Written by: Krystin Kempton, Associate
A recent case in the British Columbia Supreme Court allowed a buyer to back out of a contract to buy a $6.5 million house in West Vancouver based on a standard contract clause dealing with permitted encumbrances.
The contract stated that the land would be transferred “free and clear of all encumbrances” except for “restrictive covenants and rights of way in favour of utilities and public authorities.” Title to the property contained an old restrictive covenant that imposed restrictions on the use of the property and alterations to the property. The restrictive covenant was in favour of a developer.
The seller was not able to obtain a release of the restrictive covenant and the buyer refused to close. The seller sued the buyer for the $300,000 deposit. The seller argued that the buyer was aware of the restrictive covenant and approved a title search of the property, and therefore should not be able to back out on that basis.
The court ruled in favour of the buyer. The buyer was allowed to rely on a literal reading of the contract which did not include the restrictive covenant as a permitted encumbrance since it was not in favour of a utility or public authority.
As a seller, it is important to carefully draft purchase and sale agreements to set out every encumbrance which will remain on title following closing.