In a recent Ontario case, a buyer learned of the importance of “entire agreement clauses” after the seller was granted re-possession of a coin laundry operation in a failed business sale.
Seller Puts Coin Laundry Business Up for Sale
The seller owned and operated a coin laundry business in Brampton beginning in 2017. The laundry also offered wash and fold and dry-cleaning services.
In February 2019, the seller decided to sell his business. He arranged for a real estate agent to list the laundry business for sale on the Multiple Listing Services (“MLS”).
Buyer Purchases Coin Laundry Business
In April of 2019, the buyer searched for a small retail business to purchase to generate income for his family, for which he had approximately $100,000 to invest. He had no prior experience owning or operating a business.
In May of 2019, the buyer read about the seller’s business being for sale through an MLS search. The purchase price was $349,000.
The buyer claimed that, at their first meeting, the seller told him that the coin laundry business was profitable and generated $12,000 per month in gross income. Based on these representations, the buyer offered to purchase the business for $290,000.
Entire Agreement Clauses Included in Purchase Agreement
On May 16, 2019, the parties signed a conditional Agreement of Purchase and Sale (“APS”) for the agreed upon purchase price, with a deposit of $20,000. The APS did not list the business’ income, but contained a provision allowing the buyer to independently verify the business’ income, which he did not do. In addition, the APS contained two “entire agreement” clauses. Entire agreement clauses mean that only the representations made in the agreement can be relied upon, to the exclusion of any other representations made in the course of the negotiations regarding the deal.
Subsequently, the buyer was notable to obtain financing to complete the purchase of the business. The listing broker therefore advised the buyer that a vendor take-back mortgage (“VTB”) could be used to complete the transaction, to which the buyer agreed. As such, the buyer agreed to pay $100,000, and there would be VTB for the remaining $190,000, repayable over four years with interest, with monthly payments of $4,540. A missed or late payment would entitle the seller to initiate enforcement proceedings without notice and the business would be transferred back to the seller.
Parties Sue Each Other Over VTB and Business Income Representations
Following the close of the sale of the business, the monthly income was significantly less than the $12,000 that the buyer had believed. In fact, from August of 2019 to March of 2021, the gross monthly income generated from the coin laundry was only $3,557.
Thus, after the second month, the buyer could no longer afford to make the VTB payments and, in the third month, his rent cheque did not clear. He had to use his personal line of credit to cover business expenses.
The seller then commenced an action against the buyer to, among other things, enforce the VTB and to regain possession of the coin laundry business.
In response, the buyer counterclaimed alleging fraudulent and/or negligent misrepresentation, as well as breach of contract. The buyer contended that the seller had negligently or fraudulently misrepresented the income of the business.
Court Rules Against Buyer Based on Entire Agreement Clauses
The court looked at the APS to resolve the buyer’s claim. It noted that the APS contained two entire agreement clauses. The court then explained:
“To the extent there is a dispute about whether [the seller] made a representation to [the buyer] at their first meeting about the income of the business, the [seller] relies upon the two “entire agreement” clauses in the APS. They confirm there is no representation affecting this Agreement other than as expressed in the Agreement itself. They further rely on the several opportunities that the defendants had to conduct their own due diligence, to exercise conditions to cancel the APS, to consult a lawyer, real estate agent or accountant, or to demand greater financial disclosure during the negotiations and prior to closing.”
As such, the court ruled that the buyer was not entitled to claim misrepresentation because the entire agreement clauses prevented him from relying on any representations that were not included in the written APS. Thus, to the extent that the seller may have misrepresented the laundry business’ income, he could not make a claim based on that statement.
In addition, the court observed:
“There was also evidence submitted which could have legitimately explained why the higher $12,000 monthly income was earned prior to the sale. Notably, [the seller]’s family (his son and wife) were operating and attending to the business each day. In contract, the [buyer] did not devote equal care to the business which could explain the difference in revenue. There are other variables that could legitimately explain any reduced income, other than a negligent misrepresentation.”
In the result, the court dismissed the buyer’s claim of misrepresentation and granted the seller’s motion for summary judgment to enforce the VTB and regain possession of the laundry business.
Real estate transactions represent some of the largest financial transactions in the life of any individual or company. Whether you are a first-time homebuyer or a large corporation acquiring a new space to grow your business, it is important to retain a law firm with the experience and skill necessary to ensure your interests are protected and the transaction closes without issue.
At Bader Law in Mississauga, our real estate lawyers have been providing excellent service to individuals, families, and businesses throughout the Greater Toronto Area for over a decade. We can assist on any real estate transaction, from a simple sale or purchase to a complex commercial acquisition. Our real estate lawyers, in conjunction with highly skilled and trusted real estate law clerk Renella Seelochan, have considerable experience in a wide range of real estate matters. From beginning to end, we will oversee your transaction with an eye to mitigating your risk and protecting your significant financial investment.
The business lawyers at Bader Law have been establishing trusted relationships with business owners and entrepreneurs in the Mississauga community for over a decade. We work with each client to develop an effective strategy focused on their specific needs and will create custom agreements designed to avoid conflict and mitigate risk. When conflicts do arise, we represent clients in a variety of issues and work to find effective and practical resolutions in every situation. To discuss your needs with a skilled lawyer, contact us online or at (289) 652-9092.