CAVEAT EMPTOR: LET THE BUYER BEWARE

“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”

INTRODUCTION
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 vendor. The reasoning behind this is the REALTORS® as well as the vendors 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 vendor 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 vendor to do several things if there is a defect with their property. The first being not to cover up defects or try to misrepresent the true state of the property being sold. If it is found that the vendor 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 vendor being held liable to some degree to the purchaser for the defect.

It is not only the vendor 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 recent 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 & upfront with purchasers.

Facts
The vendors 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 vendors were also aware that the house had issues with the foundation’s 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 vendors’ 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 vendors. In this case, the agent knew about the house’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 vendor’s statements.

A key factor in this case was the fact the agent acted on both sides. Ultimately, the Court decided to apportion 50% fault to both the vendors and the agent. The agent also assisted the vendors in filling out the SPIS and should have informed the vendors 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 vendors 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 that it was a potential risk and hazard and although not an immediate risk or danger, amounted to a potential danger. The vendors had a duty to disclose to the purchasers the fact that the latent defect was only known to be on the property in the immediate area and not on the property itself provided no excuse for non-disclosure.

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

When acting for a vendor, discover what a reasonably prudent agent would discover and advise the vendors of your ethical obligations to them and to other members of the public. If the vendor 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; discover 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 article 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.

Shari D. Elliott
Elliott & Elliott
135 Bayfield Street, Suite 101A
Barrie, Ontario, L4M 3B3
Tel.: 705-797-2672
Fax: 705-797-8445
Email: shari@elliottlawyers.com

Home Inspection Reveals Issues?
Be Sure to Disclose This to Potential Purchasers…

As a real estate agent it is advisable that you inform potential purchasers if a previous home inspection had been conducted on the property which revealed defects. Also be sure to disclose ALL defects which were identified, and if any work had been completed to attempt to repair the issues.

In the case Gundersen v. Savoy an offer was made on the Savoy’s property conditional upon a home inspection. The home inspection revealed some defects which allowed the potential buyer to terminate the deal. The results of that inspection was not disclosed to the next potential buyer (the plaintiffs) and the real estate agent (Mr. Lightburn) discouraged this buyer from conducting their own home inspection. The property was purchased and it was discovered that the structure was infested with mould and mildew.

The Savoy’s had listed their property in 2003 and over a period of three years they did not have much action on their home until an offer was submitted in 2005, conditional upon a home inspection. The home inspection revealed the presence of mildew and as a result the offer was terminated. Some work was undertaken to attempt to remediate the issue and the real estate agent was aware of this fact.

In 2006, the plaintiffs viewed the property and had discussions with the real estate agent indicating that if an offer was made they felt it should be conditional upon a satisfactory home inspection. The agent advised that this was not necessary and pointed out the fact that an inspection had already been completed, however, he left out the very important detail that mildew/mould had been identified. The purchasers took the agents advice (he was also a family friend) and an offer was submitted without the home inspection condition. It was accepted the next day by the vendors.

Several months after taking possession, the purchasers discovered a significant amount of mould infestation. Furthermore, their daughter began to experience some minor health issues. As a result, they vacated the property and started a lawsuit against both the vendors and the real estate agent/brokerage. During this time, Ms. Gundersen also developed depression as a result of the whole situation. The detrimental health effects on both the daughter and Ms. Gundersen was included in the lawsuit to seek aggravated damages which “are awarded to compensate for intangible emotional injury.”

At trial it was found that the vendors were not liable as they had not attempted to conceal anything. They undertook to complete the work that they believed was required to fix the issue when it was first identified in the home inspection. After the work was completed, they were under the impression that they had solved the problem.

The listing agent and the brokerage were found to be liable for both general and aggravated damages. The listing agent had been attempting to sell the property for about three years and was clearly in a position “where his desire to sell a property that had been on the market a long time and his duty to the vendors to do his best […] conflicted with his duty to the plaintiffs as purchasers.” As a result, what he decided to say and not say to the purchasers was considered to be deceitful. There was clearly a conflict of interest and the way that he chose to approach and resolve the situation was detrimental to the plaintiffs.

Justice Melnick stated that “by only giving part of the findings of the report […] Mr. Lightburn was probably more effective in dissuading the plaintiffs from having an inspection done than if he had said nothing at all about the prior inspection.” This led to the conclusion that he was liable to the plaintiffs in deceit. Also, his brokerage was found liable due to the fact that listing agent’s knowledge is ascribed to it as his employer. The general damages amounted to $37,000. The plaintiffs were also awarded aggravated damages in the amount of $10,000 due to the ill health effects and inconvenience that was caused to their lives.

This case points to the fact that real estate agents have a duty to act fairly, honestly and with integrity in their real estate dealings. Even when agents have a listing of a property which could be considered a ‘problem property’, they have a duty to advise potential purchasers of any issues which they are aware of. If a home inspection has been completed which has resulted in a revoked offer, be sure to inform potential purchasers of this fact and do not intentionally leave anything out.

The content of this article 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.

Shari D. Elliott
Elliott & Elliott
135 Bayfield Street, Suite 101A
Barrie, Ontario, L4M 3B3
Tel.: 705-797-2672
Fax: 705-797-8445
Prepared with the assistance of Hayley Valleau Email: shari@elliottlawyers.com

September is always a good time to reflect on the transactions over the summer to see what trends there are that caused issues with closing and how to learn from them.

PRIVATE WATER – WHAT HAPPENS WHEN THE WELL GOES DRY?

This summer so far I have been notified by three purchasers of properties with private wells that have gone dry. This is not a temporary issue, in all three cases the well-driller consultant has advised the only remedy is to install a new well. Each of these files have been transferred to a litigation firm and a small claims court action has been commenced.

As a result of the quantity of water becoming a problem, I have investigated what a real estate agent can do to have the quantity not just the quality of the water investigated. In all three of my client’s situations the well-driller company retained has advised that the water quantity issues had to have been long-standing and known.

There are two things that agents can do to protect their clients: The first is to have your client retain the services of a well-driller, to perform a flow-test. I have prepared a full handout on this topic which I have attached. The second thing is to insert in the agreement a representation and warranty clause. This is on the basis of the owner representing and warranting (also can be referred to as guaranteeing) that there is and has been proper quantity of water while under the owner’s occupancy of the property that a small claims court action can be commenced if this is later discovered to not be true. A sample representation and warranty is as follows:

The Seller represents and warrants that during the Seller’s occupancy of the property, the pump and all related equipment servicing the property have performed adequately and will be in good working order on closing and are capable of supplying an adequate quantity of water to meet the household needs. The parties agree that this representation and warranty shall survive and not merge on closing, but apply only to the state of the property existing at closing.

As a purchaser you do not want this clause:

This offer is conditional upon the Buyer determining at the Buyer’s own expense that:
i) There is an adequate supply of water to meet the Buyer’s household needs;
ii) The pump and all related equipment serving the property are in proper operating conditions; and
This puts the onus on the Buyer and if the Buyer has a consultant attend and perform a flow test it might pass on that day but for any number of reasons will not be enough if there are known problems which have not been disclosed. Without a representation or warranty from the Seller there will be no basis for a small claims court action.

RETAINING WALLS – WHAT IF IT IS NOT ON YOUR PROPERTY?

I have been involved in two files where a retaining wall existed to protect my client’s property, but the retaining wall was not located on that property, but rather the adjacent property. In both cases the transactions were not completed, upon the discovery of this fact. In the first situation the Sellers were not aware that the retaining wall was not on their property until the title search commissioned by my office revealed it. There was a survey registered on title that the Sellers did not have, that clearly showed this. During the home inspection my clients had the retaining wall inspected and upon discovery of the need for repairs had been provided an abatement in the purchase price, so they could address the repairs after closing. In this situation the Seller’s solicitor was the same solicitor who acted on their purchase and this fact was never discovered. I required, on behalf of my client, an encroachment agreement with the adjacent landowner to be registered on title acknowledging the fact that the retaining wall is the property of my clients and providing access for repair and maintenance. This was refused and the position was taken this was not substantive enough to refuse to close the transaction. It was my position this was substantive the retaining wall in place to protect my client’s property was not on their property, they had no right to access it and it was in need of repair. The transaction was not completed and after threatening a small claims court action the deposit was eventually returned.

The second situation was just this past week. In this case the retaining wall was located 7 inches on the adjacent property and was discovered during the lawyer approval conditional period. In this situation because it was so close to the boundary and without a survey it was unknown whether or not it was in fact on the boundary. The easy fix appeared to be to enter into a boundary fence agreement with the adjacent landowner and have it registered on the title to both properties. This would allow terms for the existence of the retaining wall in that location and for repair and maintenance to be agreed upon. This was also refused. After explaining the ramifications of not owning the retaining wall for the duration of my clients occupancy and more importantly on the resale of this property this transaction was terminated.

It is important for agents to know that fences are exempt from title insurance coverage. As well, items that are off-site or are known at the time of the closing are exempt. In this second situation the listing real estate agent could not understand why we would not just rely on title insurance. Not sure what that coverage would have even provided but what is clear is when you are aware of an issue you do not have coverage.

STATE OF PROPERTY ON CLOSING – SAME DAY FINAL INSPECTION.

The third item that appears small when the clause is inserted in the agreement but becomes a big issue on the day of closing is “leaving the property in a clean, broom swept manner with all debris removed”. Almost every week we had a problem on the day of closing with debris being left at the property and not in a minor way. In one instance my clients had to take their children to relatives and put their dogs in a kennel because the property was so disgusting. My clients had to rent a bin and spent a full-day removing items from the house before they could start to clean it to be ready to move their things in. In this instance I was able to get my clients, expenses totalling $1,000 paid. This payment was made voluntarily upon request as the transaction was already closed. If it had not been paid voluntarily, my clients would of been responsible for these unforseen costs or may have needed to rely on the real estate agent because the amount is to minimal to warrant a small claims court action.

To avoid having the place not be in a proper state on the day of closing, agents should make it a habit to arrange a final inspection the morning of closing. It is a common law right, based on case law, that clients are entitled to an inspection on the day of closing, which is not something that is required to be set out in the agreement of purchase and sale. This right is based on the common law principle that the buyers are entitled to walk through on the day of closing to ensure the property has not been damaged or altered such that it would not be insurable or of the same value for the mortgage. A recent problem with obtaining access for same day closing has been access to keys. I recommend that agents make same day inspections part of their practice and ensure keys will be available for this purpose.

Every year there are new items that occur in real estate transactions that change the advice I give to agents and what I do during solicitor approval. I trust that this review from the summer of 2013 will assist you.

The content of this article 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

In Ontario, the land registration system shuts down at 5:00 p.m. and lawyers involved in real estate transactions are responsible for making sure that this deadline is met, or otherwise, the deal must be closed “in escrow”.

Closing in escrow means that the lawyers involved in the transaction have made an agreement (typically before 6:00 p.m.) that although the transfer has not yet been registered, the buyers have permission to enter into the home. The lawyer acting on behalf of the seller will then hold the funds in their trust account until the registry office opens again and the registration can be completed.

When an escrow closing occurs you may be wondering what will happen with your title insurance policy. Stewart Title Guaranty Company offers a benefit called “Gap Coverage” for those situations in which you close in escrow and the transfer and/or mortgage is unable to be registered. Gap Coverage provides the lender and homeowner with coverage during the gap that exists between closing and the registration of documents, provided the underwriting requirements are met and where due to unforeseen circumstances registration cannot take place until the next day the registry system is available for closing.

When a transaction is required to be closed in escrow, the lawyers acting on behalf of the buyers/sellers will sign what is referred to as an ‘Escrow Closing Agreement’. This agreement contains important information related to the terms of the escrow closing such as:

• the extended closing date (the day that registration will take place);
• permission for the buyers to take immediate possession of the property; and
• an agreement that the sellers lawyer will hold all moneys received from the buyer in escrow until registration is complete.

This Escrow Closing Agreement means that all terms and conditions of the agreement of purchase and sale will remain the same as intended, in full force and effect. The only difference is that the registration will be taking place on a day later than the original closing date.

The content of this article 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.

While trees add beauty and character to neighbourhoods, they can also cause tension between neighbours, particularly where they grow across property lines. This raises many questions:

When must I cut my trees?

As a tree owner, if a dead or dying branch or tree is in the location where it could potentially cause significant damage, the owner of the tree has a duty to take reasonable care. This could give rise to a duty to trim back a tree or branch that is a threat to neighbours. In Hayes v. Davis an injured neighbour was awarded substantial damages from a neighbour that refused to take reasonable care in maintaining his trees, which resulted in an accident following a severe storm.

However, in the case of Doucette v. Parent, the court held that growing trees is a natural use of land that does not attract liability, only dead or dying trees or branches that are noticeably likely to cause damage need to be cut back. Hence, this case was dismissed, as neither party knew that the tree was sick and would have fallen and caused damage in a windstorm.

New Law on Tree Preservation

In May 2013, the Ontario Superior Court in Hartley v. Cunningham et al redefined the law on tree preservation in Canada. Cutting down a shared tree or chopping at wayward branches without a neighbour’s approval could now be considered a criminal act, punishable under the provincial Forestry Act, R.S.O. 1990, c. F.26. The decision gave neighbours equal ownership over trunks that cross over property lines whether above or below ground, which in effect redefined what constitutes a tree’s trunk. In order to remove a boundary tree, both neighbours are now required to provide consent.

Justice Moore ruled that a shared tree under the Forestry Act begins where its roots join the trunk, up to where the trunk begins to branch out. Defining a trunk at ground level alone may be considered ‘arbitrary’ as individuals could potentially alter ‘ground level’ simply by adding soil or other materials at the base of the tree in order to raise the base to a position which may not be on the boundary line. As a result, it was decided that the adjoining neighbours in this dispute were to be given common ownership of the boundary tree under provincial law as the portion of the tree in which the trunk met the roots was located on the boundary line. This case
can be accessed by clicking here.

Do neighbours have the right to trim overhanging trees?

Usually neighbours have the right to trim branches overhanging their side of the fence, but cannot enter your property to do so. This could give rise to trespass. If the tree is damaged as a result of a neighbour’s pruning attempts, they could be found liable. The best advice is to do only as much as is necessary to solve the particular problem. Never go overboard.

Can I trim municipally owned trees that are in front of my house?

Homeowners are obligated to inform the municipality of any concerns but are restricted from trimming these trees. Failure to comply could result in fines and replanting if necessary.

It is important to check with your local municipality when dealing with problems concerning trees. There may be restrictions on the cutting of trees. Even if a tree is completely on your property, you may not be able to cut it down without a permit depending on the size. As well, it is a good idea to ensure the tree is not actually owned by the municipality.

The content of this article 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.