Executive Summary: Key Legal and Evidentiary Issues

• Fiesta Homes Ltd (seller) sought partial summary judgment to have the real estate brokerage pay the deposit of $109,250.00 to the seller on the basis that R & L Investments Inc (buyer) failed to close the transaction for a four-unit complex.

• R & L Investments alleged the seller represented that the property was suitable for CMHC financing, that this representation was false, and that it constituted negligent and/or fraudulent misrepresentation.

• An Entire Agreement Clause in section 15.1 of the contract was invoked by the seller to bar consideration of the misrepresentation allegation, but the Court found that such a clause will not protect a party that induced entry into the contract by a fraudulent misrepresentation.

• Cross-examination revealed the seller's representative was aware the property did not meet CMHC MLI Select Program eligibility requirements yet relied on a broker's claim of having "found a way around it."

• Contradictory communications from the seller's representative were noted by the Court — his affidavit stated he disclosed unmet CMHC requirements to the buyer's agent, while a text message from him told the buyer's agent that CMHC had not finalized those requirements.

• The Court was not prepared to conclude that the alleged misrepresentation was not made recklessly, finding it possible that it could amount to a fraudulent misrepresentation.

The sale of a four-unit complex and the failed closing

Fiesta Homes Ltd, the plaintiff and seller, entered into a residential purchase contract with R & L Investments Inc, the defendant and purchaser, for the sale of a four-unit complex. The contract included a deposit of $109,250.00 held by the real estate brokerage. The transaction, however, never closed, prompting Fiesta Homes to apply before the Court of King's Bench of Alberta for partial summary judgment, seeking to have the real estate brokerage pay the deposit to the seller on the basis that the defendant failed to close the transaction and, pursuant to the contract, the deposit was to be forfeited to the seller.

The buyer's allegations of misrepresentation regarding CMHC financing

R & L Investments opposed the application by asserting that the contract was entered into based on the seller's representation that the property was suitable for CMHC financing. The buyer claimed that it entered into the contract relying upon the truth of this representation, that the representation was false, and that the seller made the representation knowing it was false or recklessly with the intention that the buyer would act upon it. R & L Investments sought rescission of the contract on the basis of the plaintiff's negligent and/or fraudulent misrepresentation. The defendant also filed an Amended Statement of Defense and issued third-party proceedings against the real estate brokerage and mortgage brokerage that assisted the defendant with respect to the transaction.

The Entire Agreement Clause and its limitations

Fiesta Homes argued that the Court did not need to consider the misrepresentation allegation because of the Entire Agreement Clause found in section 15.1 of the contract. That clause provided that the contract was the entire agreement between the parties and that, unless expressly made part of the contract in writing, verbal or written collateral or side agreements, representations, or warranties made by either the seller or buyer, or their brokerage or agent, had not and would not be relied on and were not part of the contract. It further stated that any pre-contractual representations or warranties, howsoever made, that induced either party into making the contract were of no legal force or effect. The Court, however, relied on the precedent set in 1234389 Alberta Ltd v 606935 Alberta Ltd, 2020 ABQB 28, which involved a sale of land where environmental contamination had not been disclosed. In that case, the seller was found liable for fraudulent misrepresentation, but her realtors were protected from the purchaser's claim for negligent misrepresentation by the entire agreement clause. The Court drew from this precedent the principle that an entire agreement clause will not protect a party that has induced entry into the contract by a fraudulent misrepresentation.

Evidence of the seller's knowledge and contradictory communications

During cross-examination on affidavit, the seller's representative, Chintan Dipakbhai Patel, testified that he was aware of the eligibility requirements under the CMHC MLI Select Program — specifically the need for separate water meters and common access to mechanical rooms — which the property did not have. Mr. Patel stated that the plaintiff's broker, Keith Shack, had advised him that he had found a way around it. The Court further noted a contradiction in Mr. Patel's communication to the buyer's real estate agent: in his affidavit, Mr. Patel stated that he disclosed to the buyer's real estate agent that the CMHC MLI Select Program had requirements that the property did not meet, yet in a text to the buyer's real estate agent, Mr. Patel told the agent that CMHC had not finalized these requirements. The Court also expressed concern that many questions of Mr. Patel during cross-examination were refused by his counsel on the basis that the Entire Agreement Clause made them irrelevant — a position the Court disagreed with, noting that most of those questions went to the state of knowledge and/or belief of Mr. Patel with respect to CMHC's requirements. The Court stated that the inquiry into what Mr. Patel knew and communicated about the CMHC MLI Select Program is relevant to the fraudulent misrepresentation issue before the Court.

The Court's ruling and outcome

Applications Judge B.W. Summers dismissed Fiesta Homes Ltd's application for partial summary judgment. The Court concluded that, on the record before it, it was not prepared to conclude that the plaintiff's alleged misrepresentation — that the property was suitable for CMHC financing — was not made recklessly, and that it is possible the alleged misrepresentation could amount to a fraudulent misrepresentation, applying the test established in Stack v Hildebrand, 2010 ABCA 108, which confirmed that recklessness may amount to fraudulent misrepresentation. As a result, the plaintiff's request for the real estate brokerage to release the $109,250.00 deposit was denied. R & L Investments Inc was the successful party on this application. The Court directed that if the parties cannot agree on costs, an application may be made before the Court in morning chambers within 30 days of the date of the Memorandum of Decision. No final monetary award on the underlying claims was determined at this stage, as the decision addressed only the interlocutory summary judgment application.