In its recent decision, JBP Developments Ltd. v. Li, the Supreme Court of British Columbia (Court) reminded sellers of real estate and their advisers about the basic obligation to transfer clear title to the property for sale. Sellers of real estate should ensure that purchase and sale agreements are carefully drafted and include terms clearly setting out what title restrictions or encumbrances the buyer will be required to accept on closing.

In this case, the Court relieved a buyer from the obligation to close on the purchase of a property because of a restrictive covenant on title that limited what could be built on the property and imposed restrictions on alterations to, and use of, the property. The restrictive covenant was not a permitted encumbrance under the purchase and sale agreement and the seller was unable and unwilling to obtain a release of it.

Although this case involved a residential property in British Columbia, the legal principles are relevant to commercial properties across Canada.

DECISION

The parties had entered into a standard form real estate contract of purchase and sale for a C$6.5-million residential property in the British Properties, a subdivision in West Vancouver, B.C. The contract included a condition that the buyer approve title to the property. It also included the standard form clause that title would be free and clear of all encumbrances except as set out in the original Crown grant, restrictive covenants and rights-of-way in favour of utilities and public authorities, and any other exceptions to title set out in the contract. However, no specific exceptions to title were listed in the contract.

The buyer removed conditions, including its title approval condition, but before the scheduled closing date, expressed concern about the restrictive covenant remaining on title. The seller indicated it could not, and would not, obtain a release of the restrictive covenant. The buyer refused to close and the seller sued.

The Court rejected the seller’s argument that the buyer was obligated to close because it was aware of the restrictive covenant when it entered into the contract, approved a title search for the property and waived conditions. Those facts did not render the restrictive covenant a permitted encumbrance. The Court noted:

[T]here is no question or evidence to suggest [the buyer] accepted the limitations or waived her right to insist on clear title. […] Purchasers frequently buy a property encumbered but do not take title to the property subject to those encumbrances unless they have agreed to accept the encumbering charges as part of their purchase agreement. Prior knowledge of the existence of a restrictive covenant does not excuse the seller’s obligation to provide clear title.

Key to the outcome is the restrictive covenant was not in favour of a utility or a public authority, which would have fit it squarely in the general title exceptions listed in the contract.

The Court also disagreed with the seller’s position that the restrictive covenant was minor in nature and so the seller was not required to obtain a release of it under the contract. In the Court’s view, the restrictive covenant objectively had “significant and material consequences to any owner’s use and enjoyment of property” and, since it was not a permitted encumbrance, the buyer could not be forced to accept title subject to it.

CONCLUSION

This case is a cautionary tale for sellers of real estate and their advisers. The key takeaway is to set out — in the contract — what title encumbrances the buyer will be required to accept on closing. This can be done by specifically listing each encumbrance or by making reference to an attached title search. The mere delivery of a title search, even if the buyer approves it, will not obligate a buyer to take title subject to the encumbrances appearing on the title search unless those encumbrances are specifically listed in the contract as exceptions to title.