When New Home Deficiencies can be Deal Breakers A Review of the Law

Numerous factors come into play in the interpretation and application of exclusionary clauses in new-home agreements.  Aside from the wording of these provisions is the nature and significance of the defect, the type of assurance the purchaser received regarding the subject feature, and whether the vendor was aware of the risk of the defect and correspondingly failed to advise the purchaser.

Exclusionary Clauses

There are many exclusionary clauses peppering new-home Agreements of Purchase & Sale. These provisions ostensibly circumscribe the remedies available to purchasers in the event of contractual deviation on the part of a builder.  These clauses permit builders, among other things, to:

The consequence of such provisions can be a home constructed in a manner materially divergent from the expectations of the purchaser.  The jurisprudence is rife with cases involving the interpretation of such provisions and has occasionally attempted to curb their efficacy.
Seminal Decision

The courts have been inclined to consult the doctrine of fundamental breach in considering the merit of such exclusionary clauses.  The leading Canadian decision on the issue of fundamental breach and exclusionary provisions is Hunter Engineering Co., Inc. v. Syncrude Canada Ltd.

This case involved contracts for the supply of gearboxes that contained a design defect and had to be repaired by the purchaser at its expense resulting in a damages claim.  The contracts contained an exclusionary provision providing that “neither the Seller nor the Buyer shall be liable to the other for … damages for loss of use arising directly or indirectly from any breach of this contract, fundamental or otherwise…”      The Court considered the issue of the availability of the doctrine of fundamental breach to invalidate the relevant exemption clause.  The Court split down the middle on the application of the following principles while holding the exculpatory clauses valid

1. Where the “true construction” of a contract shows that the parties intended an exclusion clause to apply to a fundamental breach, the exclusion clause would be valid  unless:

Some Case Law

In view of the above, it is interesting to consider how the Ontario lower courts have ruled on this issue post Hunter.

In Keen v. Alterra Developments Ltd. , the purchasers refused to close the transaction upon learning that the grading pattern of their lot would not allow their one-step-entry French country style “dream home”.  The builder argued that the elevation of the lot was something not in its control and relied on an exemption clause defence.

Fedak J. found that the builder was not permitted to rely on the exclusionary clause as it knew of the necessity of constructing additional steps to the front entrance prior to excavation and did not bring this to the attention of the purchasers.  Because the purchasers were prevented from making an informed decision, the court felt that to permit the builder to rely on the subject exclusionary clauses would not be “fair, nor reasonable, nor in the public interest.”

In Lattavo v. 770373 Ontario Ltd. (c.o.b. Grand Brook Homes)  the plaintiff purchasers chose the design of their house from the builder’s artistic rendering.  During construction it became apparent that the lot had a severe slope which affected the home’s design.  Correspondingly, the town required the design of the front entrance be modified to make conform to building regulations concerning the allowable degree of slope.

The agreement included an exclusionary clause affording the builder broad discretion to “modify the plans and specifications pertaining to the Property including … architectural, structural…grading…” with no notice due the Purchaser.  The purchasers in this case elected to close the deal and seek damages.  The court deemed the changes required by the grading problem so fundamental as to “render the exclusionary provisions of the agreement ineffective.”   It went on to hold that the deficiencies, “objectively assessed” were of such magnitude as to render it “unconscionable” to allow the builder to rely on the exclusionary clauses.

Grinberg v. Law Development Group  was an application for an order rescinding two purchase agreements.  The subject condominium units were depicted in the respondent builder’s marketing materials as having 23 windows.  Upon completion, the units had only 14 windows each; said windows were also smaller than the brochure descriptions.

The respondent advised that the plans were changed because of building code restrictions and relied on its exclusionary provision permitting it to “vary or modify the plans…and specifications pertaining to the Condominium and the Unit…”.   The court granted rescission to the applicants reasoning that the builder was precluded from relying on its exclusionary clause as it “failed to take adequate steps to bring the provision and known risk to the applicant’s attention.”

Kates v. Camrost York Development Corp.  involved the purchase of a new condominium in which the ceramic tile and marble were of different colours from that specified in the agreement.  Instead of considering fundamental breach, the court pondered whether or not there was “substantial completion” of the suite in accordance with the agreement.  In deeming the agreement at an end, the court noted that the subject areas “comprise[d] a substantial part of the floor area” of the suite.   Also influential in the court’s decision was the fact that the necessity to replace the ceramic and marble represented a “major undertaking”.

Conclusion

It is well settled that, to make a case for rescission, an aggrieved party must demonstrate a misrepresentation of material character; if and when this hurdle is passed, maltreated purchasers must contend with their builder’s exclusionary clause defence. The result being that deal breaking new home deficiencies can only be characterized as such on a case-by-case basis.

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2   [1989] 1 S.C.R. 426 (QL), [hereinafter Hunter]
3   Hunter, at page 17.
4   Hunter, at 24 [holding of Dickson C.J.C. (with the concurrence of La Forest J.)].
5   Hunter, at 52 [holding of Wilson J. (with the concurrence of L’Heureux-Dube J.)].
6   [1993] O.J. No. 2623 (QL) [hereinafter Keen].
7   Keen, at 7. The lower court judge applied the test advocated by Wilson J. in Hunter, supra.
8   [2004] O.J. No. 3334 [hereinafter Lattavo].
9   Lattavo at 7.
10  Lattavo at 7.  The lower court judge applied the test advocated by Dickson C.J.C.. in Hunter, supra.
11  [1996] O.J. No. 1722 [hereinafter Grinberg].
12  Grinberg at 4.
13  Grinberg at 5.
14  [1991] O.J. No. 640 [hereinafter Kates].
15  Kates at 1.
16  Kates at 2.