Posted by: Daryl & Wendy Ashby | May 27, 2011

I Told You So !

When I started selling Real Estate, a typical Contract of Purchase and Sale consisted of two pages; the front page which dealt with what property you were interested in, along with who you were and what you were offering, and a second page which listed the conditions (subjects) upon which you wanted to satisfy before you were willing to complete on the transaction.

Pretty straight forward. A Buyer could be in and out of an Agent’s office in less than half an hour. Not surprising too, there were a lot less law suits back then than there are today.

Today there are anywhere from eight to fourteen pages and the process can take up to two hours, as the endless pages of legal jargon and affidavits are read, reread and hopefully understood by all parties involved. Unfortunately, the vast majority of these additional documents are no more understood by the average Agent than by the clients they are attempting to assist. While any lawyer will attest to these added forms being written in a user-friendly language, what Agents lack is an understanding of historical need for the forms and the liability issues associated with the intent behind the forms.

One such form showed up about 10 years ago and it is entitled “The Property Disclosure Form”. This involves two pages of yes and no questions which we were told, must answer by the Seller and then signed at the bottom of each page. When my obstinate nature told me to drag my feet on using these forms, my office manager  dragged my sorry butt into her office and read me the riot act.

To my way of thinking, sometimes the less said the better and with this particular form, my gut told me that using it would eventually come back and bite someone (maybe me) in the same posterior that my office manager focused on initially. While the intent may have been admirable, in my opinion, this form removed any degree of defense that the Seller might have should a defect or problem with the structure show up at any date following the sale of the property. For me as an Agent working “in the best interests of the Seller”, I would have sold my Seller to the wolves by insisting they fill out the form, have then sign it and then proceed to hand it to a Buyer, instructing them to make it part of their Purchase Agreement.

Low and behold, here we are ten years later and the Ontario Court of Appeal has decided to support my suspicion.

“If there ever were any doubts about the risks to sellers and real estate agents of using the Seller Property Information Statement (SPIS), a decision of the Ontario Court of Appeal in May would seem to have put them to rest once and for all.

In the case of Krawchuk v. Scherbak, the Ontario Court of Appeal reversed the trial decision and held the real estate agent and her employer Re/Max Sudbury Inc. jointly liable with the sellers for negligent misstatement in filling out the form.”

The court ruled that the real estate agent could not rely on the disclaimers in the form and that she could not act as a mere conduit for information about the property from the seller to the buyer. The court recognized that the agent had a duty to verify the information provided by the sellers, failing which she would be held liable with them for misrepresentation.

The case began back in 2004 when Timothy and Cherese Scherbak listed their property on Boland Ave. in Sudbury with Wendy Weddell and Re/Max Sudbury.

Weddell assisted the sellers in completing the SPIS. On the form, the question, “Are you aware of any structural problems?” was answered: “NW corner settled … to the best of our knowledge the house has settled. No further problems in 17 years.”

Zoriana Krawchuk attended an open house, and with the consent of all parties Weddell became a dual agent. Krawchuck agreed to buy it, without a home inspection, for $110,100, which was $10,100 over the asking price.

After Krawchuk moved in, she discovered that the foundation walls were sinking into the ground below, resulting in the failure of proper support for the floor joists and building above.

Correcting the problem required lifting the home from its foundations, replacing the foundations and moving the house back to its original position at a cost of $197,000 – almost double what the house and land cost in the first place.

Krawchuk recovered $105,000 from her title insurer and then sued the sellers, the agent and Re/Max Sudbury for misrepresentation in failing to disclose the hidden defects. A significant component of her claim was based on the SPIS form completed by the sellers.

The form is intended to protect sellers by disclosing correct information about the property to buyers. It doesn’t always work.

The trial judge found the Scherbaks liable for negligent misrepresentation and awarded Krawchuk damages of $110,000 in addition to the $105,000 she had recovered from her title insurer. He dismissed her claims against the real estate agent and broker.

The Scherbaks appealed the judgment against them, and Krawchuk cross-appealed the dismissal of her claim against the real estate agent.

A three-judge panel of the court of appeal heard arguments last October and released its decision on May 6.

The court’s ruling noted that the “issue of primary importance” in the case was “the duty of a real estate agent to verify information provided by the vendor about the property.”

Writing for the appeal court, Justice Gloria Epstein upheld the judgment against the sellers, but also made the real estate agent equally liable for “egregious lapses” during her representation of both purchaser and vendors as dual agent.

The court wrote that the agent ought to have inquired further into the sellers’ incomplete disclosure that the foundation issues had been resolved years earlier. Failing that, she should have urged the buyer to hire a home inspector or make the offer conditional on an inspection.

Having failed to protect the buyer made the real estate agent equally liable with the sellers for damages. The court awarded half of the $110,000 in damages against the sellers and half against the real estate agent. In addition, the buyer was awarded $25,000 in costs of the appeal against the sellers and a further $25,000 in costs against the real estate agent.

The costs of the 12-day trial have not yet been resolved by the parties, but could easily range well into the hundreds of thousands of dollars for all parties involved.

Although the outcome of this case may be viewed as being restricted to its particular facts, and it did not create any new duties of real estate agents, it does emphasize how easily an experienced real estate agent can be held responsible in damages for failing to verify a seller’s statements on the SPIS form.

The Scherbaks were found liable not because their knowledge of the condition of the property was incomplete, but because they failed to disclose their full knowledge of the condition of the house. They knew that there were serious structural problems but did not disclose these facts. 

At trial, the judge found as a fact that the agent had no reason to question the truth of the information provided by the Scherbaks about the foundation of the house. Normally appeal courts do not interfere with the findings of fact by a trial judge, but in a very rare move, the Court of Appeal said that the trial judge’s conclusion that the agent had no reason to doubt the owners’ representations was “clearly wrong.”

“I appreciate,” wrote Justice Epstein, “that the trial judge’s findings of fact attract considerable deference and ought not to be interfered with absent palpable and overriding error.”

After reviewing the law on reversing findings of fact by a trial judge, Justice Epstein wrote, “The trial judge’s conclusion that Ms. Weddell had no reason to doubt the Scherbaks’ representations was ‘clearly wrong’. The only available inference is to the contrary. The circumstances were such that Ms. Weddell should have verified the accuracy of the Scherbaks’ representations about the house and she did not.”

Without actually defining the standard of care owed by a real estate agent in a case like this, the court ruled that Weddell and her company had failed to meet their obligations to their client.

In her written decision, Justice Epstein endorsed judicial comments in Alevizos v. Nirula, a 2003 Manitoba court of appeal decision, which stated that the use of SPIS forms:  “seems to present a ripe ground for litigation. Doubtless this is due in no small measure to the problems inherent in an informal ‘fill in the blank’ form which can have such serious legal consequences when problems subsequently develop in a real estate transaction. The wisdom of maintaining in use a form fraught with such inherent difficulties, exacerbated by the conflicting statements within the form concerning its purpose and effect, should be addressed by lawyers and real estate agents alike.”

The Nirula case, wrote one of the Manitoba appellate justices, “should be taken as a warning about the routine use of the form.”

The court in Krawchuk also dealt with the issue of whether the real estate agent was negligent in representing the buyer. After reviewing the governing Code of Ethics, Justice Epstein wrote, “In my opinion, in the circumstances of this case, given the requirements set out in the Code and the fact that Ms. Weddell had reason to doubt the veracity of the Scherbaks’ representations about the house, the authorities that indicate that a real estate agent’s duty to his or her client includes a duty to investigate material information about the property, are applicable.

“Whatever the standard of care, given the obvious defects in this house, Ms. Weddell had to either further verify the assurances herself or recommend, in the strongest terms, that Ms. Krawchuk 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.”

A number of conclusions can be drawn from the case:

First, the court twice says that the judgment only applies in the circumstances and on the facts of this particular case. As well, it does not create any new duties on real estate agents.

But it does clarify what the obligations of an agent are and always have been when using the SPIS. Those duties include an obligation to “investigate material information” about the property, and in some circumstances to “further verify” statements made by the seller in the SPIS.

Agents cannot be mere conduits, passing on information from seller to buyer without testing it and without being responsible for misstatements.

Second, and perhaps even more important, is the appeal court’s treatment of the disclaimer in the SPIS forms. Justice Epstein quotes the disclaimers in the form (“The broker/sales representative shall not be held responsible for the accuracy of the information contained herein.”) She then proceeds to ignore the statement in the rest of the judgment, and nails both the broker and sales representative with responsibility for the accuracy of the information in the form.

Those agents who continue to use the SPIS form may, in the past, have taken some comfort from the disclaimer. In light of the treatment of the disclaimer by Ontario’s highest court – in effect totally ignoring it – the real estate community is now on notice not only that agents have to “further verify” what their clients write into the form, but also that the attempted waiver of responsibility is not worth the paper on which it is written.

Clearly, agents and sellers who continue to use the SPIS do so at their own peril. Real estate associations that continue to promote the SPIS in its current form across the country are leading their members into needless litigation.

Earlier this year, I wrote a paper for the Ontario Bar Association, analyzing in detail all 49 Ontario court decisions concerning the SPIS since 1997. A reader’s letter published in this newspaper noted that this number was not a “big deal.”

But Barry Lebow, a frequent contributor to REM and noted expert witness, tells me that for every reported case, at least another nine are settled. That would translate to 490 Ontario decisions, and another 1,500 in the rest of the country. “I am betting that my 490 number is very low,” Lebow tells me.

In my view, at least 2,000 cases in 14 years is a very big deal, especially to the parties involved.

At press time, no decision had been made on an application for leave to appeal the Krawchuk decision to the Supreme Court of Canada.”

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