The Risk of “Knowledge” and Belief

What does it mean when the vendor of a property provides warranties about the property in the agreement of purchase and sale to the best of his “knowledge and belief”? Do such representations provide a purchaser with a right to compensation if the purchaser subsequently discovers that the condition of the property is other then as warranted by the vendor?

In a recent case in the Supreme Court of Ontario, the court was required to consider the effect of vendors warranting in an agreement of purchase and sale that to the best of their “knowledge and belief” a septic system had been constructed within the limits of the property in accordance with appropriate certificates and use permits. In addition to further provision in the agreement that such representations and warranties would survive the closing of the transaction, the vendors also provided a statutory declaration to similar effect on the closing of the transaction “conscientiously believing it to be true”. The vendors’ parents had previously obtained municipal approval for severance of an adjoining lot on condition that the septic system servicing the subject property be entirely located within its boundaries. Shortly after the closing of the transaction, however, the purchasers discovered that the septic bed servicing the property was in fact located on the adjoining severed lot. The municipality required the purchasers to relocate the septic system on their property at a cost of approximately $16, 000.

The purchasers sued the vendors for the costs of constructing their new septic system on the basis of the representations provided by the vendors in the agreement of purchase and sale and statutory declaration concerning the location of the septic bed and compliance of the septic system with appropriate certificates and use permits. In dismissing the purchasers’ claim, the court relied upon earlier judicial authority with respect to the limitation on representations qualified by “knowledge and belief”:

    “In my view, the use of the words “to the best of my knowledge and belief” did not warrant the absolute truth of the statement… but qualified the statement by the use of those words. I find that the warranty and representation made by (the vendor) was reasonably fair and truthful to the best of his knowledge and belief, and therefore not a breach that would justify the defendant to refuse to close the transaction or to rescind the contract.”

Similarly, in the case under consideration, the court held:

    “In determining this issue, I am satisfied that the defendants, in signing the warranty clause in the offer, honestly believed in the truth of the statements they made.”

    “(The defendant) testified that he remembered that his father told him about the need to put a septic bed on the retained lot, and that he saw a back hoe in the backyard in 1983. Although he cannot actually recall seeing what work was done, I am satisfied that he, ‘to the best of his knowledge and belief’, thought his father had completed the work required. I therefore conclude that (the vendor) was not reckless in signing since he relied on the information he had before him.”

Although the court held “that the wording in the Statutory Declaration in effect changed the effect of the warranty from one being ‘to the best of his knowledge and belief’ to one which warranted the absolute truth of the statement”, again relying on earlier judicial authority, the court held that, in the absence of fresh consideration, the representations in the Statutory Declaration were unenforceable after closing.

Provided that the vendor has an honest belief in the representation provided concerning the condition of the property, the limitation of such representations in the Agreement of Purchase and Sale by the words “knowledge and belief” may well preclude a purchaser from subsequently recovering compensation where the condition of the property is other than as represented. Purchasers must ensure either that such representations are not qualified by the vendors’ “knowledge and belief” or they must exercise due diligence to satisfy themselves with respect to the condition of the property before purchase.

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