Fraudulent Misrepresentations in Real Estate Transactions: The Truth Hurts, But Lies Kill Contracts

, ,

Understanding Fraudulent Misrepresentations in Real Estate Contracts

A recent decision out of Ontario (1000425140 Ontario Inc. v 1000176653 Ontario Inc., 2023 ONSC 6688) illustrates how fraudulent misrepresentations in real estate transactions can lead to the rescission of the contract. The case involved Aiden Pleterski, the self-described “Crypto King”, and NBA basketball star, Shai Gilgeous-Alexander. The defendants fraudulently misrepresented to the plaintiff, Gilgeous-Alexander, that the luxury home was private and secure, and omitted to disclose the ongoing safety risk of defrauded investors attending the property and threateningly demanding to know where Mr. Pleterski was. There was ample evidence to support the ongoing safety risk, including Mr. Pleterski being kidnapped, held hostage and physically harmed by people he had defrauded. The Court found that the defendants knew of the safety risk at the property. The Court held that the safety concerns of the plaintiff were legitimate and not simply “sensitivities or superstitions.”

The defendants argued that they were shielded from liability by the “buyer beware” doctrine and argued that they did not make any fraudulent misrepresentations. However, the Court held that rescission of the contract was the appropriate remedy in this case, putting the parties back to their original positions.

What is a Fraudulent Misrepresentation?

A fraudulent misrepresentation occurs where a representation of fact is made without any belief in its truth, with the intent that the person to whom it is made shall act upon it and actually causing that person to act upon it. A fraudulent misrepresentation may be a direct lie or a significant omission, also known as a half-truth. Generally, an executed contract for the sale of land can only be rescinded if fraud is present.

What is the “Buyer Beware” Doctrine?

The “buyer beware”, or caveat emptor doctrine operates to protect sellers of land by holding buyers responsible for defects that would be discoverable upon a reasonable inspection. Simply put, a seller is not responsible for everything that could potentially impact a property, but they may be responsible where they knew of, or ought to have known of the presence of the defect and failed to disclose it to the purchaser. As such, fraudulent misrepresentations are one exception to the doctrine. A seller who makes a fraudulent misrepresentation cannot rely on caveat emptor to shield themselves from liability.

Could this Outcome Occur in British Columbia?

Had this case occurred in British Columbia, it is possible that the outcome would be the same. However, it would require exceptional facts. In a case out of the Court of Appeal for British Columbia (Wang v Shao, 2019 BCCA 130), the seller’s omission about a murder on the property was not found to be a fraudulent misrepresentation, and the buyer was not entitled to rescission. In another case out of BC (Karner v Kuhnke, 2021 BCSC 1942), a couple selling a home failed to disclose a geotechnical report identifying a dangerous rock wall behind the house requiring costly remediation work. The sellers only disclosed that some rocks had fallen onto the deck but did not disclose the full extent of the risk. By intentionally revealing only parts of the truth, the buyers were led to believe that the rock wall was not an issue. The Court found that the half-truths told by the sellers regarding the rock wall amounted to a fraudulent misrepresentation. The sellers were liable for the tort of deceit. The plaintiff buyers in this case did not seek rescission, however, rescission of the contract may have been an alternative remedy had they not wanted to keep the property.

If you think you’ve been a victim of a fraudulent real estate transaction, book a consultation with Nanaimo’s best team of legal experts in real estate law and litigation.