Brian Madigan LL.B.

Disclosure Statement Not Part of Agreement ~ Buyer Left without Remedy

By Brian Madigan LL.B.

The Csada and Williams lawsuit is a case which involves the use of the Property Condition Statement in the Province of Saskatchewan pursuant to the terms of a residential agreement of purchase and sale.

Mr. and Mrs. Csada submitted an Offer to purchase certain residential premises owned by Mr. and Mrs. Williams in the City of Regina. The case was heard in the Provincial Small Claims Court in 2006.


The offer was subject to the following conditions:

1) gasoline location (no problems)

2) furnace inspection (favourable) at purchasers expense

3) property disclosure statement.

The Williams completed a Property Condition Disclosure Statement in which they said, in part, that they were not aware of any damage due to water. Then, the parties signed an amendment to the contract in which they agreed that the conditions quoted above are removed. In particular, the amendment stated:

"(3) Property condition statement (PCDS) is removed."

There are no warranties or guarantees stating that the house is free from any of the defects subsequently complained of by the Csadas. In short, based on those documents, the Csadas have contracted to buy the house on an "as is" basis.

So, the Court was left with the task of interpreting the PCS as it related to the agreement. Initially, there was a contract to sign a PCS. The PCS was then, signed and delivered to the Csadas. Subsequently, the parties signed an amendment to the agreement thereby deleting that provision.

The Court concluded:

"The property disclosure statement has no effect on the contract, and the parties are left with what they agreed to .... That agreement provides the Csadas with no remedy against the Williams for the expenses in relation to which they bring this action."

Recognizing that the decision might seem somewhat harsh the trial Judge offered the following advice:

"Home buyers, particularly first time home buyers,

1) frequently fall into the trap of spending too little time inspecting the home before making the decision to purchase,

2) rush into the purchase at a time when caution is of the utmost importance,

3) assume that mortgage appraisers will do a pre-purchase inspection when in fact they do not, and

4) enter into a contract containing provisions such as in clause 11 of this contract in which all of the risk shifts to them.

It is further unfortunate that the Csadas did not receive and follow advice to employ pre-purchase inspection experts, or require as a term of the contract guarantees as to conditions."

COMMENT:

Here the PCS was not part of the agreement. An amendment deleted it from the contract terms. Independently, other Courts have viewed the representations from tort principles and established liability. In this case, the strict rules of contract were applied.

It is obvious that in this case, the execution of the amendment deleting the conditions was in error, if the purchasers wished to have the PCS as part of the contract.

It might also be noted that this case was tried in Small Claims Court, and consequently larger liability issues were likely not raised due to the lack of time and resources. If the damages were higher, and the matter tried in a higher Court, it is much more likely that the plaintiff would have been successful.

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

Seller Responsible for Inaccurate Answers in Disclosure Statement

By Brian Madigan LL.B.

The case of Seaman and Phinney came on for trial in the Court of Queen's Bench in New Brunswick. It is another case based of a poorly completed Disclosure Statement.

A 10 year old septic tank and disposal field for a home overflowed through a "cheater pipe" into a ditch. The purchaser Mr. Seaman bought the home and noticed the out-flow approximately one month after moving in.

The defendants are the vendors of the home, Mr. and Mrs. Phinney. They had built the home and occupied it for 10 years. Mrs. Phinney had signed a Property Disclosure Statement. It was one of the papers relied on by Mr. Seaman when he agreed to buy.

Mrs. Phinney answered "No" to the question: "Are you aware of any problem with the septic system?"

The Judge stated:

"In her evidence Mrs. Phinney describes the care they took of the septic system and the views of her husband in these words:

... You don't do all your laundry at once, you space it out. I had a 'sudsaver' on my washing machine so that the water from the whites I could use to wash the dark clothes and, and he was always harping about the amount of toilet paper we would use and that, you know, it would block the septic system ... he'd notice the number of rolls in the garbage can I guess, empty rolls ... it was one of his fetishes...".

As noted on the Property Disclosure Statement Mrs. Phinney answered simply "No" to the question: "Are you aware of any problem with the septic system?".

In my opinion with her knowledge of the care taken of the septic system she would have been more accurate if she had said:

"No, but we are very careful to space out our laundry, to reuse washwater and to minimize our use of toilet paper".

I find that Mrs. Phinney's answer "No" was untrue. The evidence forces me to find that she misrepresented the condition of the septic system to Mr. Seaman on the Property Disclosure Statement.

Court Findings

· I find that Mrs. Phinney is liable to Mr. Seaman for her misrepresentation and breach of contract.

· As Mr. Phinney has benefited from his wife's misrepresentation, he is liable to Mr. Seaman as well.

· Damages were determined on the basis of the cost of early hookup to the municipal sewer system

Comment

This is just another example of how imporatnt it is to answer questions in the Disclsoure statement:

1) truthfully, and

2) accurately.

All too often, sellers are rather "cavalier" in the approach to the document. The answers are treated in a "best guess" manner.

It is noteworthy that the disclosure statement need not be completed at all, but if it is, the answers must be both truthful and accurate.

No comment was made by the trial Judge concerning the role of the real estate agents in the completion of the document.

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

Minor Disclosure Error Insufficient to Establish Liability

By Brian Madigan LL.B.

The Taschereau and Fuller lawsuit is a case concerning false representations in a Property Condition Statement (PCS). The purchaser Mr. Tashereau brought an action before the Court of Queen's Bench in Manitoba against the vendors of a residential property which he purchased. The vendors in turn took third party proceedings against their own agent for negligence concerning his advice related to the completion of the PCS

The PCS was completed by the vendors, the Fullers on 14 May 2001 and delivered to the purchasers on 17 May 2001.

Here was a question contained in the Form:

‘To your knowledge has there ever been any flooding or leakage affecting any portion of the property (into the house or garage or into low-lying areas of the yards or other part of the property) and from any cause or source (rainwater, snow melt, sewer backup or other cause or source)?'

to which it was indicated "yes" and the following handwritten answer added:
"Minor water seepage thru bsmt window during a heavy rain."

An Offer was submitted providing that the "seller's property condition statement would be incorporated into, and form part of, the contract". The offer was accepted on May 15, 2001.

Mr. Tashereau arranged to have the property inspected by his own home inspector. A note was made about a repair to the window wells in the basement to prevent water from the surface contacting with the wood.


The purchasers took possession on July 5, 2001. On July 16th, a substantial amount of rain fell and water leaked into the basement.

The plaintiffs' position at trial was that the comment in the seller's property condition statement that only minor water seepage had occurred through a window was inaccurate given the amount of leakage evidenced on July 16th.

The defendants' position is that the comment in the seller's property condition statement was inaccurate only as to the use of the singular rather than of the plural, and that in their experience, only minor water seepage had occurred through the windows at any time during their possession of the premises.

Once the parties have completed the transaction, the title has registered in the name of the purchasers and the purchase price has been paid to the vendors, the remedies available to an aggrieved party are severely limited.

The doctrine of merger is basically set forth in Anson and Honsberger, Real Property Law is as follows:

1. After closing, the doctrine of merger may apply.

2. The doctrine of merger is that, upon the completion of an agreement for the sale of land, the agreement and the parties' rights thereunder are merged in the deed of conveyance, so that after closing they can no longer rely on the terms of the contract, but must look to the deed for any remedy.

3. The purpose of the doctrine of merger is to bring finality and certainty to business affairs, as it would be unfair to allow a party to seek to set aside the transaction or to obtain damages for an indefinite period after closing.

4. It is the general rule that the acceptance of a deed is prima facie full execution of the agreement to convey, and preliminary agreements and understandings related to the sale of land become merged in the conveyance.

5. The doctrine of merger does not apply to independent covenants or collateral stipulations in an agreement of sale.

6. Where the agreement of sale creates rights or imposes obligations or stipulations collateral to or independent of the conveyance, the question of whether those stipulations are extinguished by merger is one of intention.

7. The proper inquiry should be to determine whether the facts disclose a common intention to merge the warranty in the deed; absent proof of such intention, there is no merger.

8. The exceptions to the doctrine of merger are as follows:

(i) fraudulent misrepresentation;

(ii) mutual mistake resulting in a total failure of consideration or a deficiency in the land conveyed amounting to error in substantialibus;

(iii) a contractual condition; or

(iv) a warranty collateral to the contract which survives the closing (as referred to above).


The trial Judge commented as follows:

"As a result, the doctrine of merger will apply to the comment unless it falls within any of the exceptions:

(a) fraudulent misrepresentation:

I accept Mr. Fuller's evidence that he did not deliberately intend to mislead. I believe that he was being truthful. He indicated that while there had been some seepage in the basement, there was nothing that he would have considered of a major issue. Furthermore, I accept his evidence that he did not deliberately attempt to mislead by the fact that the comment refers to the word "window", and not "windows".

(b) error in substantialibus:

Even if there was an error as to the reference of a "window" as opposed to "windows", I do not see this error as one of substance or as one that would change the substance of the subject matter of the contract. There is no indication that the vendors took steps to hide the problems caused by the water seepage. In fact, the purchasers' home inspector noted them. While the inspector did not note the larger problem found in the wall behind the boxes, there is no indication that the boxes were laid in such a way as to prevent the wall from being viewed. In fact, Mr. Fuller readily agreed to move boxes on another occasion to allow the view of the attic. Had he been asked to do the same in the basement, there is no indication that he would not have agreed. Furthermore, according to the purchasers' own expert, it would appear that the problem can be remedied fairly simply. In his view, the problem is with the window wells and not with the foundation. It can be remedied by a simple alternative procedure rather than by an expensive one, which the purchasers propose.

(c) contractual condition:

There are no conditions in the contract that would entitle the purchasers to recover damages.

(d) collateral warranty:

As I have indicated, I do not find that the representation amounted to a collateral warranty.

In summary, I find that the principle of caveat emptor does apply."


Accordingly, the purchasers case was dismissed and it was not necessary to consider to the merits of the third party proceedings.

COMMENT:

This particular case was determined on the basis of basic real property law and contract law. This involves the strict application of traditional legal principles to the case.

Other cases, where liability is found, the determining factors will be misrepresentation and the law of deceit in accordance with basic tort principles. When viewed from a vendor's perspective, traditional real estate and contract law provide the greatest level of protection. It is tort law which essentially opens up the opportunity for increased liability.

It should be noted that most other cases have not followed this very traditional approach.

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

Agent Liable for Poor Advice on Signing Disclosure Statement

By Brian Madigan LL.B.

The Bond and Richardson lawsuit is a case in the province of New Brunswick involving the use of the Property Condition Statement and the liability of the agent who assisted the vendor in the completion of the document.

The case is interesting from a procedural perspective. Mr. Bond purchased a property which was subject to certain deferred taxes under the Farm Lands identification Program (FLIP). If Mr. Bond changed the use of the property, these deferred taxes would become payable.

So, he sued his own lawyer Ms. Richardson, for negligence. His lawyer then sued the vendor for improperly completing the Property Condition Statement. The vendor then sued his own agent for improper advice concerning the completion of the document. All matters were heard in one proceeding.

The purchaser grew up on the property which is the subject of the sale. His family sold the property in 1975 and he saw it advertised in 2003. He contacted the agent, Paul Langlais who agreed to act in a dual agency capacity for purchaser and the vendors, Mr. and Mrs. Kerr.

The FLIP program is designed to keep property as farming lands. If the use changes, the owner is responsible for the current taxes and 15 years of deferred taxes. Mr. Bond wishes to use some of the lands for a commercial auction which is his business. This change in use would trigger 15 years of back taxes. In the interim, Mr. Bond leased out the land for farming.

Liability of the Purchaser's solicitor

The Court concluded that the purchaser's solicitor had failed to properly check the taxes prior to closing and this constituted negligence. Mr. Bond has suffered damages as a result of that negligence in that he is restricted in the use he can make of his property without incurring a cost and, by her failure to advise him of the deferred taxes, Ms. Richardson deprived him of the opportunity to reduce, eliminate or even negotiate those costs prior to closing.

Liability of the Vendors

There is also the matter of the vendor's liability, since the purchaser's solicitor claimed over as against them.

James Kerr, the vendor testified that he and his wife lived on the property for 15 years. It was registered in the FLIP when they bought it in 1988 and it was still in the program when they sold it in 2003. He regarded it as a tax break. He testified that all he knew about the program was that it resulted in lower taxes for him and that he was not aware that he would have to pay taxes back if the use of the property changed. He further testified that at the time of the sale to Mr. Bond he was not aware that Mr. Bond may have to pay the deferred taxes.

As part of the agreement, the vendors agreed to sign a Property Condition Statement.

In the first section of the Property Condition Statement, which deals with general information about the property, the vendors answered "no" to the following two questions:

4. Are you aware of or have you been charged any local improvement levies/charges?

5. Have you received any other notice or claim affecting the property from any person or public body?

The trial Judge said " the purpose of that Statement is disclosure. If they didn't have a duty to answer the questions both honestly and accurately that purpose would be defeated and the Statement would be meaningless."

And, the Judge made the following comment:

"It is clear......, James and Carole Kerr, made misrepresentations to Mr. Bond when they completed the Property Condition Statement. Mr. Kerr was aware of the FLIP taxes and while he regarded them as a benefit as opposed to an encumbrance, that did not excuse him from disclosing their existence, particularly when he answered the questions on the Property Condition Statement about whether or not he had received any notices from a public body affecting the property and whether or not the property was under the jurisdiction of any Conservation Authority. Both of those answers were clearly wrong and Mr. Kerr knew or ought to have known they were wrong since he knew from the time they bought the property that it was registered in the FLIP and he executed a document in 1997 in which he opted to continue to have the property registered in the FLIP."

The trial Judge determined that there was no intention to deceive, it was an oversight. So, even though there was no finding of fraud, there was still a negligent statement. This statement met the 5 part test set out by the Supreme Court of Canada in Queen and Cognos to establish liability.

The Judge also commented that there was a special relationship between the parties, that is, they were negotiating an agreement, and that gave rise to a positive duty to provide honest and accurate answers:

"The representor's belief in the truth of his or her representations is irrelevant to the standard of care."

On the issue of the completion of the PCS, the Judge observed the following:

"In my view, if Mr. Kerr, in completing the Property Condition Statement, had given some thought to those questions he answered incorrectly, it is more likely than not that he would have realized that the FLIP should be disclosed in answering them.

I find that he did not exercise the care that an objective, reasonable person would have exercised in order to ensure the answers he gave were accurate and he was therefore negligent.

Mrs. Kerr was also negligent because she merely relied on the answers given by Mr. Kerr in signing the statement and made no effort on her own to ensure that the answers were accurate."

Liability of the Real Estate Agent

Paul Langlais had only been an agent for 2 years when he came across this situation. He was unfamiliar with farm properties, and although he obtained a tax statement referring to the FLIP, he knew nothing of the program or its deferred tax provisions.

The Court concluded:

· By failing to make himself and his clients aware of this essential and pertinent fact in a timely manner I find that Mr. Langlais failed to write the agreement in compliance with Article 6 of the Standards as it is not clear and understandable because it does not set out whose obligation it is to pay the deferred taxes.

· It follows, and I find, that Mr. Langlais failed to comply with the standard of care required of a realtor as set out in the Canadian Real Estate Association's Standards of Business Practice and thereby breached the duty he owed to Mr. Bond.

· I further find that Mr. Bond has sustained damages as a result of that breach. It follows, and I find, that Mr. Langlais was negligent.

Accordingly, the Court awarded a judgment in favour of the full amount of the deferred taxes to the purchaser. On the third party claim, the purchaser's solicitor was entitled to claim two thirds from the vendors and the real estate agent, the result being that the solicitor, the vendors and the vendors' agent each bore one third of the loss.

COMMENT:

This case again stresses the importance of the PCS. Be careful, when you arte providing responses. If you are a real estate agent, you must counsel your client in terms of its execution. And, the mere fact the purchaser's lawyer made a mistake was not enough to relieve the vendors or the real estate agent from liability.

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

Half-Truth by Seller Leads to Liability

By Brian Madigan LL.B.

The lawsuit Alevizos and Nirula is another Property Condition Disclosure Statement case. This case came before the Manitoba Court of Appeal for consideration in 2003. It is the highest Court yet to discuss this document, since no cases have reached the Supreme Court of Canada.

The comments made by the Justices are noteworthy. Originally, this was a claim that was heard in Small claims Court due to the monetary size of the dispute, but under appeal it was considered sufficiently important for the Court of Appeal to offer some guidance.

The Alevizos purchased from the Nirulas a substantial home in the Tuxedo area in Winnipeg. During the initial negotiations, and after a first offer to purchase had been made, a request was made by the purchasers for the vendors to complete a PCS. Mr. Alevizos had noticed a gap in a window and had expressed a concern to his real estate agent who in turn suggested that a PCS be obtained from the vendors.

Pertinent for our purposes is question H and the answer noted directly underneath:

"To your knowledge has there ever been any flooding or leakage affecting any portion of the property (into the house or garage or into low-lying areas of the yards or other part of the property) and from any cause or source (rainwater, snow melt, sewer backup or other cause or source)?

[Answer] Exterior water tap froze and broke - caused some flooding in the rec rm. - thus all doors, flooring & carpeting, & lower 3 ft. of all walls replaced 1998."

But a frozen water tap was not what the purchasers were worried about. Rather, their concern was about the potential difficulties with some of the windows.

Analysis by the Court:

· There can be no doubt that caveat emptor is alive and well.

· mere silence without more on the part of the vendor with respect to a defect subsequently discovered by a purchaser will not normally found a cause of action against the vendor by the purchaser for misrepresentation or for fraud.

· A distinction must be made between a failure to disclose which in effect renders what has been stated a misrepresentation, and a failure to disclose which leaves anything said or written as true, but results in some misconceptions since the whole truth has not been told. The former kind of non-disclosure if fraudulent is fraudulent misrepresentation.

· A half a truth will sometimes amount to a real falsehood

· A representation might be literally true but practically false, not because of what it said, but because of what it left unsaid. In short, because of what it implied. This is as true of an innocent misrepresentation as it is of a fraudulent misrepresentation.

· To state a thing which is true only with qualifications or additions known to, but studiously withheld by, the representor, is to say the thing which is not. Such a statement is a "lie", and one of the most dangerous and insidious forms of lie.

· Any active concealment by the vendor of defects which otherwise would be patent is treated as fraudulent, and the contract is voidable by the purchaser if he has been deceived by it. Any conduct calculated to mislead a purchaser or lull his suspicions with regard to a defect known to the vendor has the same effect.

· The purpose of active concealment, of course, is to make latent that which would otherwise be patent.

· Where there is an active concealment of an otherwise patent defect, the general rule of caveat emptor will not apply.

· .... the question is whether the Mr. Nirula deliberately omitted to say something which was required to render completely true his response to question numbered H on the PCS, namely, whether there had "ever been any flooding or leakage affecting any portion of the property."

· Assuming the statement made by Mr. Nirula about the frozen water tap as far as it went was true, does it also represent a positive statement that no other leakage occurred?

· Viewed in this way, confirmation that the frozen water tap was the only leakage is a fraudulent misrepresentation within the classic definition contained in Peek, earlier referred to, since, "the withholding of that which is not stated makes that which is stated absolutely false". (Derry and Peek)

· ....the misrepresentation, .... runs afoul of yet another exception to caveat emptor, namely, because there was a duty to disclose such a material fact pursuant to the terms of the PCS document itself? In addition to the nature of a contract (uberrimae fidei for example), such a duty may arise "from circumstances which occur during the negotiation".

· ..... a contracting party who is entitled to remain silent once the decision is made to say anything at all during negotiations on a particular subject that is relevant "must say everything, that is, everything material to the topic in question; by breaking silence, he impliedly ‘undertakes' a duty which otherwise the law would not have prescribed".

· by speaking there is an implied undertaking in the circumstances to speak fully.

· The vendors' response was not merely a "half truth," it was a positive falsehood. Once the vendors voluntarily undertook to complete the PCS, they were obliged - indeed they were under a duty "in the circumstances" - to do so honestly and completely. This they did not do.

The Court on The PCS itself:

· Declarations made in a PCS are representations as opposed to terms of the contract.

· Such statements do not constitute a warranty, rather the purpose of a PCS is to put purchasers on notice, to make purchasers aware of a problem if there is one.

· Since the purpose of the PCS is to give the purchasers a "heads up" with respect to potential problems, liability will ordinarily be disallowed when the problem in question is obvious. This is because purchasers in such circumstances should not have been misled by the disclosure statement.

· If the vendor answers the PCS honestly and does not deliberately intend to mislead, then liability will not follow even if the representation turns out to be inaccurate

· Based on the experience of those provinces that have employed the PCS, it seems to present a ripe ground for litigation. Doubtless this is due in no small measure to the problems inherent in an informal "fill in the blank" form which can have such serious legal consequences when problems subsequently develop in a real estate transaction. The wisdom of maintaining in use a form fraught with such inherent difficulties, exacerbated by the conflicting statements within the form concerning its purpose and effect, should be addressed by lawyers and real estate agents alike.

Mr. Justice Kroft, another Justice of the Court of Appeal offered his own comments about the use of the PCS:

· "My purpose in writing these brief separate reasons is to emphasize an aspect of this case which should be of particular interest to members of the public who are buyers or sellers of homes and to the agents and lawyers who represent them. I am referring to the risks, well demonstrated here, which are inherent in the recently introduced "form" document described as a property condition statement or PCS.

· The Chief Justice, in paragraph 36 of his judgment, sets forth five "general statements" which describe the nature of the PCS. He explains both the intent and the difficulties related to its use. In his fifth statement, he observes that based on the experience of other provinces, the form creates "a ripe ground for litigation." He attributes at least part of the problem as being due to the frailties of a practice which encourages important representations about the condition of real property to be asked and answered on a short pre-printed form comprised of standard questions and answers which are given by filling in boxes and blanks.

· This judgment should, in my view, be taken as a warning about the routine use of the PCS. The purchase and sale of a home is for many people the most significant business transaction they will ever enter into. Representations as to the condition of the property are inevitably going to be requested and given. I do not believe that these concerns are ever going to be safely dealt with by filling in the blanks on a short form carried in the real estate agent's briefcase with his or her other supplies.

· It is my concern that the use of the PCS is likely to increase the number of disputes in circumstances similar to those which existed here. That view causes me to emphasize the suggestion of Chief Justice Scott that the continued use of the PCS "should be addressed by lawyers and real estate agents alike." A more careful and traditional way of making important representations about the condition of property is surely better than incurring the risk of costly and uncertain litigation."

COMMENT:

So, you might wonder whether to use this document at all? The Court emphasized that should the vendor choose to answer the document which was otherwise voluntary, then there were certain conditions and limitations placed upon the vendor in terms of responses.

No half truths, no concealments. There was now a duty to be fully forthright and provide detailed and accurate answers. Anything that might trick a purchaser is a deceit. Answering questions in a clever way is really not allowed. That is just a little too "cute".

Adding additional information is sometimes distracting and is intended to placate the purchaser into the false belief that full and complete disclosure has been provided, when really it's just a "curve ball" calculated to deceive.


Remember... "the truth, the Whole truth, and NOTHING but the truth!


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