It is well established that home sellers have an obligation to disclose latent defects to potential purchasers. Recent court and discipline decisions confirm that real estate agents also share this duty of disclosure.
Although the principal of "caveat emptor" or "buyer beware" generally applies to real estate transactions, some defects must be disclosed to prospective purchasers. Patent defects cannot be concealed, but are not required to be disclosed. Patent defects are ones that are discoverable by a purchaser exercising ordinary due diligence. Latent defects, which are not discoverable in such instances, must be disclosed.
The seller property information statement (SPIS) is a disclosure form published by the Ontario Real Estate Association OREA.
It is meant to provide a convenient way for home sellers to disclose relevant information. It contains several pages of questions about the property that vendors answer and initial. It is optional, and real estate agents are divided on whether or not it should be used. Some agents insist on it and others strongly oppose it.
The Real Estate Council of Ontario (RECO) code of ethics requires real estate agents to determine and disclose all “material” information relating to the property, but do not dictate the form of disclosure. There are provisions in the code of ethics relating to the completion of the SPIS, but they stop short of requiring vendors to provide it.
Many of the questions in the SPIS form do not relate to “material” information that a vendor is obligated to disclose. Some of the questions are beyond the scope of most home sellers and can be confusing. In light of recent decisions finding real estate agents liable for inaccuracies in an SPIS, I suspect that many more real estate agents will be discouraging their vendor clients from providing them.
A disclaimer on the SPIS attempts to limit an agent’s responsibility for the accuracy of the information provided to buyers, but the courts and RECO discipline panels have confirmed that agents are required to confirm the accuracy of statements disclosed in the SPIS and can be responsible for inaccurate statements.
A disciplinary panel of RECO recently confirmed this obligation in a hearing regarding Sault Ste. Marie agent Dale Godfrey. Godfrey was in a dual agency situation, representing the vendor and purchaser in a 2010 transaction. Godfrey provided a completed SPIS to the purchaser which stated that there were no known problems with moisture or water penetration. The purchaser relied on these statements and entered into the agreement. A subsequent home inspection revealed significant foundation issues which left the basement vulnerable to water leaks. The inspection company estimated the cost of repair at $12,000. In light of the inspection report, the purchaser’s bank would not advance funds and the purchaser was unable to complete the transaction.
The RECO discipline panel held that Godfrey violated a number of sections of RECO’s code of ethics. In an agreed statement of facts, Godfrey admitted to acting unprofessionally by failing to verify the accuracy of the statements in the SPIS and failing to promote and protect the best interests of the purchaser. This is consistent with rulings from Ontario courts.
The Court of Appeal for Ontario held a real estate agent liable for inaccurate statements in an SPIS in Krawchuk v. Scherbak  O.J. No. 2064. In that case, the real estate agent also acted in a dual agency role. The agreement was not conditional on a home inspection, but the vendor completed an SPIS which was provided to the purchaser prior to her offer. The purchaser relied on the statements in the SPIS and entered into the agreement.
After closing, the purchaser discovered structural and plumbing defects that the City of Sudbury ordered her to rectify. The total cost of the repairs was approximately $190,000. The court referred to the RECO code of ethics in determining the standard of care for an agent with respect to disclosure obligations. The court concluded that, in these circumstances, the agent had reason to doubt the accuracy of the representations made by the vendor in the SPIS, and should therefore have verified the statements or recommended, in the strongest terms, that the purchaser obtain an independent inspection.
These decisions confirm that real estate agents have an obligation to confirm the accuracy of the disclosure made by vendors. In each of these cases, the agents represented both the vendor and the purchaser in the transaction. However, if there is any reason to doubt the validity of the disclosure made by the vendor, a vendor’s agent has an obligation to make further inquiries regardless of whether or not they also represent the purchaser.
Lawyers are no longer permitted to act for vendors and purchasers in real estate transactions, with limited exceptions. Perhaps it is time for RECO to re-examine its policies relating to conflicts of interest and dual agencies.
Merredith MacLennan is a partner in the real estate and development law group at Nelligan O’Brien Payne, a full-service law firm in Ottawa. She can be reached at firstname.lastname@example.org.
[This article was originally published in the February 27, 2015 edition of The Lawyers Weekly.]