Buyer Beware: the legal effect of the SPIS

In the recent case of Picard v Grgurich, Ontario’s Divisional Court provided a detailed analysis of the doctrine of caveat emptor (let the buyer beware) and the legal implications of a vendor’s refusal to complete the Seller Property Information Statement (the “SPIS”), also known as the vendor disclosure form.

Background

This case involves a detached rental property in Thunder Bay. Prior to listing the property, the vendor’s real estate agent advised that homes with fully-finished basements generally fetch a higher sale price. Following that advice, the vendor hired a contractor to finish the basement to make the house more appealing.

An offer to purchase was accepted by the vendor with standard conditions; financing, insurance, and home inspection.  The vendor provided an SPIS form with the purchase agreement but did not complete the form.  The Vendor instead crossed out the SPIS, indicating that they were not making any representations or warranties and the purchase was on an “as is” basis.  

Two months after taking possession of the home, the purchaser noticed water in the basement.  The purchaser then hired contractors to repair the damage and sued the seller and a former contractor.

Small Claims Court

At trial before the Small Claims Court, the Deputy judge did not express what specifically amounted to a representation by the vendor, but stated:

“The nature of the failure to disclose in this instance is more significant when considering that the [SPIS] was not completed by (the vendor). He was leaving the impression that he did not know virtually anything about the subject property when he most assuredly did.”

The Deputy Judge found that whether the vendor fraudulently or negligently failed to disclose relevant information was ultimately irrelevant to the legal consequences of the situation. The Deputy Judge ruled that the situation resulted in liability resting on the vendor because a representation of some form happened in this instance. In other words, the Deputy Judge ruled that no representation in itself was a misrepresentation.  The Deputy Judge awarded the Purchaser $25,000.00 in damages. The vendor appealed the decision to the Divisional Court.

Divisional Court Decision

On appeal, the Divisional Court addressed the following issues:

  1. Did the vendor have to tell the Purchaser about the water issue?
  2. Did the vendor fraudulently or negligently misrepresent the status of the basement by crossing out questions and signing the SPIS?

Latent Defect vs Patent Defect

To understand the Court’s decision in this case, it is important to know the difference between a latent defect and a patent defect.  Patent defects are defects that are discoverable on a quick inspection of the property. A vendor has no duty to draw the purchaser’s attention to patent defects. Latent defects are defects which an ordinary purchaser would not be expected to discover in a routine walk through of the property. For example, a crack on an interior wall that was covered up with drywall and no longer visible.

The Divisional Court upheld the concept that a vendor can rely on the defence of caveat emptor so long as there is no attempt at concealing a latent defect.  An act of concealment is an attempt to hide or be willfully blind to a defect known to the vendor. Concealing would be considered a misrepresentation, and therefore, a breach of contract. In other words, so long as there is no attempt at concealment, caveat emptor remains a viable defence for latent defects.

The Court did caution that a purchaser may bring a viable claim if the vendor failed to inform the purchaser of a latent defect that renders the property unfit for habitation, or where the latent defect renders the premise dangerous.

In the case at hand, the Court found that the vendor’s renovations prior to listing the property were simply a good faith effort to increase the value of the property and not to actively conceal any defects.  There was also no factual finding that the property was unfit for habituation or dangerous. During the Court process, the purchaser admitted the home was safe and habitable despite the water issue.

Nature of the SPIS

Completing an SPIS is not mandatory under any provincial law, however, the Thunder Bay Real Estate Board has a by-law that states that every house listed on the MLS must have a Seller Property Information Sheet. Vendors have the option to cross it off rather than fill it out.  In Picard v Grgurich, instead of answering the questions, the vendor crossed out the questions and signed the bottom.

On appeal, the Divisional Court ruled that the Vendor did not fraudulently or negligently misrepresent the status of the basement. The Court explained that, once a vendor “breaks his silence” by answering the questions and signing the SPIS, the doctrine of caveat emptor can no longer be relied on. In this circumstance, the Court held that crossing out the questions on the SPIS was actually a refusal to answer the questions and did not amount to breaking his silence.  The Divisional Court overruled the Small Claims Court and concluded that a failure to complete an SPIS cannot give rise to misrepresentation.   

Summary

As many real estate agents are aware, the SPIS forms can cause uncertainty and liability concerns.  The Small Claims Court decision in this case added much more confusion as it was decided that a failure to make any representations was in itself a misrepresentation by the vendor. On appeal, Justice Nieckarz clarified that this was an error in law and Buyer Beware remains the presumptive rule in real-estate transactions.

One practice point all vendors and purchasers should be aware of is that several Judges have previously concluded that the SPIS cannot be relied on unless (i) the purchase agreement is conditional upon receiving the SPIS; or (ii) the SPIS was completed by the vendor and provided to the purchaser prior to the purchase agreement being signed.  In other words, if an offer is made, accepted, and then the vendor later completes the SPIS, it cannot be relied on as it does not form part of the purchase agreement.

Authors: Ken Ritson Cody Fraser