without limitation, any conformity to applicable laws and regulations, that no warranty is given as to the quality of the property and that the property is purchased by the buyer at its risks and perils.   

Footnotes

1 Foncière 384 St-Jacques inc. c. Wasserman, 2018 QCCS 4606 

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