Warranty By Numbered Company - Bankruptcy - Licensee’s Liability for Failure to Advise Seller to Take Security for the Warranty; Private, Not Public Rights of Way and Paragraph 9 of the Contract Of Purchase and Sale #317

By Gerry Neely
B.A. LL.B

What is a licensee’s duty of care to a client who is negotiating the purchase of a commercial property from a numbered company that agreed to give an unsecured warranty? This was the issue in an Ontario case where the licensee drafted the warranty clause in the contract he prepared for foreign clients who were unfamiliar with commercial real estate purchased in Canada.

The numbered company gave the licensee's client a one-year warranty that the gross rental income would be no less than the amount specified in the contract. However, the warranty became valueless when the company was put into bankruptcy. The clients sued the company, the salesperson and the salesperson’s agent/employer for their $62,000 loss.

According to the expert evidence given by another licensee, a knowledgeable agent would explain the special risks of an unsecured warranty of a numbered company. The knowledgeable licensee would also recommend attempting to obtain security - for example, a vendor take-back mortgage containing a right of set-off against a rental shortfall.

The Ontario salesperson had taken on the role of an advisor who had a duty and the opportunity to protect his client’s interest before the offer was presented. He was held to be negligent for failing to do so. After weighing the evidence to the probability of the company giving security, the agent/employer was held to be liable for only 20 per cent of the judgment.¹

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Several licensees have experienced problems recently because of their failure to advise their sellers of the inter-relationship between paragraph 9 (formerly paragraph 1) of the standard form Contract of Purchase and Sale, and the seller’s obligation to deliver a title free and clear of all encumbrances. Paragraph 9 excepts from the obligation to deliver clear title, any rights-of-way and easements in favour of utilities and public authorities. That limited exception leaves the seller with the responsibility of clearing the title of private easements and rights-of-way. A seller’s inability to discharge these private easements gives a reluctant buyer the opportunity to repudiate the contract.

The recommendation of the Real Estate Council of BC to deal with this problem was discussed in column 198. Council recommended that a clause be added to the contract - a clause to confirm that the title would continue to be subject to the specifically named registered encumbrances against title, such as building schemes, restrictive covenants, rights-of-way or easements not in favour of utilities and public authorities, that would remain.

See columns #160, #188, #267 for further information.

1.

Wong v. 407527, 26 R.P.R. (3d) p. 262.

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