Implications for Realtors

KRAWCHUK v SCHERBAK – IMPLICATIONS FOR REALTORS

The Ontario Court of Appeal has recently made it clear that a salesperson will be held liable for not fulfilling duties to their clients that are set out in the Real Estate Council of Ontario’s Code of Ethics (the “Code”).  This case serves as a reminder to real estate salespersons to be very careful when assisting sellers with the Seller Property Information Sheet (“SPIS”) and when acting as a dual agent.

FACTS

The sellers took the time to fill out a seller property information sheet, but did not do it accurately.  In response to the question “Are you aware of any structural problems?”, they had 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 had replied “No”.  In reality, they knew that the foundation of the house was seriously compromised and that there were ongoing plumbing problems.

The house is built on a peat bog and had experienced significant settling.  It was clear to the naked eye that it had settled. The floors were sloped and the lines of bricks showed a sloping to a corner. There was significant evidence of foundation cracking and repairs.

In relation to the plumbing, there was a pit in the basement covered over with a steel plate. The sewage from the house flowed into the pit and then drained into the municipal sewage system.

To further complicate matters, both the purchaser and the vendors used the same real estate sales representative for the transaction.  The sales representative “encouraged” the purchaser to sign a “clean” offer so that her offer would be the one accepted. Accordingly, the conditions (financing and inspection) were removed. She offered $110,100 for the house and the offer was accepted.

Immediately after moving in, the purchaser found a buildup of sand in the crawl space.  A few days later there was more. Investigation disclosed the house had to be lifted off the foundation.  The foundation had to be removed, along with significant subsoil, and replaced with engineered fill. New footings, foundation and a basement floor were poured and the housed placed onto the new foundation. Removing and replacing the house caused significant cracking and repairs were required as a result.  Cost of the repair was $190,000.00.

It was evident the seller had tried to hide some of the issues because when the buyer viewed the house, there was significant chalk graffiti on the exterior concrete wall where the cracking had occurred and been repaired, making it harder to notice.  The vendors had also put an air freshener on the underside of the steel plate in the basement to mask the sewage smell.

DECISION

The Trial Court found the vendors liable for negligent misrepresentation and awarded the plaintiff purchaser damages of $110,742.32 but did not find any liability for the salesperson.  On appeal, it was found that the salesperson and the agency were 50% responsible along with the vendor.

The Court held that the sales representative was negligent to the purchaser for failing to recommend they have a qualified inspector provide an opinion about material issues affecting the house, as well as for failing to explain the risks of not making the offer conditional on a home inspection.  It was also found that the salesperson was negligent for not properly assisting the seller with the vendor disclosure form.

In addition to the damages, the Court of Appeal awarded the purchaser $27,780 in legal costs and interest.

COURTS REASONING FOR FINDING THE SALESPERSON LIABLE

The Court’s reasoning included the fact that the sales representative had plenty of reasons to question the authenticity of the vendors’ assurances in the SPIS which stated the settlement problems were resolved.  The salesperson knew that the house had a history of settlement problems and accordingly it was underpriced.  In addition, the salesperson’s visual inspection of the property disclosed settlement problems.

The Court of Appeal stated that “The due diligence requirements of a real estate agent mandated by the Code, while not dispositive, are of considerable importance in informing what is expected of real estate agents in terms of verifying information about a property listed for sale”.  The Court also hi-lighted previous cases which indicate that a sales representative’s duty to his or her client includes a duty to investigate material information about the property.

The Court made it clear that given the obvious defects in this house, the salesperson had to either further verify the assurances themselves, or recommend, in the strongest terms, that the purchaser get an independent inspection either before submitting an offer or by making the offer conditional on a satisfactory inspection.  The failure to do either was an ‘egregious lapse’.

WHAT DOES THIS DECISION MEAN FOR A REAL ESTATE SALES RESPRESENTATIVE?

This case serves as a reminder that sales representatives always have a duty to provide a certain level of guidance when a client is filling out or receiving a disclosure statement.  If acting as a seller’s agent and assisting in the completion of the SPIS, the representative has to exercise reasonable care and skill in ensuring its accuracy.  In this Court of Appeal case, the salesperson failed to meet the standard of care.  There were obvious defects in the house and the sales representative obviously knew the vendor disclosure form was not accurate.  They should have questioned the vendors further and appropriately counseled them with respect to the implications of the representations on the SPIS.

The Court of Appeal continually discussed the Code and a salesperson’s obligations to abide by it.  The Code provides guidelines that should always be followed, but above all else, use common sense!  If the seller is obviously trying to commit fraud, as in this case, do not turn a blind eye or you could find yourself in some serious trouble.  Sales representatives should always be proactive and inform the vendors about the implications of misrepresenting information in the vendor disclosure form and help counsel clients when they are filling out the form.

Another issue not discussed in this case is whether a sales representative can just tell the seller they are not giving any advice on how to fill out the SPIS?  In past cases, salespersons have argued that they had nothing to do with the SPIS and they just left it up to the seller to complete.  Although the courts have not provided a well defined test or standard of care to be followed, the trend in the case law tends to suggest this defence may not always work for a sales representative.  It would be prudent of all representatives to go further and provide assistance when the SPIS is being filled out.

The standard of care is always going to be more onerous when acting in a dual relationship.  Any decisions made by a salesperson are going to be scrutinized more carefully if they are acting for both the vendor and the purchaser.  In this situation, you should be extra careful and either take measures to verify the information provided by the vendors or strongly recommend to purchasers that they undertake an inspection of the property and make the closing conditional upon passing the inspection.

As one would expect, the Court in this case also focused on the fact that this sales representative encouraged the purchaser to waive the inspection condition.  Be very careful if ever discouraging parties to a transaction from seeking outside professional advice.  You should always encourage parties to seek professional advice when appropriate.  With the market this year, many buyers in Thunder Bay have been frustrated while house hunting, and are putting in offers without any conditions.  The majority of the time, everything will work out fine, and they will be able to get financing and insurance, but you still need to be very careful when suggesting the purchaser make an offer without conditions.  At the very least, if they are adamant about making an offer without conditions, let them know the potential consequences of breaching the agreement.

On a final note, I have quickly learned as a young lawyer that I have to approach most files with the concept of CYA.  I document everything I do and you should do the same as a salesperson.  As an example, if you tell a client they should get an inspection, then I strongly suggest that you have evidence of that in case things ever go south.  Say you prepare an offer with several conditions in it and then the buyer says they are going to cross them out and initial the offer.  After you have verbally told them your recommendations, follow up with an email confirming your conversation that you recommended an inspection, that you mentioned the consequences of not having one, and notwithstanding this, they have decided to go ahead without the clause.  Although this seems like extra work, this can save you a big hassle down the road.