Sellers' Careless Disclosure Leads to Liability

 

By Brian Madigan LL.B.

This is another case involving the improper completion of a Property Condition Disclosure Statement and the remedies that are available afterwards.

This case was determined in the Small Claims Court of Nova Scotia in February 2007.

The Boychuks entered into an agreement of purchase and sale to acquire a residence owned and occupied by the Butlers in Dartmouth. It should be noted that Mrs. Butler was a licensed real estate agent and acted for herself and her husband in connection with the sale.

The agreement contained the following provision:

"3(b) This agreement is subject to the Seller providing to the Buyer within 24 hours of the acceptance of this offer, a current Property Condition Disclosure Statement, and that statement meeting with the Buyer's satisfaction. The Buyer shall be deemed to be satisfied with the statement unless the Seller or the Seller's agent is notified to the contrary, in writing, on or before (date) Jan 30/06. The Seller warrants it to be complete and current, to the best of their knowledge, as of the date of acceptance of this agreement, and further agrees to advise the Buyer of any changes that occur in the condition of the property prior to the closing date. If notice to the contrary is received, then either party shall be at liberty to terminate this contract. Once received and accepted, the Property Condition Disclosure statement shall form part of this Agreement of Purchase and Sale."

A Property Condition Disclosure Statement dated January 8, 2006, was completed by the Sellers and was provided to the Buyers as required under the terms of the agreement.

The home had been purchased by the Sellers in July 2002. In 2003, they experienced dampness in their yard. They contacted Ralph Crowell, who is a local installer of septic fields and septic tanks. Subsequently, they contacted two other contractors. Remedial work to the septic system was undertaken in both 2003 and 2005.

The agreement and closing took place during the winter conditions of 2006 (the 30th of March), so the septic system could not be properly inspected at that time. By the summer of 2006, a contractor reported that there was a complete system failure and the septic system required replacement.

The Court looked at the issue of negligent misrepresentation. There is a five part test before a claimant will be successful:

(1) there must be a duty of care based on a "special relationship"
between the representor and the representee;

(2) the representation in question must be untrue, inaccurate, or misleading;

(3) the representor must have acted negligently in making said misrepresentations;

(4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and

(5) the reliance must have been detrimental to the representee in the sense that damages resulted.

There is a review and analysis of the facts and the law in the Judgment:

"(76) According to paragraph 3(b) of the Agreement in this case, the Property Condition Disclosure Statement forms part of same once received and accepted.

(77) Applying the five part test .... I find firstly that there is a duty of care based upon the relationship between the parties.

(78) The next issue is whether the Sellers made to the Buyers a representation that is untrue, inaccurate or misleading.

(79) The Sellers rely upon the fact that the Property Disclosure Statement contains additional comments at paragraph 11 as previously noted. In fact paragraph 11 does contain a statement that french drains had been installed around the rear of the property in the Summer of 2004 and Spring of 2005.

(80) From their perspective, however, the Buyers submit that the provisions of the Property Condition Disclosure Statement relating to the septic disposal system note no previous problems with the existing system or upgrades having been carried out to the system in the last five years. In addition, paragraph 5 of Addendum Form 101, Schedule 4, contains a specific statement that the Seller warrants "to the best of their knowledge" that the septic disposal system is in good working order and has not presented any problems during their ownership and this warranty explicitly is stated to survive the closing.

(81) On the whole, I find the statements in the Property Condition Disclosure Statement to be misleading to potential purchasers. Anne Butler is a licensed Real Estate Agent. Despite her lack of personal experience with septic waste disposal systems, she clearly was aware that the water and drainage problems they were having were related to the septic field.... The drainage repairs were undertaken by them as a means of attempting to fix the issues they were having with their septic system. No explanation was given concerning why the information about the french drains was noted under additional comments in the area of "Structural" in the Property Condition Disclosure Statement. Paragraph 6A. and B. specifically refer to structural problems, unrepaired damage or leakage in the foundation, roof or walls and make no reference to problems with the septic system.


(82) The third step of the test is to determine whether the representor acted negligently in making the representation. I do conclude that the Vendors were negligent in making such representations in the manner in which they were made. It would be expected of a Vendor in this case, and even more so where Ms. Butler is a licensed Real Estate Agent, to note the drainage repairs in the area in the Property Condition Disclosure Statement concerning "Sewage Disposal" which would alert potential purchasers to possible problems with the system, such that they would inquire further. To include this information in the area of "Structural" would imply to a potential purchaser that the repairs were undertaken to deal with a problem of leakage in the foundation, roof or walls of the house. They would not be alerted to the possible problems with the septic system which the Sellers in this case were fully aware of.

(83) I find in this case that the Sellers were at the very least careless when preparing the Property Condition Disclosure Statement by failing to connect the drainage repairs to possible problems with the septic system.

(84) ....... to place this information under the "Structural" section of the Property Condition Disclosure Statement could easily mislead a potential purchaser into believing that the aforesaid repairs concerned structural issues with the foundation, roof or walls. This was particularly important in this case as the Sellers had in fact undertaken major structural repairs, including replacement of leaking windows before listing the property for sale.

(85) In reaching my conclusions on this point, I have also taken into consideration that a failure to provide information may constitute a misrepresentation as much as a positive misstatement.

(86) The fourth step of the test is whether the Buyers in this case relied in a reasonable manner upon the negligent misrepresentation. Once again, I have no hesitation in finding that this is the case. A buyer would reasonably conclude from the way that the Property Condition Disclosure Statement was prepared that the installation of the french drains was to deal with structural issues not possible problems with the sewage disposal or septic system.

(87) Step five of the test is clearly proven as the Buyers discovered that the system had failed entirely shortly after the snow melted from the ground."

The trial Judge allowed the purchasers' claim for the cost of the replacement of the septic system, but reduced the amount of the damages by 50% by reason of betterment.

COMMENT:

This case again points out the difficulties with the completion of the form. Here, one of the vendors was a real estate agent and was therefore held to a higher standard than might otherwise have been the case. While there was no apparent attempt to deceive, the document was filled out carelessly.

It should be observed that in this particular case the Property Condition Disclosure Statement (PCDS) was elevated to form part of the contractual terms of the agreement itself.

The test of correctness of the answers was measured from the purchasers' perspective. What would a normal purchaser think, given the responses? The Court did not consider whether the answers might be good responses from a technical point of view on the part of the vendors.

In this case, there were questions related to the septic system, and nothing was noted. Yet, the mere fact that disclosure was provided in another part of the document was not sufficient. It is risky and foolhardy to be vague. It is also risky and foolhardy to place the correct information in the wrong location in the document. That's not disclosure. In fact, it might be considered to be concealment.

In this case, the Court correctly imposed liability upon the sellers because the Property Condition Disclosure Statement as a whole was misleading.

It is noteworthy that the Court did not have to go as far as to conclude that the sellers were "deceitful", the Court simply based liability on the basis of "carelessness".

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