A Warning to Sellers and Real Estate Agents About the Use of Property Disclosure Forms by Jason Filek

A house being sold needs properly documented property disclosure forms

A relatively recent case, Krawchuk vs Scherbak, from the Ontario Court of Appeal, is generating a lot of attention in Canada’s real estate industry. The Court held a real estate agent, her firm, and the seller jointly liable for the seller’s negligent misstatement on a property disclosure form formally known as the “Seller Property Information Sheet” (SPIS). Real estate agents and sellers are recognizing that the SPIS is a double-edged sword: the SPIS provides information about a house to a prospective purchaser, but also increases the chance that the seller and the real estate agent may be liable if the information on the SPIS is inaccurate or insufficient

Facts:

In the spring of 2004, Timothy and Cherese Scherbak listed their house for sale. On April 18, Zoriana Krawchuk attended an open house for the property, quickly became interested in the property, and walked through the house on her own and with the agent. During her walk-through, Krawchuk noticed several visible defects in the house: these included uneven floors, a foam-filled crack in the northwest corner of the crawl space, and sloped brick work on the exterior of the northwest corner. When asked about the defects, the agent advised Krawchuk about the SPIS and stated that the house had settled in the northwest corner and that there had been no further problems in 17 years. Krawchuk decided to purchase the house. Since the agent was already acting for the sellers, she became a dual agent in the transaction. The purchase price was $110,000.

After the closing, Krawchuk cleaned up small accumulations of sand in the northwest corner wall of the crawlspace. A few days later, more sand had accumulated in the same area. A contractor inspected the house and concluded that the entire north foundation wall and northern section of the east foundation wall were sinking into the ground. The sinking walls were causing substantial damage to the foundation and floor joists in the building.

The contractor also noted that the household sewage was draining into a small pit beneath the crawlspace before emptying into the municipal sewage system. The pit was poorly constructed and did not have an airtight seal. In response to the serious defects, the city issued a work order requiring Krawchuk to repair the problems in her house.

During the repairs, the house was lifted from its foundation and the ground below the house was excavated and removed. Contractors replaced the cement basement floor and placed the house on its new foundation. As if the original damage was not enough, moving the house caused large cracks in the walls, which were also repaired. Krawchuk sued the sellers, the agent and the agent’s employer, Re/Max Sudbury Inc. in an effort to recover her substantial losses.

Trial Decision:

At trial, Krawchuk claimed breach of contract and misrepresentation against the sellers. The information provided on the SPIS, argued Krawchuk, was insufficient and did not refer to the hidden defects (the sinking foundation and sewage system) which rendered the house uninhabitable. Krawchuk further claimed that the sellers had tried to conceal the problems by re-leveling the living and dining room floors in 1995.

Most of Krawchuk’s arguments, however, pertained to the SPIS. Although the SPIS was created to increase transparency in the sale and purchase of homes, sellers may face legal consequences if they do not accurately and completely disclose their knowledge of defects. In Krawchuk’s case, she argued that the sellers failed to disclose the continuing problems with the foundation of the house. In response to a question on the SPIS, “Are you aware of any structural problems?” the sellers answered: “NW corner settled – to the best of our knowledge the house has settled. No further problems in 17 years.”

In June 2009, the trial judge concluded that Krawchuk would not have purchased the house had she known the actual extent of the damage to the foundation. In the result, it was held that the sellers were responsible for negligent misrepresentation.

While the trial judge held the sellers liable for Krawchuk’s losses, the judge did not extend any liability to the real estate agent or her firm. Burdened with having to pay all the damages and costs, the sellers appealed the trial judge’s decision. Krawchuk also cross-appealed the dismissal of her claim against the real estate agent.

Court of Appeal Decision:

The Ontario Court of upheld all of the trial judge’s findings except for the apportionment of liability. The Court of Appeal concluded that the sellers, the agent and the agent’s firm were equally liable to Krawchuk for damages.

The Court examined the real estate agent’s duty “to verify information provided by the vendor about the property.” On behalf of the Court, Epstein J. wrote that “While the Scherbaks were in the best position to have accurate and complete information about the condition of the property, the agent should have done more to protect both of her clients [the sellers and the buyer].” Epstein J. also commented that routine use of the SPIS form was a ground “ripe for litigation.”

Lessons from Krawchuk:

Krawchuk is not the first case that involved the legal ramifications of Ontario’s SPIS form. Since its introduction in 1993, the SPIS form has led to numerous reported court decisions in Ontario. Property disclosure documents akin to Ontario’s SPIS have been the focus of over 150 reported decisions in other provinces and territories. Unlike the other cases, Krawchuk has generated the most attention because of its large damages award and the associated costs of litigation. In effect, Krawchuk has compelled everyone in the real estate industry to reexamine whether property disclosure forms are a useful tool or a potential liability.

The real estate industry in British Columbia uses the Property Disclosure Statement (PDS), which is a document similar to Ontario’s SPIS form. Sellers and agents in B.C. real estate transactions should note that the reverberations of Krawchuk are likely to reach courts in B.C. When a PDS has been prepared, sellers and their agents should carefully determine whether the disclosures in the document are clear, comprehensive, and most importantly, accurate. Real estate agents should remind sellers of the important liability issues that may arise if the PDS is inaccurate or incomplete, and should also strongly recommend that purchasers have an independent inspection performed either before making an offer or as a condition of an offer. Notwithstanding the old rule of “buyer beware”, after Krawchuk, courts in B.C. may be more amendable to legal claims against not only sellers, but also against real estate agents by purchasers who, after accepting the truthfulness and accuracy of the disclosures in the PDS, are stuck with defective houses and large repair bills.