August 9th - 2013

Legal Beat: Faulty valve leads to breach of contract and lawsuits

The parties entered into an agreement of purchase and sale on this high-end B.C. property with a closing date no later than Oct. 20, 2008.

The parties entered into an agreement of purchase and sale on this high-end B.C. property with a closing date no later than Oct. 20, 2008. The purchase price was $3.4 million and the buyers submitted a deposit of $100,000. The contract included the term that the property would be in substantially the same condition at possession date as it was when viewed by the buyers on July 15. The offer was subject to the conditions that the buyers receive and approve a satisfactory inspection report by Aug. 7 and that they review and approve a rental agreement with a nearby ski lodge. The contract also contained the following clause: “It is a fundamental term of this contract that the seller must have finished all work, and delivered to the buyer by the completion date, an unconditional municipal occupancy certificate. Seller warrants that he is duly licensed pursuant to the Homeowner Protection Act and that the mandatory warranty insurance pursuant to that act is in place.”

An inspection was done and all conditions removed. The inspector identified as a maintenance concern the fact that a water shut-off device at the foot of the driveway and used by emergency personnel had a 45-degree bend, such that the water could not be turned off at that location. The inspector did not, however, actually attempt to close the valve. The inspector stated that it “would be a good idea” to have it straightened. He testified that by this he meant that the device should be repaired. He acknowledged that he was not sure whether the valve was located on municipal property or on the seller’s property and that he was uncertain about who was responsible to repair it. Another shut-off valve inside the house was in proper working order. The buyers claimed that the bent valve was an issue and refused to close, claiming that the valve represented a fundamental breach of contract by the sellers and of the above clause. The sellers sued the buyers and later resold the property at a lower price, for $2.75 million.

The judge ruled that there was no evidence to prove that the valve was on the property. He also stated that failure to repair this maintenance item did not constitute a fundamental breach of contract on a multi-million dollar home. The term was a warranty only and did not entitle the buyers to repudiate the contract. According to the judge, the buyers were not deprived of substantially the whole benefit of the agreement. The buyers lost their $100,000 deposit and owed the seller damages of $600,000.

Greenberg & Greenberg v Shanghai 2010 BCSC 1837

MERV’S COMMENTS
It is difficult to determine which conditions warrant a fundamental breach so severe that a contract is terminated. The cautious buyer should consider claiming that there is a breach, close the transaction, and sue for damages. Was the faulty water valve the real reason for the breach, or did the declining conditions of the B.C. housing market and/or the buyers’ finances play a role?

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