By Brian Madigan LL.B.

By Brian Madigan LL.B.

The Zadegan and Zadegan matter is a very unusual case involving the use of a Seller Property Information Statement. Actually, the SPIS formed part of the evidence in a contempt of court matter in Superior Court of Justice (Family Division) before Justice Mackinnon in Ottawa in October 2003.

Briefly, the Zadegans were involved in a series of legal proceedings that arose out of the breakup of their marriage. Issues of child support, the division of net family property and the sale of the family home were brought before the Court and resulted in a number of Court Orders.

The Court directed that the family home be sold. Mrs. Zadegan occupied the house with the children and she was basically opposed to the sale. It appeared that she did everything in her power to frustrate the potential sale.

She refused to appoint a real estate agent, but finally did so when threatened with another court application; she refused signs in the neighbourhood, she refused showings unless they were very convenient to her schedule. All in all she was quite uncooperative.

The matter came on for hearing to determine whether or not she was in contempt of Court, for it was the Court which had ordered the sale of the house. This was not simply a request by her husband.

Mrs. Zadegan took the position that the property was unsaleable. There were leaks in the basement which would cost $20,000 to repair and she didn’t have the money to do those repairs. She took the property off the market and failed to lower the price into the range that had been established in the proceedings. The failure to sell suited her own convenience since she continued to occupy the premises in the meantime. The more she could do to thwart the sale the better.

Obviously, in determining whether she was in contempt of Court, her credibility and her motivation were factors that were taken into consideration.

Court Review

Here is the review by the Court of the execution of the Seller Property Information Statement signed by Mrs. Zadegan:

“[39] Exhibit 13 is the Ontario Real Estate Association Seller Property Information Statement that was completed and signed by Mrs. Zadegan on 1 November 2002 with respect to 1667 Marronier Court. The instructions state that the answers must be complete and accurate for the purpose of establishing that correct information is being provided to buyers. In completing the form, Mrs. Zadegan noted two problems with flooding in the basement: one caused by an outside pipe rupturing, which was repaired in December 2001 by adding a second sump pump; and, the second caused by the float in the sump pump being burnt and replaced on 28 October 2002.

[40] In cross-examination, it was suggested to her that this information was quite different from that set out in her affidavit filed in the present proceedings. She was asked these questions and gave these answers:

Q. Okay, so would you agree with me that by the time you wrote this on November 1st, 2002, what happened was:
1) a ruptured outside pipe and
2) a burnt sump pump.
A. These were two occasions that happened, yes.
Q. Were there more?
A. And there were much more.
Q. There were much more?
A. Yeah, the builder said to me if we write that down…
Q. I don’t want to know what the builder said to you.
A. Okay.
Q. That’s hearsay.
A. Okay, I tell you that if I put everything down there, I could not sell the house at that price. I didn’t mention all of them, I just said this and I thought the problem was solved but it’s not solved.
. . .
Q. You just admitted that this document may not be quite true.
A. There was a small amount of water there, I wasn’t going to tell people that this house has problems, not to get the fair amount of price for it.

[41] Thus, there are many contradictions in Mrs. Zadegan’s evidence with respect to the water problem in the basement. These contradictions affect her credibility.”

Significance of SPIS

Please note that Mrs. Zadegan said about the SPIS: “….I wasn’t going to tell people that this house has problems, not to get the fair amount of price for it.” Clearly, she lied, and she was prepared to lie in order to get her way.

Court Decision

As you probably can imagine, the trial Judge concluded that she was in contempt of Court.

COMMENT:

This is a rather new and novel use of the SPIS. If you decide to make false statements, it is not only the purchaser who may sue you. These same false statements can effect your credibility in other legal proceedings. Basically, it’s just the same as if the statements were sworn under oath. While, there was no criminal charge of perjury, there was a finding of contempt of Court in a civil matter, which still can result in sentencing and confinement.

This raises a new level of obligations for real estate agents. You may have to point out risks associated with the completion of the SPIS that go beyond potential liability to the prospective purchaser.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

The Macdonald and Robson matter was an application in the Superior Court of Justice of Ontario for an order rescinding an agreement of purchase and sale.

The purchaser Mr. Macdonald had submitted an offer to acquire certain property owned by the vendor Robson. The transaction was to close on 28 April 2008 and the matter proceeded to Court 3 days before closing.

The property comprised 2 acres of rather picturesque property backing onto conservation lands in Flamborough, Ontario.

As it turned out, there was an easement in favour of the Township over one half of one acre or 25% of the property.

The vendor had completed a Seller Property Information Statement (SPIS) indicating:

“in response to a question inquiring whether there were any easements, the answer given was “unknown, on survey”.

In another question asking if the survey showed the location of all easements, the response was “yes, written location of sunroom”.

A survey was produced ……, but it made no reference to any easements.”

The motions Court Judge said:

“There was no suggestion that the vendor’s were aware of the existence of the easement or that any misrepresentation was made. Rather, the vendor’s argument before me was that the existence of the easement did not materially affect the purchaser’s use of the property, principally because there are other areas on the property where Mr. Macdonald would be permitted to build his drive shed and other structures. The respondent relies on the decision of Stefanovska v. Kok reflex, (1990), 73 O.R. (2nd) 368, arguing that Ms. Robson, the vendor can convey substantially what Mr. Macdonald contracted to get.

Justice Forestell in Ridgely v. Nielson, [2007] O.J. No. 1699, noted that there are four factors to be considered in determining whether an easement is material:

1) the location of it;

2) the size of the easement;

3) the point of access; and

4) the owner’s enjoyment of the property.”

Consequently, the Court determined that the purchaser was entitled to rescind the agreement.

COMMENT:

Although there was a SPIS completed in this case and although it was incorrect, the decision of the motions Court Judge was made on the basis of contract alone.

In all likelihood, should the matter of misrepresentation have been made an issue, then the Court would probably have directed the trial of an issue. The important matter to bear in mind in this case, is the issue of costs. Such a proceeding would have been substantially more costly than an application in motions Court. In this case, the Judge saved both litigants some expense, by disposing of the matter summarily.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

Mr. and Mrs. Whaley purchased a small house from the vendors Mr. and Mrs. Dennis in 2002 . The property was located in the Niagara Peninsula and was intended to be the retirement home of the purchasers.

The case of Whaley vs. Dennis came on for trial in the Superior Court of Justice in October 2005 before the Honourable Mr. Justice Quinn. A matters in issue were false statements made pursuant to the Seller property Information Statement.

Mr. and Mrs. Dennis purchased this property in 2002. They decided to list the property for sale and in that connection executed a Seller Property Information Statement.

Earlier, in the Summer of 2001, Mr. Dennis obtained two quotations for work to the septic system. He retained one company to dig a trench but not complete the connection. He decided to do this himself, because otherwise he would require a permit. Also, Mr. Dennis constructed some drywall in the basement.

Specifically, they made certain representations which are the subject of this lawsuit:

“Are you aware of any problems with the septic system?” Answer, “Unknown.”

“Are you aware of any moisture and/or water problems in the basement or crawl space?” Answer, “No.”

An agreement of purchase and sale was executed and was conditional upon both a home inspection report and a septic inspection satisfactory to the purchasers.

The trial Judge stated:

“The plaintiffs waived the conditions in the agreement of purchase and sale regarding both the home inspection and the septic tank inspection. I was never told why. In respect of the latter, which had not yet been carried out, it certainly was an unwise move and probably prompted by the realtor representing the plaintiffs. I doubt whether the plaintiffs understood what they were doing. However, by executing the waiver, I conclude that the plaintiffs cannot be said to have relied on the septic-system inspection in deciding to complete their purchase of the Property.”

The Spring of 2003 was the first wet season encountered by the plaintiffs at the Property. They began experiencing a strong odour of sewage. In addition, the basement flooded. The leakage (or most of it, at least) seemed to originate from the front side of the house as opposed to the rear where the septic tank was situated. It was the testimony of Mr. Dennis that, while he and his wife owned the property, they did not experience moisture in the basement.

During the exterior remedial work subsequently carried out by Robson (the purchasers’ contractor) a crack was discovered in the front basement wall about one-quarter inch in width. Robson testified that the crack seemed to be an old one: it was discoloured and had a growth of moss. When Mr. and Mrs. Dennis purchased the Property they removed the existing drywall in the basement and replaced it with new drywall. The crack would have been visible to them then and they concealed it with the new drywall. It is also curious that, while they occupied the property, Mr. and Mrs. Dennis did not place coverings of any kind on the basement floor and they did not use the basement as a living area. In a home having less than 700 square feet of living space, would they not occupy the basement, if it were habitable?

The seriousness of the sewage-system failure is abundantly clear from the fact that, following the inspection by Murray on May 2nd, Regional Niagara Public Health Department issued an order to the plaintiffs regarding sewage escaping “from your sewage system or septic tank onto the ground or into a water source.”

The relevant parts of the order state: “….immediately stop the discharge of sewage escaping onto the surface of the ground.”

Discussion by the Court

“patent and latent defects

[19] There can be no question that the problems with the septic system and the basement are defects. But, are they patent or latent defects?

[20] A latent defect is “some fault which one would not expect an ordinary purchaser to discover during a routine inspection”

[21] A patent defect is “something which an unsophisticated purchaser can discover on cursory inspection”

[22] Whether a purchaser should be taken to have been aware of a defect involves the application of an objective test.

[23] The defect in the septic system at bar is a latent defect. If it was not noticed by [the septic system inspector], it certainly is not something the plaintiffs would be expected to discover during a routine inspection of the Property.

[24] Where a vendor actively conceals a latent defect he or she can take no protection from the doctrine of caveat emptor (“let the buyer beware”) and the purchaser is entitled to sue for rescission or damages. In other words, a latent defect known to a vendor must be disclosed to a purchaser.

[25] On behalf of Mr. and Mrs. Dennis, it is argued that the answer “Unknown” recorded on the Seller Property Information Statement should have put the plaintiffs, or at least their realtor, on notice to the possibility of septic-system problems. I respectfully disagree. At the time, had the plaintiffs inquired of Mr. and Mrs. Dennis, it is likely (based on the testimony of Mr. Dennis) that the conversation would have gone something like this:

Plaintiffs: We notice that you checked ‘Unknown’ in response to the question ‘Are you aware of any problems with the septic system?’ What does that mean?

Mr. and Mrs. Dennis: Well, the septic system is very old, 40 years old in fact, and we do not know what condition it is in.

Plaintiffs: But, you were not asked to describe the condition of the system. The question relates to ‘problems with the septic system.’ So, will you say whether, during the time that you have lived on the Property, you experienced any problems with the septic system? You would know that, correct?

Mr. and Mrs. Dennis: Yes, we would. And, during the time that we have lived here, we have not had any problems with the septic system.

Therefore, it is somewhat Machiavellian to suggest that the plaintiffs should have used the answer “Unknown” as a basis for further inquiry of Mr. and Mrs. Dennis.

[26] As I am persuaded by the evidence of Giroux and Zwierschke that Mr. Dennis (and, undoubtedly, Mrs. Dennis, as well) knew the septic system was defective, I easily find that those defendants actively concealed the existence of the defect by not bringing it to the attention of the plaintiffs. Therefore, Mr. and Mrs. Dennis are liable to the plaintiffs for their septic-system damages.

[27] Regarding the basement leak, I also find that it would not have been discoverable by the plaintiffs during a routine inspection of the Property. It was actively concealed behind the drywall installed by Mr. and Mrs. Dennis.”

Consequently, the trial judge found in favour of the purchasers and awarded damages against in the vendors for misrepresentation.

COMMENT:

This is a case involving actual concealment of known problems. To say “no” to the septic system issues when the vendor had sought to repair the system does not make any sense. Further to say “unknown” when the vendors concealed the water leak by drywall also causes problems. The statement “unknown” is a further act of concealment.

A substantial difficulty for vendors and septic systems is often that the same contractors will be called by the purchasers later on to repair a problem. Invariably, they will say, “we’ve been here before….. there were all kinds of problems…. the vendors decided it was too expensive to repair”.

That kind of response is very difficult to disprove and offers the very best evidence for a plaintiff. When there is clear evidence of deliberate false statements the Court will take steps to ensure that the plaintiff is compensated.

You will note the fabricated conversation between the parties that was speculated by the Court. Obviously, if the trial Judge feels that way, about the vendors’ conduct, then they are going to be found responsible.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

The Miersma and Pembridge case was an application brought in October 2005 before the Superior Court of Justice of Ontario to determine whether a policy of insurance covered a false statement under a Seller Property Information Statement (SPIS) pursuant to an agreement of purchase and sale.

Mr. and Mrs. Pinkerton bought certain property in Picton, Ontario from Mr. and Mrs. Miersma. Pursuant to that agreement, there was a SPIS which included representations alleged to be false concerning a septic system and an underground storage tank.

The purchasers sued the vendors for false representations in the SPIS, both in contract and tort. Upon receipt of the claim, the vendors reported the matter to their insurer, Pembridge Insurance Company. The insurer took the position that the insurance policy did not cover this claim, since it was a claim in contract.

The purpose of this application was to determine whether the insurer had a “duty to defend” under the insurance policy. The actual merits of the lawsuit are not in question, just the issue of coverage under the policy.

The Court observed:

The duty of a liability insurer to defend will be triggered if, on a reasonable reading of the pleadings, they allege facts, which, if true, would require the insurer to indemnify the insured for the claim.

The mere possibility that a claim falling within the policy may succeed will suffice.

In its decision in BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 CanLII 145 (S.C.C.), [1993] 1 S.C.R. 12, the Supreme Court of Canada stated that where a given wrong prima facie supports an action in contract and in tort, the party may sue in either or both, subject to any limit the parties themselves have placed on that right by their contract.

The statement of claim:

The particulars of the negligence pleaded against the defendants are as follows:

(a) they represented that they did not know of any underground fuel oil storage tank when they had themselves disconnected the tank some years previously and left it in the ground;

(b) they represented that the septic system was constructed in conformity with applicable laws and was in good working order when they knew or ought to have known that there was an unlawful effluent line allowing leachate to move into the Bay of Quinte;

(c) they represented that all environmental laws and regulations had been complied with when they knew or ought to have known that they had not complied with the shutdown and removal requirements relating to the underground fuel oil storage tank in accordance with the provisions of the Technical Standards and Safety Act 2000;

(d) they represented to the best of their knowledge no hazardous condition or substance existed on the premises when they knew or ought to have known that their failure to properly decommission and remove the underground fuel oil storage tank left a hazardous condition or substance on the land.

Further, and in the alternative, the plaintiffs state that the defendants are liable for damages for breach of contract by reason of the breach of the express warranties contained in the Agreement of Purchase and Sale.

Decision of the Court

“In my view, the present case is similar to that in BG Checo, supra, where the court held that a pre-contractual representation which becomes a contractual term could found liability in negligent misrepresentation. This is the situation referred to in BG Checo where it was held that the duty in contract and the common law duty in tort are co-extensive.”

COMMENT:

This imposes an additional burden upon insurers if they are to provide insurance coverage for this type of claim. You might quickly see that general homeowners’ liability policies will soon begin to exclude coverage for this type of claim. You might be able to purchase it, but you will have to buy it and pay a premium related to its risk.

The case is important because it means that the vendor will have money to pay any judgment. Why? There’s insurance! Also, the proceedings will become somewhat more costly. Why? There’s insurance, and a professional litigant will incur greater expense. Further, a lawsuit like this is more likely. Why? There’s insurance! The first insurer pays the loss to the purchaser. It then determines whether it can sue anyone to recover. Now, it can sue the vendor for negligent statements under the SPIS. So, it initiates proceedings, and just hopes that it is not also the insurer for the vendors.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

This is another case involving the improper completion of a Property Condition Disclosure Statement and the remedies that are available afterwards.

This case was determined in the Small Claims Court of Nova Scotia in February 2007.

The Boychuks entered into an agreement of purchase and sale to acquire a residence owned and occupied by the Butlers in Dartmouth. It should be noted that Mrs. Butler was a licensed real estate agent and acted for herself and her husband in connection with the sale.

The agreement contained the following provision:

“3(b) This agreement is subject to the Seller providing to the Buyer within 24 hours of the acceptance of this offer, a current Property Condition Disclosure Statement, and that statement meeting with the Buyer’s satisfaction. The Buyer shall be deemed to be satisfied with the statement unless the Seller or the Seller’s agent is notified to the contrary, in writing, on or before (date) Jan 30/06. The Seller warrants it to be complete and current, to the best of their knowledge, as of the date of acceptance of this agreement, and further agrees to advise the Buyer of any changes that occur in the condition of the property prior to the closing date. If notice to the contrary is received, then either party shall be at liberty to terminate this contract. Once received and accepted, the Property Condition Disclosure statement shall form part of this Agreement of Purchase and Sale.”

A Property Condition Disclosure Statement dated January 8, 2006, was completed by the Sellers and was provided to the Buyers as required under the terms of the agreement.

The home had been purchased by the Sellers in July 2002. In 2003, they experienced dampness in their yard. They contacted Ralph Crowell, who is a local installer of septic fields and septic tanks. Subsequently, they contacted two other contractors. Remedial work to the septic system was undertaken in both 2003 and 2005.

The agreement and closing took place during the winter conditions of 2006 (the 30th of March), so the septic system could not be properly inspected at that time. By the summer of 2006, a contractor reported that there was a complete system failure and the septic system required replacement.

The Court looked at the issue of negligent misrepresentation. There is a five part test before a claimant will be successful:

(1) there must be a duty of care based on a “special relationship”
between the representor and the representee;

(2) the representation in question must be untrue, inaccurate, or misleading;

(3) the representor must have acted negligently in making said misrepresentations;

(4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and

(5) the reliance must have been detrimental to the representee in the sense that damages resulted.

There is a review and analysis of the facts and the law in the Judgment:

“(76) According to paragraph 3(b) of the Agreement in this case, the Property Condition Disclosure Statement forms part of same once received and accepted.

(77) Applying the five part test …. I find firstly that there is a duty of care based upon the relationship between the parties.

(78) The next issue is whether the Sellers made to the Buyers a representation that is untrue, inaccurate or misleading.

(79) The Sellers rely upon the fact that the Property Disclosure Statement contains additional comments at paragraph 11 as previously noted. In fact paragraph 11 does contain a statement that french drains had been installed around the rear of the property in the Summer of 2004 and Spring of 2005.

(80) From their perspective, however, the Buyers submit that the provisions of the Property Condition Disclosure Statement relating to the septic disposal system note no previous problems with the existing system or upgrades having been carried out to the system in the last five years. In addition, paragraph 5 of Addendum Form 101, Schedule 4, contains a specific statement that the Seller warrants “to the best of their knowledge” that the septic disposal system is in good working order and has not presented any problems during their ownership and this warranty explicitly is stated to survive the closing.

(81) On the whole, I find the statements in the Property Condition Disclosure Statement to be misleading to potential purchasers. Anne Butler is a licensed Real Estate Agent. Despite her lack of personal experience with septic waste disposal systems, she clearly was aware that the water and drainage problems they were having were related to the septic field…. The drainage repairs were undertaken by them as a means of attempting to fix the issues they were having with their septic system. No explanation was given concerning why the information about the french drains was noted under additional comments in the area of “Structural” in the Property Condition Disclosure Statement. Paragraph 6A. and B. specifically refer to structural problems, unrepaired damage or leakage in the foundation, roof or walls and make no reference to problems with the septic system.

(82) The third step of the test is to determine whether the representor acted negligently in making the representation. I do conclude that the Vendors were negligent in making such representations in the manner in which they were made. It would be expected of a Vendor in this case, and even more so where Ms. Butler is a licensed Real Estate Agent, to note the drainage repairs in the area in the Property Condition Disclosure Statement concerning “Sewage Disposal” which would alert potential purchasers to possible problems with the system, such that they would inquire further. To include this information in the area of “Structural” would imply to a potential purchaser that the repairs were undertaken to deal with a problem of leakage in the foundation, roof or walls of the house. They would not be alerted to the possible problems with the septic system which the Sellers in this case were fully aware of.

(83) I find in this case that the Sellers were at the very least careless when preparing the Property Condition Disclosure Statement by failing to connect the drainage repairs to possible problems with the septic system.

(84) ……. to place this information under the “Structural” section of the Property Condition Disclosure Statement could easily mislead a potential purchaser into believing that the aforesaid repairs concerned structural issues with the foundation, roof or walls. This was particularly important in this case as the Sellers had in fact undertaken major structural repairs, including replacement of leaking windows before listing the property for sale.

(85) In reaching my conclusions on this point, I have also taken into consideration that a failure to provide information may constitute a misrepresentation as much as a positive misstatement.

(86) The fourth step of the test is whether the Buyers in this case relied in a reasonable manner upon the negligent misrepresentation. Once again, I have no hesitation in finding that this is the case. A buyer would reasonably conclude from the way that the Property Condition Disclosure Statement was prepared that the installation of the french drains was to deal with structural issues not possible problems with the sewage disposal or septic system.

(87) Step five of the test is clearly proven as the Buyers discovered that the system had failed entirely shortly after the snow melted from the ground.”

The trial Judge allowed the purchasers’ claim for the cost of the replacement of the septic system, but reduced the amount of the damages by 50% by reason of betterment.

COMMENT:

This case again points out the difficulties with the completion of the form. Here, one of the vendors was a real estate agent and was therefore held to a higher standard than might otherwise have been the case. While there was no apparent attempt to deceive, the document was filled out carelessly.

It should be observed that in this particular case the Property Condition Disclosure Statement (PCDS) was elevated to form part of the contractual terms of the agreement itself.

The test of correctness of the answers was measured from the purchasers’ perspective. What would a normal purchaser think, given the responses? The Court did not consider whether the answers might be good responses from a technical point of view on the part of the vendors.

In this case, there were questions related to the septic system, and nothing was noted. Yet, the mere fact that disclosure was provided in another part of the document was not sufficient. It is risky and foolhardy to be vague. It is also risky and foolhardy to place the correct information in the wrong location in the document. That’s not disclosure. In fact, it might be considered to be concealment.

In this case, the Court correctly imposed liability upon the sellers because the Property Condition Disclosure Statement as a whole was misleading.

It is noteworthy that the Court did not have to go as far as to conclude that the sellers were “deceitful”, the Court simply based liability on the basis of “carelessness”.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

This was a case heard in the Supreme Court of British Columbia and it involved the Property Condition Disclosure Statement.

Briefly, the plaintiff as purchaser acquired a condominium unit for $133,000 but the unit leaks, as do others in the complex. Obviously, this problem has become well known in Vancouver. No one wants to buy, particularly with so many others available. The value has dropped to $22,000 and the purchaser, Sask faces a special assessment of $60,000 for her share of common ownership repairs.

In a nutshell, this is a mess!

Naturally, the condominium owners are suing the builder but that will take time. In this case, Sask claims that the vendors made false or negligent representations in the Property Condition Disclosure Statement (PCDS).

The trial Judge expressed the issues in the case as the following questions:

1. Did Michael Brooke and Ursula Wenzel misrepresent the condition of their condominium at the time of sale?

2. Was Shirley Sask induced to purchase the condominium by those misrepresentations?

3. What damages has Shirley Sask suffered?

The agreement of purchase and sale included several conditions including financing, perusal of the strata council minutes and the sellers’ Property Condition Disclosure Statement.

In many cases, the PCDS is made to form part of the agreement by attaching it to the agreement as a Schedule or Addendum. Here, it was simply a condition.

The sellers answered “No” to the following questions:

H. Are you aware of any structural problems with the premises or other buildings on the property?

K. Are you aware of any damage due to wind, fire, water?

M. Are you aware of any roof leakage or unrepaired damage?

The preamble to the document is worth noting, according to the trial Judge:

“THE SELLERS ARE RESPONSIBLE FOR THE ACCURACY OF THE ANSWERS ON THIS DISCLOSURE STATEMENT AND WHERE UNCERTAIN SHOULD REPLY “DO NOT KNOW”. THIS DISCLOSURE STATEMENT CONSTITUTES A REPRESENTATION UNDER ANY CONTRACT OF PURCHASE AND SALE IF SO AGREED IN WRITING BY THE SELLERS AND BUYERS.”

In addition, there is a statement that appears in the document above the seller’s signature:

“The sellers state that the above information is true, based on the sellers’ current actual knowledge as of the above date. Any important changes to this information made known to the sellers will be disclosed by sellers to buyers prior to closing. The sellers acknowledge receipt of a copy of this disclosure statement and agree that a copy may be given to prospective buyers.”

Further, just above the buyers’ signature on the same document is the following disclaimer:

“The buyers acknowledge that they have received and read a signed copy of this disclosure statement from the sellers or the sellers’ agent on the 24th day of February, 1997. The prudent buyers will use this disclosure statement as the starting point for their own inquiries. The buyers are urged to carefully inspect the property and, if desired, to have the property inspected by an inspection service of their choice.”

The Judge in analysing this case said that “The more important questions concern the extent to which the sellers represented the condition of the property and the extent to which Shirley Sask relied upon their representations.

A copy of the disclosure statement, dated February 17, 1997, was given to Shirley Sask before she signed the contract of purchase and sale on February 24th, and the sale was subject to Sask “perusing & approving” the strata council’s minutes, bylaws, and financial statements.

Sask has not proved reliance upon the disclosure statement in isolation from the strata council minutes which were provided to her at the time of sale. Sask has failed to prove that the sellers intended to mislead her in any way, particularly when the disclosure statement is read in conjunction with the strata council minutes.

It should be noted that the strata council minutes detailed the problems and expenditures of the condominium in respect to the premises.

The tort of negligent misrepresentation is now an established principle of Canadian law: Queen v. Cognos Inc. (1993), 99 D.L.R.(4th) 626 (S.C.C.). Five requirements must be met:

(1) there must be a duty of care based on a “special relationship” between the representor and the representee;

(2) the representation in question must be untrue, inaccurate, or misleading;

(3) the representor must have acted negligently in making said misrepresentation;

(4) the representee must have relied, in a reasonable manner, on the said negligent misrepresentation;

(5) the reliance must have been detrimental to the representee in the sense that damages resulted.

In this case, the first three requirements were met including negligence on the part of the sellers in making the statements.

The trial Judge stated:

“However, whether or not the sellers were negligent in purporting to confine their representations to the condition of their own unit is not, in my view, determinative of this claim. In light of their concurrent provision of minutes from strata council meetings where leakage problems were discussed, the sellers’ disclosure obligations were fulfilled in a manner that should have alerted a prudent purchaser to the need to make further inquiries.”

And further commented:

“In my view, the fourth requirement of the mentioned test in Queen v. Cognos Inc. has not been met, as I cannot conclude that Shirley Sask acted in a reasonable manner by relying upon the property condition disclosure statement without reference to the information provided in the strata council minutes. The sale was subject to a condition precedent that contemplated perusal and approval of the strata council’s minutes, bylaws and financial statements, and in complying with that condition the sellers were effectively providing Shirley Sask with the history of water leakage problems in the complex. In light of her opportunity to review those documents, Ms. Sask had the right to refuse to close the transaction as a consequence of that information, but chose not to do so.

On the whole of the evidence, it has not been proven that the sellers misrepresented the condition of unit #206, and the claim is dismissed”.

COMMENT:

So this is an interesting case. The sellers made a misrepresentation. That misrepresentation was made negligently, but the Judge concluded that all in all, the purchaser did not rely on that the document that contained the errors.

There was ample opportunity for the purchaser to find out the correct facts from the strata council minutes. As a result, there was no liability on the part of the vendors. However, rather than being saved by the signing of the Property Condition Disclosure Statement, they were in fact saved because there was a condition in the agreement permitting the purchaser to peruse the strata council minutes, and the correct information could be found there. The mere fact that the Purchaser failed to look, is her fault, and does not establish liability on the part of the vendors.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

Sometimes it’s difficult to detremine what Judges think about ordinary and customary practices in the real estate industry.

Recently, Judge Cozens offered a comment upon the use of the disclosure statement, at times in various jurisdictions referred to as:

1) Seller Property Information Statement (SPIS),

2) Property Disclosure Statement (PDS), and

3) Property Condition Statement (PCS).

This is a document that is in common usuage throughout Canada and in many States in the United States. It was intially designed to limit liability, by protecting agents and obligating sellers to tell what they knew about the property. In some jurisdictions the document is mandatory and in others it is optional.

The difficulty is that the document is oftentimes difficult to interpret. What do the questions really mean, and is the answer a sufficient response? Although intending to protect agents, now sellers are suing their own agents for improper advice, improper direction and negligent advice concerning the completion of the Form. So, while it was intended to reduce litigation, in fact, it seems to be a source of litigation.

Have a look at the comments made by Judge Cozens:

“Recommendations

[1] I would recommend that a comprehensive review be undertaken by real estate agencies and lawyers with respect to the use of the PDS….

Such a review should work towards ensuring that both sellers and buyers are made fully aware of the potential legal implications that may flow from the preparation and disclosure of the PDS.

For example, to the degree that there is any apparent or potential ambiguity in the questions in the PDS, some consideration could perhaps be given to simple wording changes that make it clear that “past” and “present” problems are to de disclosed in the PDS.

[2] I say this keeping in mind that real estate agents are not lawyers and should not be expected to provide legal advice.

The practical reality, however, is that many individuals in real estate transactions likely rely on their real estate agent for legal advice more than they should and real estate agents should be aware of this fact.

[3] While there may be a concern among real estate agents that a PDS with numerous warnings and cautions may have the effect of delaying or possibly even preventing the completion of a purchase and sale, thus potentially becoming a “deal-breaker”, any such concern is far outweighed by the potential legal issues that could arise in cases such as the one before me.”

So, all in all, this particular Judge would be quite cautious.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

By Brian Madigan LL.B.

This was a Small Claims Court decision in Toronto involving the use of the Seller Property Information Statement.

Briefly, the purchaser (Weinman) acquired a real estate property (416 St. Clement’s Ave.) in Toronto from the vendor pursuant to a standard form real estate agreement. The Offer was accepted on 30 May 2006 and the transaction closed on 4 July 2006. Eight days after closing, the basement was leaking.

The repair was expensive and the purchaser as plaintiff abandoned the claim in excess of $10,000 in order to bring the action within the jurisdiction of the Small Claims Court.

The facts related to the leakage:

• The vendors bought the property in approximately 1994.

• The basement contained a storeroom at the northern (rear) end, a laundry room and a utility room to the south.

• Part of the basement was used as a study.

• The vendors were aware that water could enter the basement at the north wall, at the north east corner and along the east wall.

• Their evidence was that this happened to a greater effect on an intermittent basis and the water drained away into a drain.

• Some months before the house was listed for sale some of the basement wall and the floor was painted.

The facts related to the Seller Property Information Statement:

• In May, 2006 in anticipation of listing the house for sale the vendors engaged James Hammond to inspect the property.

• Hammond noted: “Some staining/dampness from water penetration has been noted along foundation wall at north/east corner. Investigate to determine cause and correct as required”.

• In response to the question, “Is the property subject to flooding?” Ms. Brinkman indicated “No.”

• In response to the question, “Are you aware of any moisture/water problems?” Ms. Brinkman indicated, “Yes,” and added “Some moisture in basement.”

Inspection and Offer

• The purchaser viewed the house at an open house on May 27, 2006.

• The purchaser’s real estate agent had 26 years experience.

• An offer date was set for May 30, 2006 and there were multiple offers.

• For reasons that are completely unexplained, the purchaser’s agent did not provide plaintiffs with a copy of the SPIS.

• The SPIS was not attached as a schedule to the agreement of purchase and sale.

• The purchaser did not ask for it, even though its existence is specifically referred to in the Toronto Real Estate Board listing that had been provided to the purchaser.

The Standard Wording in the Agreement

Clause 13 of the Ontario Real Estate Association standard form listing
agreement the provides:

“INSPECTION: Buyer acknowledges having had the opportunity to inspect the property and understands that upon acceptance of this Offer there shall be a binding agreement of purchase and sale between Buyer and Seller. The Buyer Acknowledges having the opportunity to include a requirement for a property inspection report in this Agreement and agrees that except as may be specifically provided for in this Agreement, the Buyer will not be obtaining a property inspection or property inspection report regarding the property.”

The Offer

• An unconditional offer without containing an inspection condition was submitted.

• No review of the SPIS was conducted.

• The SPIS might have prompted further inquiry.

• No request was made for production of the Hammond report (which again might have been prompted by the SPIS).

The water leakage

The basement started to leak on 12 July 2006. The purchaser consulted a contractor JAGG Enterprizes who reported as follows:

“Based on my visual inspection of your residence here are my findings. There appears to be several leaking areas, efflorescence and staining was evident more towards the back half of the house. This is usually caused by deteriorating damp proofing (tar) that was applied on the exterior of the foundation walls at the time of construction. Based on the age of the house the old clay weeping tile system (if any) may be clogged or damaged. In my opinion this problem appears to have been present for quite some time……”

Analysis by the Court

• The vendor made no effort to conceal any water problems.

• The problem had been disclosed in the SPIS.

• The purchaser failed to review the SPIS.

• The purchaser could have made an offer conditional on an inspection.

• The inspection report of James Hammond makes it plain that water damage was visible, as does the quotation provided by JAGG Enterprizes.

• There were no representations made by the vendor as to the condition of the basement.

• The ignorance of the purchaser about the water leakage can be directly related to the lack of inquiry.

• The problem was a patent defect not a latent defect.

• The entry of water into the basement was detectible on ordinary inspection.

• There was no attempt on the part of the vendor to mislead the purchaser by concealing the damage or by inducing the purchaser to limit inquiries.

• The repairs have never been made.

• The actual cause of the leaks remains open to speculation.

• It is impossible to conclude that the defendants were in any better position to know about the source of the problem than would have been the purchaser.

• The purchaser is entirely incorrect in the assertion that there was any duty whatsoever on the part of the vendor to bring the water problem to the attention of the purchaser.

Consequently, the Trial Judge dismissed the purchaser’s claim for damages.

COMMENT:

This is an interesting case because the trial Judge correctly applied the law to the facts. The SPIS document was helpful to the vendor in this particular case. It was part of the disclosure and indicated that the vendor had nothing to hide. It was mentioned in the listing agreement.

There is a small problem on the part of the real estate agent. Under the Code of Ethics that have been passed as a Regulation pursuant to the Real Estate and Business Brokers Act there is a provision that deals specifically with the SPIS document:

“Seller property information statement

20. If a broker or salesperson has a seller as a client and knows that the seller has completed a written statement that is intended to provide information to buyers about the real estate that is available for acquisition, the broker or salesperson shall, unless the seller directs otherwise,

(a) disclose the existence of the statement to every buyer who expresses an interest in the real estate; and

(b) on request, make the statement available to a buyer at the earliest practicable opportunity after the request is made. O. Reg. 580/05, s. 20.”

So, the listing agent fulfilled the obligation to disclose it by noting its existence and availability on the actual listing as published on MLS. However, the buyer and the buyer’s agent failed to ask about it. There is no corresponding obligation on the part of the buyer’s agent to seek a copy of it, but there are other provisions in the Act which could easily be interpreted as an obligation to do so.

In this case, the buyer was not suing her own agent. Why? Remember that this was a multiple offer situation. This house was in a very desirable part of Toronto. The water leakage issue was a very small problem. If you wanted to buy it, you would simply overlook it and press on with an offer. To speculate that there may have been some negligence on the part of the buyer’s agent would be incorrect. The water leakage issue was never repaired? Why? It was not that big a deal!

So, the purchaser simply decided to outbid everyone else, and consider her options later. Others, who were outbid, or who requested a home inspection or some resolution to the water leakage issue didn’t get the property. So, this result is the correct result.

The completion of the SPIS was helpful to the vendor to prove that full disclosure or at least sufficient disclosure was made in the circumstances.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

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Brian Madigan LL.B.

A real estate professional, that is a brokerage, broker or sales representative is obligated to follow the Code of Ethics passed pursuant to the Real Estate and Business Brokers Act, 2002.

These obligations are imposed in order to protect the consumer. In part, they raise the standards of the real estate industry to a “professional level”.

The problem for vendors, is that such legislation is not of any direct benefit to them, and may be contrary to their own interests. Vendors may question why certain matters need to be disclosed, when such disclosure exceeds their obligations at common law.

Nevertheless, real estate professionals face a challenge trying to meet vendors’ expectations and balance their own ethical duties. It is important to note, that for these professionals, ethics is not simply a moral platitude, it’s the law.

For this article, we will look particularly at the specific obligation of the registrant concerning the seller property information statement (SPIS).

My comments appear in italics

“Real Estate and Business Brokers Act, 2002
ONTARIO REGULATION 580/05
CODE OF ETHICS
OBLIGATIONS OF REGISTRANTS

Seller property information statement

20. If a broker or salesperson has a seller as a client and knows that the seller has completed a written statement that is intended to provide information to buyers about the real estate that is available for acquisition, the broker or salesperson shall, unless the seller directs otherwise,

(a) disclose the existence of the statement to every buyer who expresses an interest in the real estate; and

The seller property information is very much at the centre of the issue of disclosure in many lawsuits.

Was the document:

1 signed

2 available

3 disclosed

4 delivered

5 made a part of a written agreement?

Did the seller otherwise direct that the document not be made available except under certain conditions, or not at all?

This provision only applies to clients. It appears not to apply to customers. You might recall that there is an obligation to be “conscientious” when it comes to both clients and customers. Also, if the seller is in fact a “client”, then the “best interests’ duty is applicable.

Are there circumstances when it might not be wise to complete the seller property information statement (SPIS), such that, it would not be in the best interest of the seller as a client.

This provision would seem to suggest that the customer may end up be treated better than the client. But, that is based solely on the premise that full disclosure of the SPIS document is in the best interests of the seller-client.

The trigger for disclosure appears to be a buyer who expresses an interest in the real estate. This doesn’t mean every singe person who walks through an open house.

Let’s look at the definition:

“buy” means acquire or seek to acquire an interest in real estate, and “buyer” has a corresponding meaning;

So, that would be an actual buyer, someone who has an agreement to acquire the property, or “seeks to acquire”. This extended definition would apply to anyone who submits an Offer, registers an Offer, or provides instructions for the preparation of an Offer.

Just what is a seller property information statement? There is a Form that has been prepared for use by the Ontario Real Estate Association (OREA). But, this reference has wider meaning. It can be any statement provided that it has been “completed” by the seller. Such a reference would then exclude any documents in the possession of the seller that were prepared by someone else, ie. title documents, and letters, approvals, reports from the municipality, prior owners, neighbours or inspectors

(b) on request, make the statement available to a buyer at the earliest practicable opportunity after the request is made.

This obligation seems quite clear. Once the registrant has indicated its existence to the buyer through the buyer’s representative, then the statement must be made available. You will see that it doesn’t say that a copy must be delivered to the buyer. It simply says that the statement must be “available”.

While delivery of a copy would be sufficient, the actual, original signed statement could be offered up for inspection. That too would constitute sufficient compliance. Also, the trigger to see, view or examine the document is the “request” made by or on behalf of the buyer.

In such circumstances, the listing sales representative or broker should make notes of two matters:

1 the disclosure of the existence of the SPIS document,

2 the request for examination of the document.

What are the obligations of the registrant concerning the due and proper completion of the SPIS document. Is the registrant to provide advice, information and an opinion about the questions?

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Brian Madigan LL.B.

A vendor may have some degree of limitation on the obligation to provide information and disclose facts about a property, but, if something goes wrong, how is the unfortunate purchaser to frame his lawsuit?

The first piece of advice he will likely receive from his lawyer is sue everybody. The reason for that, is that at the outset of the case, it may be difficult to determine who is at fault. Throw everybody into the lawsuit, and then let them out, “one by one” as the case develops, appears to be the preferred strategy for most plaintiffs.

Let’s consider a fact situation involving a faulty foundation, a dual agent, and a Seller Property Information Statement completed and provided as part of the transaction.

Potential Responsible Parties

The purchaser who unwittingly acquires the property with the faulty basement is going to consider suing the following:

• The seller
• The seller’s sales representative
• The seller’s agent (the brokerage)
• The purchaser’s own sales representative
• The purchaser’s own agent (the brokerage)
• The home inspector
• The home inspection company
• The builder
• The foundation contractor
• The consulting engineer
• The consulting engineering company
• The builder inspector
• The municipality

That’s the potential list. Now, in any given case, who is actually still around who can be sued? Also, it’s important to determine whether any of the parties carry insurance, and whether there are any limitation periods that may have expired in terms of the potential claims.

It is also important to consider that some claims will be founded in contract, and others in tort.

Contractual Claims

From the perspective of the purchaser, there is a contractual claim against:

• The seller
• The purchaser’s own sales representative
• The purchaser’s own agent (the brokerage)
• The home inspector
• The home inspection company

A contract is a legally enforceable binding agreement between two parties. It may contain limitations of liability which must be considered, since such matters are part of the negotiated arrangement between the two contracting parties.

Tort Claims

From the perspective of the purchaser, there is a tort claim against:

• The seller
• The seller’s sales representative
• The seller’s agent (the brokerage)
• The purchaser’s own sales representative
• The purchaser’s own agent (the brokerage)
• The home inspector
• The home inspection company
• The builder
• The foundation contractor
• The consulting engineer
• The consulting engineering company
• The builder inspector
• The municipality

You will notice that list is the same as the first list. Just because you have a contract, it doesn’t mean that you cannot institute proceeds in tort.

Tort Defendants

Naturally, there is also a group that are tort defendants alone. There are no contracts in place, so the sole and only basis of liability is in tort.

Here is the list from the purchaser’s perspective:

• The seller’s sales representative
• The seller’s agent (the brokerage)
• The builder
• The foundation contractor
• The consulting engineer
• The consulting engineering company
• The builder inspector
• The municipality

A tort is a civil wrong. It is an assault, battery, libel, slander, wrongful act, negligent act, interfering activity of some nature which causes another individual harm, personal injury or financial loss. The fundamental difference between it and contract is the lack of consent to the arrangement or activity.

The next step will be framing the action in contract and/or tort against the selected defendants.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

The Law of Disclosure in real estate transactions has been the subject of lawsuits for years and the controversy still continues.

It is important to note a very significant and potential conflict right at the outset:

1) there is a law of disclosure that applies to vendors, and

2) there is a law of disclosure that applies to real estate registrants (agents, brokerages, sales representatives.

These laws are not the same, and they are sometimes in conflict.

Laws for Vendors

The law of disclosure that applies to vendors arises out or real property law as it’s derived from common law. There are rules that prevent fraud that are codified in the Criminal Code and special rules that might apply to particular vendors, ie. new homes by builders, but, other than that, the laws are of a general nature.

Laws for Real Estate Industry

These laws of disclosure are different. There is a positive duty to make known certain matters that a vendor could keep quiet about. The regulated professionals in the real estate industry, most follow the Real Estate and Business Brokers Act, 2002, and the Code of Ethics passed pursuant to that Act.

The Unresolved Conflict

So, here’s the issue: the real estate professional must disclose the matter. The vendor, is not required at law to make such a disclosure. The real estate professional encourages the disclosure by having the vendor execute a Seller Property Information Statement (SPIS), or simply indicates that such a disclosure is an obligation or requirement at law. Usually, this aspect is rather vague.

The Series

We will look at the law as it applies in a series of fact situations, and consider the potential conflict between the real estate professional and the vendor.

In many cases, you will see that the vendor comes up short-changed. The disclosure is made, the price is reduced, and the transaction completed. The problem is that the real estate professional in order to protect themselves sacrificed the client vendor.

And, this happens every day of the week. Was there a suitable alternative? Sure, the proper advice should have been:

1) you may disclose that fact or withhold that fact,

2) if you stay with me, and I continue to represent you, I am obligated to disclose that fact,

3) you, may choose to engage another real estate professional at this point, who is not under this same obligation,

4) you should consult with your solicitor.

Is that going to happen? Not very likely!

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com