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T H E C A N A D I A N
HOME INSPECTOR
COURTROOM CORNER
The paperwork that comes with many real estate deals says the terms of
the sale are “conditional on lawyer approval.”
This clause confuses buyers, sellers and real estate agents and rightly so.
What is the lawyer supposed to be approving? The price? Some particular
part of the contract? Does the phrase give someone the right to walk away
if the lawyer does not find anything really wrong with it?
The law says that every condition must be exercised in good faith. You can’t
just say “I changed my mind” and walk away from a deal. But in practice, it
is not so easy to understand, as we see in the following two cases.
On April 2, 2006 Flora and Mario Rizzutto received an offer for their Edmon-
ton home from Hassan and Mona Rahall. It had a condition that it was
“subject to seller’s lawyer’s approval.” The Rizzuttos had until April 10 to
review this offer with their lawyer.
On April 7, the Rizzuttos told the buyers that they would accept their offer,
but on April 10, the Rizzuto’s lawyer told the Rahalls the deal was off.
Apparently the sellers were building a new house and they were worried it
might not be finished at the time the sale on their old home was scheduled
to close. This concern was never raised with the Rahalls.
The main issue was whether the Rizzuttos even asked their lawyer to
approve the contract. The Rizzuttos claimed that they did and that they did
not need to reveal what they discussed with their lawyer because these
conversations were protected by lawyer-client privilege.
The Rahalls sued and a judge concluded the Rizzuttos did not act in good
faith and demonstrated no reason why their lawyer might not approve of
their contract. It was clearly not enough that the sellers suddenly changed
their mind because of a concern that their new house might not be finished
in time.
Here’s what the judge said: The term “subject to lawyer’s approval” is not
an all-encompassing condition. The Rizzuttos did not act in good faith by
cancelling the deal and could not use the late closure of their new house as
an excuse if it was not shared with the Rahalls.
A Manitoba case that went to court in 2010 had a different outcome. In
this situation, Sheila and Robert Morrow agreed to sell some land and the
agreement was “subject to seller lawyer approval.” They changed their
minds and told their lawyer to say he did not approve the deal. It appeared
the lawyer in fact found no problem with the agreement, but the Morrows
viewed the condition as allowing them an escape hatch.
In this case the judge decided that the sellers could rely on the condition
to get out of the deal. He noted that the facts demonstrated that the sellers
had only one hour to make up their minds whether to accept a $3 million
deal, received no professional representation prior to signing the agree-
ment, were not trying to cancel the deal just to accept a higher offer and
did take the time to meet with their lawyer. As such, he concluded that they
could rely on the condition to get out of the deal.
The moral of the story is that buyers and sellers need to understand that all
conditions must be exercised in good faith and that judges will look at the
particular circumstances of every case before making any decision.
Facts matter.
For example, if your deal is conditional on financing, you have to at least
apply for financing and get turned down or receive unacceptable terms
before you can cancel your deal. If your deal is conditional on a home
inspection, you have to at least have the home inspected and then not be
satisfied with the results. It is the same with a lawyer review condition. You
need to go to the lawyer and receive advice about all aspects of the contract
and then make up your mind.
If you want to a limit lawyer’s advice to certain clauses in the agreement,
then you will need to say so. If the clause is left too wide, then more latitude
will be given to the lawyer.
The irony is that to properly draft a subject to lawyer clause, you need a
lawyer. But if you had a lawyer advising you, you wouldn’t need the clause
in the first place. Go figure. Lawyers always make things too complicated.
Mark Weisleder is a lawyer, author and speaker to the real estate industry.
Email Mark at
They Walked from House Deal and Were Sued
By Mark Weisleder |
Moneyville.ca
| November 18, 2011