An anchor for the way we do sales without legal warranty

The Court of Appeal in Blais c. Laforce[1] rendered a decision on a major topic in real estate law: the purchase and sale of property without legal warranty. In rendering its decision, the Court confirmed that a clear and unequivocal exclusion of warranty included in a deed of sale constitutes an express waiver by the buyer of all legal warranties, preventing future purchasers of having a recourse against any prior seller. This ruling challenges the principle of transmissibility of the legal warranty during the sale and purchase of property.

1.         Facts

In 1982 and 2001, Léo Constant (“Constant”) and Robert Laforce (“Laforce”, and together with Constant, the “Initial Sellers”) respectively sold the property in dispute (the “Property”) with the legal warranty of quality.

In 2013, Michel Blais (“Blais”) purchased the Property from Terrence O’Reilly (“O’Reilly”) without any legal warranty, at Blais’ own risk and peril, as expressly stated in their deed of sale.

In 2018, Blais sold the Property to Chantal Ouellette (“Ouellette”) and Michael Mayran (“Mayran”, and together with Ouellette, the “Buyers”).

In 2019, after ascertaining that the Property was defective, the Buyers gave notice in writing of the defect to their seller Blais, as required by Article 1739 of the Civil Code of Quebec (“CCQ”), and instituted a lawsuit against Blais thereafter for latent defect.

In 2020, with regards to the Buyers’ lawsuit, Blais called into warranty the Initial Sellers, alleging that he is entitled to be indemnified by them from any condemnation that may be pronounced against him by the Buyers. In response, the Initial Sellers presented an application to dismiss pursuant to article 168 al. 2 of the Civil Code of Procedure, arguing that Blais acquired the Property from O’Reilly without legal warranty, at his own risk and peril, and therefore could not invoke the legal warranty against them. According to the Initial Sellers, the explicit waiver by Blais in his own deed of sale with O’Reilly caused the “chain of title” of the legal warranties to break.

2.         Analysis

a)    Legal Warranty

During the sale and purchase of a property, the seller is bound to warrant the buyer that the property is free of latent defects at the time of the sale. Pursuant to article 1716 of the CCQ, legal warranty exists by operation of law, to the benefit of the buyer, whether or not it is expressly stipulated in the deed of sale. Therefore, should the parties wish to increase, limit or exclude the legal warranty, as permitted by article 1732 of the CCQ, they must explicitly provide for it in their contract in a clear and unequivocal manner.

The concept of “legal warranty” in Québec law has two components to it: the warranty of ownership and the warranty of quality.

(i)            Warranty of ownership: whereby a seller warrants that the property is free from any defect in title. The seller’s obligations towards the buyer pursuant to the warranty of ownership are outlined in articles 1723 to 1725 of the CCQ as follows: (i) the seller is bound to warrant the buyer that the property is free of all rights except those declared at the time of sale; (ii) the seller is bound to discharge the property of all hypothecs, unless the buyer has assumed the debt so secured; (iii) the seller warrants the buyer against any encroachment on his part unless declared at the time of sale, as well as any encroachment commenced with his knowledge by a third party prior to the sale; and (iv) the seller warrants the buyer against any violation of public law restrictions affecting the property.

(ii)           Warranty of quality: whereby a seller warrants that the property is free of any latent defects. The seller’s obligations towards the buyer pursuant to the warranty of quality are outlined in articles 1726 to 1731 of the CCQ as follows: the seller is bound to warrant the buyer that the property and its accessories are free of latent defects which are unknown to the buyer or unapparent, an apparent defect being one that can be perceived by a prudent and diligent buyer without the need to resort to an expert. The warranty of quality may be waived for the property in its entirety or only for certain components related to the property.

b)    Waiver of Warranty

Warranty waivers in a deed of sale must be examined on a case-by-case basis. According to jurisprudence, clauses intended to exclude the legal warranty are to be interpreted restrictively[2]. An analysis of the parties’ intentions may be necessary to determine the true scope of the waiver. In Blais c. Laforce, the Court of Appeal ruled that the exclusion clause contained in the deed of sale was clear and unambiguous, pointing out that the clause even used the same terms as in paragraph 2 of article 1733 of the CCQ, and therefore, “leaves little doubt as to the intention of the purchaser, who indicated by this clause that he wishes to purchase the property without any warranty[3]”.

Despite the permitted exclusion of warranty, the seller must nonetheless act in good faith in accordance with articles 6 and 1375 of the CCQ and fulfil his obligation of information and transparency towards the buyer[4]. Thus, if the seller is aware of a defect or is presumed to have been aware, the seller must reveal it to the buyer. If the seller acted in bad faith or in a fraudulent manner, the buyer may (i) request the nullity of the warranty clause in question, (ii) request the nullity of the sale of the property, (iii) request a reduction in the purchase price, or (iv) claim damages from the seller. However, requesting nullity does not go unchallenged: pursuant to article 2803 of the CCQ, the burden of proof lies on the buyer who must prove that the seller was aware of the defect and acted intentionally to induce the purchaser to acquire the property. The buyer must further prove that the defect renders the property unfit for the use for which it was intended, and that the buyer would not have purchased the property had he been aware of such defect.

c)    Transmissibility of Rights (Article 1442 CCQ)

Article 1442 of the CCQ introduces the rule of transmission of personal rights to successors in title. Essentially, if the right in question constitutes an accessory to the property being transmitted or is closely related to it, then the right is transmitted to the successors. According to jurisprudence, article 1442 of the CCQ has a broad scope and must be interpreted largely.

From Article 1442 CCQ came the theory of accessory, also known as the “Kravitz Rule”, a theory that was recognized by the Supreme Court of Canada in the decision General Motors Products of Canada Ltd. v. Kravitz[5], whereby the warranty of quality was deemed to be an accessory to the property being sold, as the warranty is directly related to the property itself[6]. Following this theory, any claim arising from the warranty of quality during the purchase of a property is transmissible to the successors simultaneously with the property itself. In other words, the warranty follows the property in the hands of the subsequent purchaser which, in theory, would allow the subsequent purchaser to sue the initial seller for latent defects. However, for this theory to be valid, the chain of title must not have been disrupted.

The chain of title traces the sequential transfers of title from the current owner back to the original owner of the property. As explained in the above paragraph, in theory, the warranty of quality, as an accessory of the property, follows the property with every sale, allowing a buyer to climb the chain of title to directly sue the previous sellers for latent defects. However, the chain of title can be broken by the sale of a property that is made without any warranty, at the buyer’s sole risk and peril. As a consequence of this rupture, a buyer’s right to sue directly the previous seller would not survive.

Following this theory, the Court of Appeal in Blais c. Laforce confirmed that Blais (as a subsequent purchaser) could only have recourse against the Initial Sellers (as prior sellers) if the chain is still intact, in that none of the prior purchasers, including himself, expressly waived the legal warranty when purchasing the Property. Thus, the explicit waiver by Blais in his own deed of sale precluded any recourse by Blais against any prior seller, without limiting itself to the immediate seller of Blais[7].

Conclusion

The Court of Appeal’s ruling in Blais c. Laforce confirmed that a clear and unambiguous waiver by the purchaser prevents a future purchaser from having recourse against previous sellers for latent defects. For a recourse to exist for the current owner against a previous seller, proof must be made that the right of action of the first purchaser against his seller has been transmitted to subsequent purchasers and this, up to the plaintiff.

This decision is a reminder of the importance of precision and clarity in drafting clauses waiving legal warranty as the wording can have serious consequences on a buyer’s rights. Our real estate law team can advise you in this regard for your future acquisitions and dispositions.

[1] Blais c. Laforce, 2022 QCCA 858.
[2] Sultan c. Gitman, 2009 QCCS 4627.
[3] Blais c. Laforce, para 11 (unofficial translation from French to English).
[4] Deschenes c. Laberge, 2021 QCCQ 10497, para 27.
[5] General Motors Products of Canada Ltd. v. Kravitz [1979] 1 S.C.R. 790.
[6] Imperial Tobacco Canada ltée c. Conseil québécois sur le tabac et la santé, 2019 QCCA 358.
[7] Ouellette c. Blais, 2021 QCCS 1084.