Caveat Emptor: Buyer Beware

Posted on: Thursday, March 30th, 2017

“Caveat emptor, qui ignorae non debuit quod jus alienum emit”
“Let a purchaser, who ought not to be ignorant of the amount and nature of the interest, exercise proper caution”

Caveat Emptor is a Latin maxim which is defined by Merriam-Webster’s dictionary as follows: “the principle that a person who buys something is responsible for making sure that it is in good condition, works properly, etc.” You may wonder what this has to do with real estate transactions. When dealing in real estate, it is not only the purchaser in a real estate transaction that has to be aware of this maxim, but also the seller. The reasoning behind this is the realtors, as well as the sellers, have to be fair and honest when disclosing problems which may not be evident to the purchaser or home inspector.

DEFINITIONS

A patent defect, by definition, is an obvious flaw that would be discovered upon a reasonable inspection of the home. An example of a patent defect would be a hole in the wall of the living room which is visible to the plain eye.

A latent defect is one that was not known to either the seller or the purchaser at the time of sale, and, as a result, was not disclosed. An example of a latent defect would be an inadequacy in the foundation which causes subsidence of the building structure itself.

POSITIVE OBLIGATION ON REALTORS & VENDORS

There is a positive obligation on the seller to do several things if there is a defect with their property. The first is that they should not cover up defects or try to misrepresent the true state of the property being sold. If it is found that the seller did misrepresent the property, or intentionally tried to cover up a defect, it will nullify the concept of “buyer beware” and will most likely result in the seller being held liable to some degree to the purchaser for the defect.

It is not only the seller who has a positive obligation to divulge information regarding defects in a home. Real Estate Agents have an obligation under the Real Estate and Business Brokers Act, 2002 Ontario Regulation 580/05 Code of Ethics, sections 3 and 4, which pertain to being candid and honest with ones client as well as when dealing with any property in Ontario. Section 21 is also relevant because it sets out what the definition of a ‘material fact’ is. The relevant sections read as follows:

Section 3 – Fairness, honesty, etc.
A registrant shall treat every person the registrant deals with in the course of a trade in real estate fairly, honestly and with integrity.

Section 4 – Best Interests
A registrant shall promote and protect the best interests of the registrant’s clients.

Section 21 – Material Facts
(1) A broker or salesperson who has a client in respect of the acquisition or disposition of a particular interest in real estate shall take reasonable steps to determine the material facts relating to the acquisition or disposition and, at the earliest practicable opportunity, shall disclose the material facts to the client.
(2) A broker or salesperson who has a customer in respect of the acquisition or disposition of a particular interest in real estate shall, at the earliest practicable opportunity, disclose to the customer the material facts relating to the acquisition or disposition that are known by or ought to be known by the broker or salesperson.

EXAMPLE IN PRACTICE

The case of Krawchuck v. Scherbak et al. 2011 ONCA 352 is a prime example of when a REALTOR might be held responsible for not being candid and upfront with purchasers.

Facts

The sellers were aware of plumbing issues with the house but responded ‘no’ to the question about whether there were any issues with the plumbing on the Seller Property Information Statement (SPIS). The buyer was provided with a copy of this SPIS and relied upon it when purchasing the property. The sellers were also aware that the house had issues with the foundation settling. Despite this fact, they told their real estate agent that the house had not faced any settling issues for 17 years. That information was not questioned by the agent but simply conveyed by the agent to the buyer.

Held

The Court of Appeal agreed with the trial judge with respect to the sellers’ negligence, but due to the actions and inactions by the agent, the Court also extended liability to the agent. The Court used the due diligence requirements found in the Real Estate Council of Ontario’s Code of Ethics to establish the agent’s standard of care. It concluded that the agent should have been apprehensive about the information provided by the sellers. In this case, the agent knew about the home’s history of settlement problems, and could also have discovered signs of problems through the agent’s visual inspection of the property. Those factors should have prompted the agent to verify the accuracy of the seller’s statements.

A key factor in this case was the fact that the agent acted on both sides. Ultimately, the Court decided to apportion 50% fault to both the sellers and the agent. The finding against the agent was justified by the court because the agent assisted the sellers in filling out the SPIS and should have informed the sellers about the implications of misrepresenting information in the SPIS.

In another case, Sevidal v. Chopra (1987), 64 O.R. (2d) 169 (H.C.J.), the sellers of a house knew, at the time the agreement of purchase and sale was entered into, of the existence of radioactive material in the area and did not disclose it to the purchasers. The Judge found that the amount of radioactive material was sufficient to be considered a potential risk and hazard and although not an immediate risk or danger, amounted to a potential danger. The sellers had a duty to disclose to the purchasers the potential danger to the property even though the radioactive material was in the immediate area but not known to be on the actual property in question.

CONCLUSION

It is always important to know what your role is as a seller and an agent to disclose material facts and to know what your disclosure obligations are. Here are a couple of simple tips for real estate agents to keep in mind when acting for either the purchaser or the seller:

When acting for a seller, ascertain what a reasonably prudent agent would discover and advise the sellers of your ethical obligations to them and to other members of the public. If the seller refuses to disclose a defect that you must disclose, do not accept the listing.

When acting for a purchaser, ask questions and record the answers given; ascertain what a reasonably prudent agent would discover and ensure that professional inspections are done.

If all else fails, just remember to follow the golden rule: “Do unto others as you would have them do unto you.”

The content of this Blog is intended to provide a general guide to the subject matter. The information does not constitute legal advice and a solicitor and client relationship is not created.

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