LAWPRO helps avert havoc for Ontario real estate bar

Over the past year, LAWPRO was instrumental in obtaining four Court judgments which averted havoc for the Ontario real estate bar. Three judgments were from the Ontario Court of Appeal; the fourth was from the Supreme Court of Canada. Had LAWPRO not been successful, real estate practitioners would have faced major headaches in their practices, not to mention a strong likelihood of practice claims.

Two cases that redefined the lawyers' retainer
The judgment of Gotlib, J. in Wong v. 407527 Ontario Ltd., (1996), 1 R.P.R. (3d) 245 was the subject of considerable consternation.

In this precedent-setting case, the defendant solicitor was retained to close a purchase of a commercial property. The agreement of purchase and sale was fully executed at the time of his retainer. The agreement made no provision for security for the vendor's warranty regarding rents. After closing, the vendor defaulted on its warranty and became bankrupt. Gotlib, J. held that the solicitor was negligent in failing to attempt to negotiate security, even though the clients were keen to close the transaction, and did not ask for advice on obtaining additional security, or in improving the agreement in any way.

Cullity, J. applied the Wong judgment in Vaz-Oxlade v. Volkenstein, (1999), 22 R.P.R. (3d) 159. This time, the defendant solicitor was retained to act for the plaintiff on the purchase of a cottage. The agreement of purchase and sale had already been fully executed at the time of his retainer. It contained a warranty to the effect that the septic system was in working condition, and complied with the local health authority's requirements. The solicitor failed to make inquiries of the local health unit concerning the septic system. Had he inquired, he would have learned that no records were available. The trial judge found that the vendors' warranty was complied with. The septic system did work. Although it did not comply with modern standards, it was a "non-conforming use" in that it complied with the standards set when it was constructed many years previously. The trial judge dismissed the plaintiff's action against the vendor and the real estate agent, but held that the solicitor was liable for the plaintiff's loss of opportunity to negotiate an abatement.

The appeals
LAWPRO immediately appealed both the Wong and Vaz-Oxlade judgments. In September 1999, in a judgment reported at [1999] O.J. No. 3377, the Court of Appeal reversed the Wong judgment. Laskin, J.A. expressed the view that the trial judge was not sensitive enough to the limitation on the solicitor's retainer. Laskin, J.A. found it hard to admonish the solicitor, let alone make a finding of negligence against him, for failing to negotiate something to which his clients had no legal entitlement.

In late July, 2000, the Vaz-Oxlade appeal was heard. The Court of Appeal held that there was no basis for distinguishing Vaz-Oxlade from Wong, and allowed the solicitor's appeal.

The case: Re-defining mortgage priority
The judgment of Mossip, J. in Silaschi v. 1054473 Ontario Ltd., (1999) 20 R.P.R. (3d) 320 was a source of considerable commentary and chagrin in the real estate bar. This judgment declared that a vendor's lien for the unpaid purchase price of land had priority over a first mortgage registered against the land on closing the sale. This was true notwithstanding that the vendor obtained a second mortgage as security, that it was intended by all parties that this security stand second to the first mortgage, and that the first mortgage proceeds were intended to fund the construction of a house and thus increase the equity available to both mortgagees.

The appeal
LAWPRO successfully appealed this judgment on behalf of the first mortgagee - (2000) 48 O.R. (3d) 313. Carthy, J.A. noted the vendor's lien is a creation of equity. It would be inequitable to allow a vendor to enforce his lien against the first mortgagee in these circumstances. Their agreed priorities, as evidenced by the order of registration, would be reversed, and the business sense of the transaction skewed.

The Court gave the real estate bar the benefit of this guidance: "It must invariably be the case that a vendor's lien gives way to a first mortgage when the first and second purchase money mortgage are placed on title on closing."

The case: Upholding the sealed contract rule
A mortgage lender made a concerted effort to overturn the "sealed contract" rule in order to reach the personal assets of investors in the shell company which had given the mortgage. The investors and their solicitor had relied on the well established doctrine that a mortgage is a contract under seal, and since the investors were not parties to the mortgage, they could not be personally liable on it. When the investors were sued, they issued a third party claim against their solicitors. In the ensuing litigation, the mortgage lender relied on the fact that the "sealed contract rule" has received considerable academic and judicial criticism, and argued that the time had come to repeal it.

The appeal
This litigation was taken all the way to the Supreme Court of Canada. In late July, 2000, the Supreme Court ruled against the plaintiff mortgage lender - Friedman Equity Developments Inc. v. Final Note Limited; Robins, Appleby & Taub (T.P.), [2000] S.C.J. 37. While the "sealed contract" rule is archaic, it is not unjust or commercially inconvenient. The Court was unwilling to create uncertainty and unfairness by abolishing ex post facto a rule on which so many transactions were based.

LAWPRO's role
As the profession's liability insurer, LAWPRO's interests and obligations extend beyond providing each lawyer with the best defence possible: LAWPRO is also concerned with the far-reaching implications that potentially precedent-setting court rulings can have on the practice of law - and their related impact on claims against lawyers.

LAWPRO took these cases to appeal because it recognized that the initial judgments were potentially flawed and could wreak havoc within the real estate bar. Had LAWPRO not succeeded in these four cases, the real estate bar would have faced turmoil in matters governed by the "sealed contract rule", and in respect of priorities between first mortgages and vendor's liens. Numerous claims would have been engendered. As well, practitioners would have faced exposure for failing to attempt to improve on "firm" agreements.

A disaster prevented is better than any amount of claims payments after the fact.