Do You Understand What The “Does Not Merge On Closing” Phrase Means?

In the past several years, the expression “Does not merge on closing” has appeared in several clauses in Toronto real estate offers. The most common occurence happens in the chattels (appliances, furnace, etc) guarantee clause. Here’s how it typically reads…

“The Seller warrants and represents to the best of his knowledge and belief that the existing fixtures and chattels are now and on completion date will be in good working order and free from all liens and encumbrances. The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction, but apply only to the state of the property at completion of this transaction.”

The simple explanation of this clause is that the chattels are the responsibility of the owner to maintain (and repair if necessary) up TO the date of completion – the date the keys are exchanged.

Normally, in any offer we do for one of our buyer clients, we’ll have a clause allowing us one further visit prior to completion. We’ll usually take that visit a couple of days before closing and, during our visit, turn on all the appliances to verify that they are still working.

Make sure your offer has the "Does Not Merge On Closing" clause very concise

Once the new owner is in possession of the premises and let’s say the washing machine breaks down a week later, then it is the buyer’s sole responsibility to repair it.

There was a recent court case about this topic… the Ontario Real Estate Association counsel Mervin Burgard quotes what happened…

A claim by a buyer related to the condition of a hot-tub incorporated as a collateral term or condition within the Agreement of Purchase and Sale. The offer stated that, “The seller declares the hot-tub is in good mechanical working order.” In this case neither phrase “shall survive” or “shall not survive” were there in the offer.

In fact, after closing, the buyer at his earliest opportunity determined that the hot-tub was not operable, which was known to the seller. Although the buyer was suspicious that the hot-tub was not operational at the time of inspection, there was no opportunity to check such deficiency until after closing, when the hot-tub could be filled to determine its mechanical condition. This opportunity to make such a determination must take place within a reasonable period of time after closing.

In dealing with the hot tub, he made a finding that it was a warranty which did not merge on closing. This constituted a breach by the seller of the terms relating to the hot-tub; he assessed damages against the seller to the extent of 50% and 50% against the agent and brokerage.

Although it would have been prudent to make clear that this proviso survived transfer of title, when the court examined paragraph 25 of the printed Agreement together with the intent of the buyer and the knowledge of the seller of the importance of this provision, it survived the transfer of title.

MERV’S COMMENTS…
It is surprising how often I am asked on Legal Forum about the “shall survive and not merge” clause. This case is another example of trying to determine the intentions of the parties. It is easier if you just say that it will survive – or will not. The finding of the obligation of the agent was for his failure to make it absolutely clear to the seller of his legal responsibilities regarding the hot-tub clause and the buyer’s possible right to claim damages.

So what’s the lesson learned here? Make sure your buyer agent (or listing agent if you’re selling) includes one or the other of the ‘shall’ or ‘shall not survive’ phrases to make it clear to all parties (and worse case to a judge) what’s being warrantied and what’s not. There’s no problem either way… just be concise!

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