Assignee Beware #538
In a caveat emptor, or buyer beware, jurisdiction such as BC, buyers are required to conduct their own due diligence to satisfy themselves as to the condition of the property they are acquiring. They often employ experts such as home inspectors and environmental, structural and geotechnical engineers to assist them in this regard. These experts conduct their investigations and provide the buyer with a written report setting out their findings. Included in these reports one can usually find a variety of limitations and disclaimers. One limitation that is often included is the disclaimer that the report is being prepared for the sole use and benefit of the client and no one else. This is a rather uncontroversial limitation for a buyer but can be a dangerous pitfall for an assignee, as was demonstrated in a recent BC Supreme Court case.1
In this case, the buyer was purchasing a commercial property and engaged an environmental consultant to assess whether there were any environmental concerns with the property. The consultant undertook a Phase I and II assessment. The Phase II report concluded that "environmental contamination was not discovered on the subject site." It also contained the following disclaimer:
"[consultant] has prepared this report for the use of the Client to assist the Client in understanding the physical and environmental factors related to the subject property... [consultant] will not accept liability for any loss, injury, claim or damage arising directly or indirectly from any use or reliance on this report by any person or entity other than the Client"
The buyer/Client assigned the Contract of Purchase and Sale to another company ("Assignee"). Despite the assignment agreement recommending that the Assignee conduct its own due diligence the Assignee did not, relying solely upon that done by the buyer. The sale completed with the Assignee becoming the registered owner of the property. Five years later, the Assignee discovered environmental contamination and spent over $800,000 remediating the property. The Assignee sued the consultant for negligent misrepresentation to recover those costs.
To succeed in its claim of negligent misrepresentation, the Assignee would have to prove:
1. the consultant had made a representation that was inaccurate,
2. the consultant was negligent in making the representation,
3. the Assignee relied on the representation, and
4. the Assignee suffered loss as a result of the reliance.
At issue, of course, was the disclaimer. While the Assignee might have been able to establish points 1 and 2 above, the consultant argued that the Assignee could not have relied upon the report, and the representations therein, in light of the disclaimer. The Court agreed, finding that the disclaimer was clear and unambiguous, that it was the normal practice of the consultant to include such a disclaimer in all its reports, that the consultant did not know the report was to be relied upon by the Assignee and that the consultant had not consented to the Assignee relying upon the report. As such, the case was dismissed, and the Assignee did not recover the cost of the remediation.
What could the Assignee have done in this case to protect itself and what can assignees do to protect themselves, in general?
Firstly, the Assignee, or any assignee for that matter, could have conducted its own due diligence. However, that is not always as straightforward as it seems. Is there enough time to conduct further due diligence before the completion date in the Contract of Purchase and Sale? Does the Contract of Purchase and Sale allow for access to the property by the Assignee? If not, will the seller allow the Assignee to conduct its own due diligence?
Secondly, the Assignee, or any assignee for that matter, could have sought the consent of the consultant to waive the disclaimer and enabled the Assignee to rely upon the report. If such consent is granted, it should be documented in writing.
Thirdly, the Assignee, or any assignee for that matter, could have required the buyer/assignor to warrant and represent in the assignment agreement that it adopted the findings of the consultant as its own. The buyer/assignor might understandably be reluctant to assume such liability and if they did, it would probably come at considerable cost to the assignee.
Fourthly, an assignee could roll the dice and proceed with the assignment transaction being unable to rely upon the expert reports provided to the buyer. That is unfortunately what the Assignee did in this case, with disastrous results.
Regardless of what option an assignee decides to take, they should be aware of the risks inherent in trying to rely on a report with a clear and specific client disclaimer. Licensees that are advising assignees should bring such limitations and constraints to their client's attention and refer them for independent legal advice as to the consequences of specific limitation or disclaimer clauses found in a consultant's report. Licensees who are acting for a buyer/assignor and dealing with an unrepresented assignee should be sure that the assignee has been served with the Disclosure of Risks to Unrepresented Parties form as required by the Real Estate Council of BC.
While this case2 is not precedent-setting, I report on it as it warmed my heart in these otherwise dark times. A pizzeria started in business in 1976 pursuant to a lease (1976 Lease). In 1998 it entered into a new lease which would expire in 2010 (1998 Lease). Business was good and the 1998 Lease was extended twice more with the final extension set to expire in 2026, a total term of fewer than 30 years. While many of us would laud the initiative and perseverance of operating a pizzeria from 1976 to 2026, not so the Ministry of Finance. It took the position that the 1998 Lease was an extension of the 1976 Lease and that the combined leases were for a term exceeding 30 years and, as such, a Property Transfer Tax of close to $150,000 was payable. If that pizzeria was anything like my local pizzeria, I am guessing the amount of the tax exceeded its annual profit. Fortunately, the court concluded that the two leases were separate, and the 1998 Lease had a term of less than, not more than, 30 years, and as such tax was not payable. Score 1 for the little guy.
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