A few recent court decisions may disrupt the enforceability of contracts (including real estate agreements), and not in a good way.
These decisions deal with entire agreement clauses, which were once thought to be a complete defence to situations where one party tries to escape their obligations under the contract.
The entire agreement clause
An “entire agreement clause” is a very common provision in real estate contracts and is almost always found in instruments like purchase-and-sale agreements, commitment letters, commercial leases and development agreements.
Essentially, an entire agreement clause states that there are no agreements between the parties outside of the bounds of the contract. This means the contract itself is the only instrument that governs the relationship between the parties and none of the parties to the contract may rely on any other representations that were supposedly made before (or after) the contract is executed.
For instance, two parties sign an agreement of purchase and sale for a commercial property with a set closing date; then, on the eve of closing the buyer refuses to complete the deal on the basis the seller made some representations about the property before the agreement was signed, which turned out to be untrue.
In such cases, the seller could rely on the entire agreement clause in the purchase-and-sale agreement to assert that the buyer is precluded from relying on any prior representations and force them to close the deal.
Courts have generally shown plenty of deference to entire agreement clauses. After all, the point of them is to give finality to a contract and prevent a party from escaping its obligations by relying on representations that may or may not have been made before the contract was executed.
Fraudulent misrepresentation defence
However, two recent decisions from Ontario’s highest court have shown there are now ways to get around entire agreement clauses, which could pave the way to a lot of litigation.
In 10443204 Canada Inc. v. 2701835 Ontario Inc., the Ontario Court of Appeal overturned a summary judgment decision on the basis that an entire agreement clause in an agreement of purchase and sale will not preclude a defence of fraudulent misrepresentation. Please see my previous column on the motion judge’s decision.
That matter involved a dispute over the purchase of a business, which was listed for sale on Multiple Listing Services (MLS). The buyer and seller met to discuss the business and the buyer claimed the seller alleged it was profitable and made a certain amount of gross income per month.
In reliance on those representations, an offer was made to purchase the business.
When the transaction closed, the buyer paid the purchase price through an initial lump-sum payment and agreed to a vendor-take-back mortgage (VTB). The buyer also gave the seller a promissory note and personal guarantee for the remainder of the purchase price.
The buyer then discovered the monthly income generated by the business was significantly less than the amounts represented by the seller.
The buyer alleged the seller fraudulently misrepresented the business during their first meeting and immediately defaulted under the VTB payments. The seller then sued for the unpaid amounts owing under the VTB, the promissory note and the personal guarantee, and was successful.
The motion judge held that, based on the entire agreement clause in the contract, any representations made by the vendor prior to the contract were of no force or effect. The motion judge also held the buyer’s failure to conduct its own due diligence before executing the contract prevented it from later asserting that it relied on the vendor’s misrepresentations.
The Ontario Court of Appeal overturned the motion judge’s decision and returned the matter to trial. The court held that: (a) an entire agreement clause is not a complete defence to a fraudulent misrepresentation claim; and (b) the buyer’s failure to conduct its own due diligence did not, in itself, preclude a fraudulent misrepresentation defence.
Tenant owed a duty of care
More recently, in Spot Coffee Park Place Inc. v. Concord Adex Investments Limited, Concord Adex Investments Limited, a condominium developer the (“landlord”) entered into a commercial lease agreement (the “lease”) with Spot Coffee Park Place Inc. (the “tenant”), a high-end café with a number of locations in the United States and Canada.
In accordance with the lease, the tenant agreed to rent space to operate a café in a mixed-use development built by the landlord (the “development”). Before entering into the lease, the landlord had a three-year pre-existing relationship with a related company of the tenant for the operation of a café in downtown Toronto.
Before entering into the lease, the landlord assured the tenant that ample parking would be provided for the tenant’s customers at the development and this assurance was confirmed in site visits and brochures provided to the tenant. The landlord also acknowledged that customer parking was essential to the tenant’s business in order for it to attract customers from outside the development.
Following negotiations, the parties entered into the lease in October 2010. The lease contained a comprehensive entire agreement clause which stated that it:
“contains all of the terms and conditions of the agreement between the parties relating to the matters herein provided and supersedes all previous agreements or representations of any kind, written or verbal, made by anyone in reference thereto, with the exception of any written and executed offer to lease or agreement to lease (“Offer to Lease”) which may exist between the parties and pursuant to which this Lease has been entered into. There are no covenants, representations, agreements, warranties or conditions in any way relating to the subject matter of this Agreement expressed or implied, collateral or otherwise, except as expressly set out herein or in the Offer to Lease, if any. In the event of any inconsistency or contradiction between the provisions of any Offer to Lease and the terms and conditions of this Lease, this Lease shall prevail.”
After the tenant opened for business in the development, it immediately began experiencing customer parking problems. Despite the landlord’s assurances, adequate customer parking was not provided, which made it impossible for the tenant to operate its business.
In May 2013, the tenant abandoned the premises and asserted that the challenges from the parking issue caused it to suffer damages. The landlord terminated the lease in June 2013.
The tenant then commenced an action against the landlord, seeking the return of monies it expended to operate the premises, as well as costs associated with designing, constructing, and fixturing the premises. The landlord defended the action and argued the tenant’s claim was barred by virtue of the entire agreement clause contained in the lease.
The trial judge found that the landlord owed the tenant a duty of care and did make representations to the tenant regarding customer parking at the premises, which turned out to be false. The tenant was found to have reasonably relied on these representations, which the landlord used to induce it into entering the Lease.
It was held that the entire agreement clause in the lease did not preclude the tenant’s action because the key language of the clause stated that “there are no . . . representations . . . in any way relating to the subject matter” of the lease. Customer parking was not addressed in the lease and therefore the clause did not apply.
In coming to this ruling, the trial judge considered that the landlord and the tenant were both sophisticated commercial parties with a pre-existing relationship. The landlord was also determined to have made negligent misrepresentations regarding the parking issue before the lease was executed.
It was also noted that the landlord had a duty to correct its misrepresentations after the tenant began operating its business, and it did not do so.
In the end, the tenant was awarded over $1 million in damages, plus nearly $200,000 interest and costs.
The landlord appealed on the basis that the trial judge failed to consider provisions in the lease that addressed the tenant’s use of common areas in the development. The landlord argued common areas included parking and therefore the lease did address that issue, meaning the entire agreement clause would apply.
The landlord’s appeal was dismissed on the basis that the lease clauses that it raised were highly ambiguous and it was unclear whether the common areas did address the parking issue. It was therefore held that the trial judge did not err in holding that the parking issue was not addressed in the lease, meaning the entire agreement clause did not bar the tenant’s claim.
Keep good records, and write a comprehensive contract
As both of these decisions show, entire agreement clauses are no longer a complete bar to claims involving representations made before the contract was executed, especially in cases involving allegations of fraud and negligence. This is concerning for a number of reasons, as parties to contracts (including real estate agreements) no longer have assurance that they are protected if the agreement falls apart.
Bearing this in mind, when entering into a contract with an entire agreement clause, both sides would be wise to ensure they keep a record of everything discussed beforehand, and that all discussions and agreements make their way into the contract itself.
If you have questions about real estate litigation, or if there is a subject you would like me to cover for the The Property Law Hub, please feel free to contact me any time at (416) 644-2838 or by email at firstname.lastname@example.org.