At the heart of every real estate dispute is a contract.
Without a written contract, there can be no legal disposition of property; and where there is uncertainty regarding the essential terms of a contract, that contract may be unenforceable.
Needless to say, a properly drafted contract of purchase and sale is critical to the successful completion of a real estate transaction, and a poorly drafted contract may have serious consequences for the interests of the parties involved in the transaction, and ultimately for the agent(s) who drafted it.
Mistakes are common and can take many different forms. Sometimes, the mistake is with the drafting itself. Any number of drafting errors can occur that lead to uncertainty about what the parties intended. In other cases, the mistake is in not saying enough — in leaving important details out of the written contract. Such omissions can result in the buyer or seller not being able to enforce the whole of the agreement or assuming legal obligations they did not bargain for, and which may be impossible to fulfill. In these scenarios, the parties often resort to litigation to deal with the dispute, and the agent who drafted the contract or the agent who reviewed it may become embroiled in a lengthy lawsuit.
Reported decisions contain many examples of poorly drafted contracts.
In Intergulf Investment Corporation v. 0954704 B.C. Ltd., 2018 BCCA 337, a dispute arose as to whether the purchaser, Intergulf, had actually entered into three binding and enforceable contracts to purchase residential properties in North Vancouver from Dr. K and his numbered company. As recorded in the reasons for judgment, the contracts of purchase and sale contained many drafting errors. The agent had misstated the name of the purchaser in the original offer and then only partially corrected it, such that the contract referred to both Intergulf Development Corporation (a non-entity) and Intergulf Investment Corporation (the legal name of the company). In addition, there were discrepancies in the purchase price. Dr. K had instructed his agent to counter at a price that was $100,000 higher than the original offer price. This should have resulted in counter-offers of $1,150,000 and $1,190,000, respectively, but adjacent to the numbers the agent wrote the words “One Million One Hundred Fifty” and “One Million One Hundred Thousand.”
Dr. K, for whatever reason, did not want to sell the properties to Intergulf and he seized on the drafting errors as a reason for not completing (there were other reasons). The matter went before a Supreme Court trial judge, who had no difficulty finding that “the documents were sloppily drafted,” but was satisfied that he could discern the substance of the agreement despite the errors on the document and ordered rectification of the contracts (essentially, rewriting the contracts to reflect what the parties had intended).
Dr. K appealed the trial decision to the B.C. Court of Appeal. On appeal, the Court of Appeal considered whether the trial judge was correct to consider oral evidence outside of the written contracts and whether the case was one where rectification was appropriate.
The Court of Appeal observed that the “documents in issue obviously contain mistakes, both in the identification of the purchaser…and in the inconsistencies between the numerical and word descriptions of the proposed purchase prices,” but also referred to the goal of the trial judge in reviewing contracts, which is “to determine the mutual intention of the parties.” As described by Madam Justice Bennett in Hoban Construction Ltd. v. Alexander, 2012 BCCA 75, “the inquiry is not whether the contracts were competently drafted, but rather whether they disclose the parties’ intentions as to the substance of their agreement.” The operative principle is that the court should make every effort to find a meaning, no matter how difficult, rather than to look for reasons to destroy the contract.
At trial, the judge had resolved the apparent conflict in the purchase price by admitting evidence about the sequence of events surrounding the offer presentation, and in particular Dr. K’s instructions to counter-offer by increasing the price of each property by $100,000. Dr. K’s counsel argued that the trial judge should not have admitted this evidence because it offended the parol evidence rule (a rule limiting the use of extraneous evidence to aid with the interpretation of a contract). The Court of Appeal disagreed and held that evidence of the circumstances surrounding the execution of the contracts was admissible to assist the trial judge in understanding the parties’ intentions.
In the result, the Court of Appeal upheld the trial judge’s decision to rectify the terms of the contract.
Intergulf dealt with obvious errors in the contract documents, but the result might have been different if the parties’ intentions were less clear, or if the impugned language in the contract gave rise to real ambiguity, where one or more interpretations were plausible.
While the modern approach to contract interpretation considers the surrounding circumstances known to the parties at the time the contract was formed, there are limits on what can be considered. For example, the Supreme Court of Canada has held that surrounding circumstances “must never be allowed to overwhelm the words of a contract” and “the interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract” in its ruling in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. Surrounding circumstances, then, are admitted to aid the court in its interpretation of the text, but they cannot be used to deviate from the text, such that the court is effectively creating a new contract.
Neither can a party tender evidence at trial of its own “subjective intentions” at the time of contract formation to assist the court in interpreting the meaning of a contract. Subjective intentions (what one party thinks the contract means) are never admissible; only those facts “known or facts that reasonably ought to have been known to both parties at or before the date of contracting” are admissible as surrounding circumstances.
Given the limitations on the evidence that can be considered in resolving the meaning of a poorly drafted contract, agents do their clients a disservice and expose their clients to serious consequences if contracts do not clearly set out the intentions of the parties.
The court might be able to rectify the contract and vindicate the client, as in Intergulf, or the court may end up interpreting the contract in a way that does not accord with the client’s subjective views about what the contract was supposed to mean or do. In either case, the client would have been far better off if the agent had taken more time and care at the outset to make sure the contract properly recorded the details of the agreement.
Sometimes a contract is poorly drafted not because of what is written in it, but because of what is left out.
Clause 18 of the standard form residential contract of purchase and sale states that, “There are no representations, warranties, guarantees, promises or agreements other than those set out in this Contract and the representations contained in the Property Disclosure Statement if incorporated into and forming part of this Contract, all of which will survive the completion of the sale.” The effect of this clause is to confirm that anything that may have been said about the property but which is not written into the contract will have no effect on the transaction.
Absent fraud, if a seller makes a representation regarding the condition of the property and the agent neglects to include the representation in the contract as a specific term, the buyer may have no recourse against the seller if the representation proves to be false. Accordingly, it is important when drafting a contract of purchase and sale to ensure that any important representation or promise is reduced to writing and included as a term of the contract.
Similarly, the seller may be obligated under the contract to deliver the property to the buyer in a condition that the seller did not anticipate. Clause 9 of the contract lists certain permitted encumbrances that can remain on title after closing, even where the seller has promised to deliver title “free and clear,” but this list is not exhaustive and not all charges or encumbrances are “permitted.” Consequently, you may want to consider whether the encumbrances on title are in fact “permitted encumbrances” under clause 9 or if the contract should include additional language to confirm that the encumbrances on title will remain on closing.
As mentioned above, the modern approach to contract interpretation considers surrounding circumstances known to the parties at the time of contract formation, but there are limits on what can be considered. Ultimately, it is the text of the contract that will govern, and surrounding circumstances cannot be admitted to “overwhelm the words” of the contract or to create what is effectively a new agreement. For this reason, it’s critical that the contract contains all of the terms necessary to clearly set out the substance and content of the agreement between the parties.
Each real estate transaction is unique and presents its own set of challenges, but there are some guiding principles that apply in every case. Keep these in mind when you’re preparing or reviewing a contract of purchase and sale.
- Make sure you have a detailed discussion with your client concerning his or her expectations before you start drafting an offer or counter-offer.
- Take good notes of your discussions so that you have a record of what you and your client discussed. Such records are invaluable if a dispute arises and you and your client’s recollections differ.
- When you are acting for a buyer and the seller has made representations about the property, sit down with the client, prepare a list of the representations and have the client confirm that the list is exhaustive and which of the representations are important enough to include in the contract.
- When you are acting for a buyer and the seller provides the buyer with a Property Disclosure Statement, make sure the contract states that the PDS will form part of the contract.
- If a complex issue arises during the negotiations, it is always a good idea to recommend that the client obtain independent legal advice to determine if the contract adequately protects the client’s interests. Including a boilerplate term in the contract such as “buyer and seller are advised to seek independent legal advice” is rarely sufficient to shift liability risk to the client or to his or her legal counsel. You want to ensure that your recommendation is stated clearly and documented in an email, separate acknowledgement, or some other reliable document, so that the client cannot plausibly deny that you made the recommendation.
- When drafting clauses in a contract, write with clarity and make sure the clause is specific about who needs to do what for whom, when and how.
- Make sure to double check for errors and inconsistencies in the contract documents.
- Review the contract with your client and make sure that the client agrees with all of the terms and conditions and indicates their approval with initials.
- If there is a language barrier and you are concerned that your client may not understand the terms of the contract, consider recommending that the client speak with a lawyer, translator/interpreter or other expert who is conversant in the client’s native or preferred language, and document this advice in an email or other written record.