Lawyer versus Client Responsibility for Pre-closing Due Diligence

Lawyer versus Client Responsibility for Pre-closing Due Diligence

Tony Fleming*
Posted May 21, 2014 Category: Businesses

A discussion of Outaouais Synergest Incorporated v. Keenan

Background. The municipality of Gloucester (now Ottawa) purchased a portion of vacant commercial farmland owned by the Keenans in order to construct a municipal road across those lands. Since the development would benefit the Keenans, the municipality negotiated an agreement to pay for the construction of the road but recover a portion of its costs from subsequent owners of the lands. The Keenans agreed to defer payment of part of the price to be paid by the municipality for the purchase the lands, also to be paid by subsequent owners. In a formal agreement, a “cost recovery clause” was used to implement the deferred payment mechanism by establishing a 0.3 m reserve owned by the municipality along the boundaries of the Keenan lands. The effect is that any purchaser of the property requiring access to and from the municipal road and municipal services benefitting the property would have to obtain the release of the reserves by the municipality. The transfers of the lands conveyed to the municipality also contained a restrictive covenant indicating that they would not be dedicated as a public road until the municipality had collected a proportionate share of the costs associated with the road project from the owner of the adjacent lands. 

Outaouais Synergist entered into a real estate deal to purchase the Keenan lands for $850,000. After closing, Outaouais discovered that the municipality would not release road access to the property until it paid an additional $433,366 (later negotiated down to $240,000). The cost recovery agreement was not registered on title against any of the lands and was not disclosed by the vendor to the purchaser. Outaouais commenced an action against its solicitor for the transaction and the Court of Appeal upheld the lower court’s ruling, finding the purchaser’s solicitor liable in negligence and dismissing the cross-claim for contribution and indemnity of the vendors.

What did the parties know? Neither the purchaser nor their lawyers were ever told specifically about the existence of the cost recovery agreement. The vendors were clearly aware of the agreement, as was their solicitor who had discussed it with the vendors and recommended that it be disclosed. The vendor subsequently amended the agreement of purchase and sale to add a paragraph stating that it would be the purchaser’s responsibility to satisfy all municipal development charges for the property “including all costs recovered to the City of Ottawa to its .3 metre reserve”. The lawyer for the purchaser accepted the advice of his client’s real estate agent that the clause referred to payment of the standard administrative fee to the municipality to lift the reserve when the site plan obligations had been fulfilled (a fee that would be approximately $200). The purchaser’s lawyer was therefore not concerned about the amendment because he assumed it related to development fees, and the purchaser had agreed to take it upon himself to undertake any inquiries relating to the development aspects of the property. The Court of Appeal accepted the trial judge’s finding that though the amendment was poorly drafted, if considered in light of the contextual factors in the transaction it should have been sufficient to put the purchaser on notice that inquiries needed to be made regarding the 0.3 m reserve and its implications for access. 

The title search conducted by the purchaser’s solicitor shortly before closing also revealed the existence of the 0.3 m reserve in favour of the municipality and the restrictive covenant. The Court found that there was a pointed reference to the cost recovery agreement in the restrictive covenant, a copy of which was contained in the search report.

Liability of the purchaser’s lawyer. The trial judge found that the purchaser’s lawyer did not fulfill his duty to the purchaser to thoroughly investigate title. Specifically, he failed to make any inquiries of the municipality concerning its cost recovery requirements for lifting the 0.3 m reserve to ensure his client’s access to the property, and he failed to ensure that there were clear lines of responsibility drawn as between the law firm and the client regarding the legal and the development aspects of the transaction. A restrictive covenant registered on a 0.3 m reserve is a “red flag” and merits investigation.

A “bright line” between the roles of solicitor and client in the real estate transaction must be established by the solicitor. The agreement of purchase and sale provided that the agreement was conditional upon the purchaser satisfying itself with regard to ingress and egress to the property. The Court held that matters of ingress and egress fall within the purview of the lawyer’s responsibilities, as they are legal issues affecting whether the vendor can convey a good and marketable title. For that reason, they are not normally matters that are delegated to the client, especially without a clear delineation of responsibilities by the lawyer and a corresponding acceptance of those responsibilities by the client, and therefore the onus was on the purchaser’s solicitor to search the abutting lands to confirm the presence of legal road access to the property.

Liability of the Vendors. The Court held that the vendors had no obligation to do anything further to disclose the existence of the cost recovery clause. The clause could not be said to be an “encumbrance” and therefore was not required to be registered on title or disclosed to the purchaser as an unregistered encumbrance. Failure by the vendors to disclose the cost recovery clause did not constitute fraudulent misrepresentation, fraud or bad faith and therefore the purchaser was not shielded from the principle of caveat emptor. The Court held that the clause was reasonably discoverable by the purchasers and the payment requirement would have been revealed had the purchaser’s solicitor made the necessary inquiries.

Tony Fleming*
Posted May 21, 2014 Category: Businesses

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