Caveat Realtor: Negligent Seller Statement Results in Real Estate Agent Liability (en anglais seulement) - Daniel A. Taylor

08 décembre 2011

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In Krawchuk v. Scherbak et al.[2011 ONCA 352], the Ontario Court of Appeal determined that a real estate agent was equally at fault with the sellers for the damages suffered by a home buyer who had relied on certain misrepresentations contained in the Seller Property Information Sheet (SPIS).

The SPIS is a two-page, pre-printed standard form document prepared by the Ontario Real Estate Association, the stated purpose of which is, in part, to protect sellers by establishing that correct information concerning the property is provided to prospective buyers.  

There have been a number of decisions that have highlighted the risks associated with the use of the SPIS and similar documents in other provinces. The informal “fill in the blank” method as well as conflicting statements within the form concerning its purpose and effect create a situation that can have serious legal consequences in the context of a dispute. Until Krawchuck, it appeared that the seller exclusively assumed the risks associated with the representations contained in the SPIS. That no longer appears to be true.

Background

In 2004, Mr. and Ms. Sherbak (Vendors) signed a listing agreement to sell their property using the services of a real estate agent, Ms. Weddell (Agent). The Agent assisted the Vendors in completing the SPIS. In response to the question “Are you aware of any structural problems?”, they replied, “NW corner settled” and “No further problems in 17 years”. In response to the question “Are you aware of any problems with the plumbing system?”, they replied, “No”.

The Agent acted for both the Vendors and the purchaser in the deal, Ms. Krawchuk (Purchaser). Prior to putting in an offer, the Purchaser discussed with the Agent the significance of some visible defects she observed in the home. The Agent responded by reiterating the Vendors’ answers in the SPIS and indicating that she was not a qualified home inspector. The Agent and Purchaser also discussed the terms of a potential offer, including whether or not it should be conditional on a home inspection. The Agent advised the Purchaser that her offer would be more attractive if it was "clean". The Purchaser subsequently put in an offer that contained no home inspection condition. The offer was accepted.

After moving into a house, the Purchaser discovered serious latent structural and plumbing defects. The costs of the repairs, estimated at over $191,000, almost doubled the price paid for the property. Fortunately, the purchaser had title insurance and recovered $105,742.32 from the insurer. Notwithstanding this recovery, the Purchaser then sued the Vendors, the Agent, and the brokerage employing the Agent.

The Trial Decision

The trial judge accepted that the Purchaser had reasonably relied upon the accuracy of the Vendors’ statements in the SPIS. While the Court accepted that the Vendors’ representations were not made to intentionally mislead the Purchaser, the representations were negligent. A reasonably prudent person in similar circumstances would have disclosed far more detail with respect to the known structural and plumbing issues. The trial judge further accepted the Purchaser’s evidence that she would not have made an offer had she known of the structural or plumbing problems. The Purchaser's reasonable reliance on the SPIS contributed to her decision to purchase the house, as result of which she suffered damages. Thus, the tort of negligent misrepresentation had been made out and the court awarded the Purchaser damages in the amount of $110,742.32.

The Court, however, dismissed the Purchaser’s claim against the Agent. The Court reasoned that the Agent had simply relayed to the Purchaser what was told to her by the Vendors and that she had no reason to doubt the veracity of their representations.

The Decision on Appeal

The Court of Appeal agreed with the trial judge that Purchaser had established her claim against the Vendors based on negligent misrepresentation. Although a SPIS is not mandatory, once it is prepared, the Purchaser was entitled to rely on it.

The Court of Appeal, however, determined that the trial judge had erred in dismissing the Purchaser’s claim in negligence against the Agent. The trial judge had erred by holding that the Court could determine the standard of care of the Agent without the benefit of expert evidence or addressing the import of the real estate Code of Ethics (Code).

Rule 7 of the Code provides that an agent "shall not discourage the Parties to a Transaction from seeking outside professional advice. A Licensee shall encourage the Parties to a Transaction to seek appropriate outside professional advice when appropriate" (emphasis added). Rule 11 requires that an agent "discover and verify the pertinent facts relating to the Property and Transaction relevant to the Licensee's client that a reasonably prudent Licensee would discover in order to fulfill the obligation to avoid error, misrepresentation or concealment of pertinent facts" (emphasis added).

The Court of Appeal found that the record did not support the trial judge's conclusion that the Agent had no reason to question the veracity of Vendors' assurances in the SPIS. The experienced Agent knew that the house had a history of settlement problems and accordingly was underpriced. As well, the Agent’s visual inspection of the property had disclosed settlement problems. Despite these facts, the Agent had taken no steps to verify the accuracy of the information supplied by Vendors or to otherwise protect the Purchaser from the adverse consequences of the inaccurate information.

The Court of Appeal concluded that the Agent had a duty to the Purchaser, to either verify the Vendors’ assurances herself or recommend in the strongest terms that the Purchaser get an independent inspection. In failing to do either, the Agent was negligent and the brokerage she worked for was vicariously liable.

Furthermore, on the other side of the transaction, the Court of Appeal found that the Agent had a duty to the Vendors to counsel them on the implications of the representations made in the SPIS. The Agent’s failure to do so amounted to negligence in her representation of the Vendors.

In the circumstances of this case, The Court of Appeal held it appropriate to apportion fault at 50 per cent to the Vendors and 50 per cent to the Agent.

Implications

The law with respect to real estate transactions starts with the principle of caveat emptor or buyer beware. Although that principle has been slowly modified by the jurisprudence, it could be argued that Krawchuck has turned the concept on its head. In this case, the Purchaser purposely decided to forgo a home inspection despite noticing visible structural defects. Those manifest defects turned out to be a warning sign of serious structural problems. The Purchaser then spent $191,000 repairing a house that she had purchased for $110,000. The Purchaser recovered $106,000 under her title insurance policy. Notwithstanding that recovery, the Purchaser was awarded judgment in the amount of $110,742.32 plus interest (an exception to the general rule against double recovery under private insurance policies was applied by the Court, though not discussed in this comment) and her costs in appeal of $50,000.

An application to the Supreme Court of Canada for leave to appeal this decision has been filed. However, Krawchuck is currently the law in Ontario and it has significant implications for how sellers, buyers and realtors should approach the SPIS.

From the seller’s perspective, Krawchuck is a further warning against ever providing a SPIS. It is a voluntary disclosure that needlessly opens up the seller to serious potential liability. Most sellers cannot fully appreciate the legal nature of certain questions or their particular wording. However, if for business reasons (e.g. encouraging the purchase of their home) a seller decides to assume the risk of providing a SPIS, Krawchuck is clear that the answers must be as honest and up front as possible. If the seller knows of any issues from the past (even the distant past) that fall into any of the queries on the SPIS form, they must answer them completely based on the knowledge they have. Providing half-truths or incomplete answers can have very expensive consequences in litigation. As a general rule, unless a seller can answer a question with 100% certainty they should answer with “unknown” rather than “yes” or “no”.

Conversely, from the buyer’s perspective, Krawchuk affirms that the SPIS is one of the more valuable documents that they can attain in the course of the transaction as it can serve to moderate many of the risks that flow from caveat emptor. In order to ensure the maximum amount of protection, the buyer should seek to have the SPIS included in Schedule “A” of the Agreement for Purchase and Sale or incorporated into the Agreement by a clause to that effect.

The most significant implication of Krawchuk is for real estate agents and their brokerages. The longstanding perception that the SPIS serves to protect realtors has been rebuked by the highest court in Ontario. Real estate agents can no longer respond to their buyer client’s questions by advising them to "read the SPIS, it's all in there." Krawchuk is clear that if there is any reason to question the accuracy of any of the answer in the SPIS, a real estate should either take measures to verify the information provided by the seller or strongly recommend to the buyer that they make the closing conditional upon a home inspection. Furthermore, real estate agents need to counsel their seller clients about the risks associated with the SPIS and to assist them to properly complete the document.

Real estate associations were largely responsible for the introduction and widespread use (and arguably abuse) of seller disclosure forms in the Canadian home market. Consequently, if the expanded realtor liability found in Krawchuk is upheld by the Supreme Court of Canada, or if leave to appeal is denied, there may be a chill in the use of the SPIS and similar forms. While that would be a terrible result for litigation lawyers it may benefit everyone else involved in the purchase and sale of a home.

Dan Taylor is a lawyer in our Litigation Law Group. Dan can be reached at 613.566.2852 or dtaylor@perlaw.ca.