Use SPIS forms at your own peril - Krawchuk v. Sherbak


thestar.com
Bob Aaron
Bob Aaron bob@aaron.ca

Posted On: Saturday, May 28, 2011
If there ever was any doubt 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 earlier this month would seem to have put them to rest once and for all.

In the case of Krawchuk v. Scherbak, the court of appeal reversed the trial decision and held the real estate agent and her employer equally liable with the sellers for negligent misstatement in filling out the form.

Back in 2004, Timothy and Cherese Scherbak listed their property in Sudbury with Wendy Weddell and Re/Max Sudbury Inc.

After Zoriana Krawchuk bought the house for $110,100, she discovered that the foundation walls were sinking into the ground, 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 almost double what the house and land cost in the first place.

Krawchuk sued the sellers, the agent and Re/Max Sudbury for misrepresentation in failing to disclose the hidden defects. A significant component of the Krawchuk 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.

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.

On the SPIS form signed by the Scherbaks, 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.”

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 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.

In her written decision, Epstein endorsed comments in earlier cases about the SPIS form, including one that said use of the form “seems to present a ground ripe for litigation,” and another which said that the case should be taken as a warning about the routine use of the form.

Clearly, agents and sellers who continue to use the SPIS do so at their own peril.

Link to: REMONLINE page one news story:   RULING HIGHLIGHTS DANGER OF DISCLOSURE FORMS

or

http://www.remonline.com/home/?p=8755&utm_medium=email&utm_campaign=Ruling+highlights+danger+of+disclosure+...&utm_source=YMLP&utm_term=Read+more

FULL TEXT OF CASE:

from http://www.ontariocourts.on.ca/decisions/2011/2011ONCA0352.htm

CITATION: Krawchuk v. Scherbak, 2011 ONCA 352

DATE: 20110506

DOCKET: C50902

COURT OF APPEAL FOR ONTARIO

Rosenberg, Cronk and Epstein JJ.A.

BETWEEN

Zoriana Krawchuk

Plaintiff (Respondent/
Appellant by way of cross-appeal)

and

Timothy Scherbak and Cherese Scherbak

Defendants (Appellants)

and

The City of Greater Sudbury, Trow Associates Inc., Wendy Weddell,
Re/Max Sudbury Inc., Stanley Malecki, Ferdinand Nagel,
Dwight Roy Cockburn and Linda June Cockburn, Danny Gamble and
Lina Gamble and Tarion Warranty Corporation

Defendants (Respondents/
Respondents by way of cross-appeal)

D. Peter Best, for the appellants

David S. Steinberg, for Zoriana Krawchuk, respondent/appellant by way of cross-appeal

Amelia M. Leckey, for Wendy Weddell and Re/Max Sudbury Inc., respondents/respondents by way of cross-appeal

Heard: October 18 and 19, 2010

On appeal from the judgment of Justice Robbie D. Gordon of the Superior Court of Justice dated July 30, 2009, with reasons reported at (2009), 85 R.P.R. (4th) 262.

Epstein J.A.:

I.                       INTRODUCTION

[1]             This appeal arises out of a sale of a house that, unbeknownst to the purchaser, had serious defects.  While the appeal involves an analysis of the nature of the obligations between the various participants in the transaction, the issue of primary importance raised in this appeal is the duty of a real estate agent to verify information provided by the vendor about the property that is the subject of the transaction.

[2]             In June of 2004, the respondent, Zoriana Krawchuk, purchased her first home. Shortly after moving in, Ms. Krawchuk discovered serious structural problems.  The City of Sudbury issued an order requiring that the problems be rectified.  The repair process, during which Ms. Krawchuk was forced to live elsewhere, disclosed plumbing problems as well.  The repair costs exceeded the $110,100 she had paid for the property.  Ms. Krawchuk recovered almost this amount through her claim under the title insurance policy she had acquired at the time of closing.

[3]             Notwithstanding this recovery, Ms. Krawchuk sued the vendors – the appellants, Timothy Scherbak and Cherese Scherbak – for breach of contract or, in the alternative, for fraudulent or negligent misrepresentation.  She also sued Wendy Weddell, the agent acting for both she and the vendors, and the brokerage for which Ms. Weddell worked, Re/Max Sudbury Inc. (collectively, the “real estate respondents”), for fraudulent or negligent misrepresentation and in negligence.[1]  The Scherbaks and Ms. Weddell crossclaimed against each other for contribution and indemnity in relation to any damages for which they may be held liable to Ms. Krawchuk.

[4]             The trial judge found the Scherbaks liable for negligent misrepresentation and awarded Ms. Krawchuk damages in the amount of $110,742.32 ($105,742.32 based on the diminution in value of the property by reason of the defects and consequential losses and $5,000 for mental distress and “loss of health”).  He dismissed both Ms. Krawchuk’s claim and the Scherbaks’ crossclaim against the real estate respondents.  He did not address the real estate respondents’ crossclaim against the Scherbaks, which in any event was moot given his dismissal of Ms. Krawchuk’s claim against them.

[5]             On their appeal, the Scherbaks submit that the trial judge erred in his finding of negligent misrepresentation.  They put forward three main arguments in support of this position.  First, they contend that the trial judge erred in basing liability on a cause of action not pleaded.  Second, the Scherbaks submit that the trial judge, in addition to making a number of findings of fact that were not supported by the evidence, erred in concluding that they owed Ms. Krawchuk a duty of care based on information they provided about the property.  Third, they argue that the trial judge erred in holding that they owed a duty of care to Ms. Krawchuk in the light of the “entire agreement” clause contained in the agreement of purchase and sale.

[6]             The Scherbaks further contend that the trial judge erred in law by allowing Ms. Krawchuk to recover both under her title insurance policy and through damages awarded at trial. 

[7]             Ms. Krawchuk, on her cross-appeal, argues that the trial judge erred in dismissing her claim against Ms. Weddell.  She submits that Ms. Weddell breached her duty to recommend that she seek professional advice regarding the possible structural problems with the house and to advise her of the risks associated with making an offer that was not conditional on a satisfactory home inspection.  Ms. Krawchuk further submits that Ms. Weddell was also liable for negligent misrepresentation in conveying to her incomplete and inaccurate information about the house.  

[8]             In their appeal from the dismissal of their crossclaim against the real estate respondents, the Scherbaks contend that the trial judge erred in failing to conclude that Ms. Weddell had a duty to advise them with respect to their obligations arising from the information they provided Ms. Weddell concerning the house and that she breached that duty.

[9]             Finally, on this appeal, the real estate respondents continue to advance their claim against the Scherbaks for contribution and indemnity if they are found liable to Ms. Krawchuk.  This claim is based on the real estate respondents’ argument that any misrepresentations made to Ms. Krawchuk were as a result of the failure of the Scherbaks to disclose the full condition of the property to Ms. Weddell.

[10]         For the reasons that follow, I would dismiss the Scherbaks’ appeal in relation to the judgment against them in favour of Ms. Krawchuk.  I would allow Ms. Krawchuk’s cross-appeal from the dismissal of her action against the real estate respondents.  I would dismiss the Scherbaks’ appeal from the dismissal of their crossclaim against the real estate respondents and dismiss the real estate respondents’ crossclaim against the Scherbaks. 

II.                    FACTUAL BACKGROUND

[11]         In March of 2004, the Scherbaks met Ms. Weddell at an open house and hired her as their agent to assist them in finding a new home.  Following the signing of an offer to purchase a new property, the Scherbaks retained Ms. Weddell as their listing agent to sell their existing home on Boland Avenue in Sudbury.  On April 13, 2004, the Scherbaks and Ms. Weddell signed a listing agreement. 

[12]         Ms. Weddell assisted the Scherbaks in completing a document known as a Seller Property Information Sheet (“SPIS”) with respect to the property. The SPIS is a two-page, pre-printed standard form document prepared by the Ontario Real Estate Association, the stated purpose of which is, in part, to protect sellers by establishing that correct information concerning the property is provided to prospective buyers.

[13]         The SPIS completed by the Scherbaks contains the following instructions at the top of the first page:

ANSWERS MUST BE COMPLETE AND ACCURATE This statement is designed in part to protect Sellers by establishing that correct information concerning the property is being provided to buyers.  All of the information contained herein is provided by the Sellers to the broker/sales representative.  Any person who is in receipt of and utilizes this Statement acknowledges and agrees that the information is being provided for information purposes only and is not a warranty as to the matters recited hereinafter even if attached to an Agreement of Purchase and Sale.  The broker/sales representative shall not be held responsible for the accuracy of any information contained herein.

BUYERS MUST STILL MAKE THEIR OWN ENQUIRIES Buyers must still make their own enquiries notwithstanding the information contained on this statement.  Each question and answer must be considered and where necessary, keeping in mind that the Seller’s knowledge of the property may be incomplete, additional information can be requested from the Sellers or from an independent source such as the municipality.  Buyers can hire an independent inspector to examine the property to determine whether defects exist and to provide an estimate of the cost of repairing problems that have been identified.  This statement does not provide information on psychological stigmas that may be associated with a property. [Emphasis in original.] 

[14]         It also contains the following statement near the bottom of the second page:

The sellers state that the above information is true based on their current actual knowledge as of the date below.  Any important changes to this information known to the sellers will be disclosed by the sellers prior to closing.  Sellers are responsible for the accuracy of all answers.  Sellers further agree to [indemnify] and hold the broker harmless from any liability incurred as a result of any buyer relying on this information.  The sellers hereby authorize that a copy of this seller property information statement be delivered by their agent or representative to prospective buyers or their agents or representatives.  The sellers hereby acknowledge receipt of a true copy of the statement.”

[15]         In furtherance of its objective, the SPIS contains a series of questions for the sellers to answer in relation to the property being sold.  The questions fall into three main categories – (1) general, (2) environmental, and (3) improvements and structural.

[16]         As completed by the Scherbaks, with the assistance of Ms. Weddell, the SPIS provided the following information germane to this appeal.  With respect to the structural integrity of the home, the question was:  “Are you aware of any structural problems?”  The Scherbaks’ response was: “NW corner settled.  See note *”.  Under “additional comments” they added:  “*to the best of our knowledge the house has settled.  No further problems in 17 years”.  Concerning the plumbing, the question was:  “Are you aware of any problems with the plumbing system?”  The Scherbaks answered “No”.

[17]         Once the listing arrangements were finalized, Ms. Weddell scheduled an open house for Sunday, April 18, 2004. 

[18]         Ms. Krawchuk attended the open house.  She met Ms. Weddell and agreed to have her act as her agent in submitting an offer to purchase the Scherbaks’ home.  With the consent of all parties, Ms. Weddell therefore became a dual agent, acting for both the Scherbaks and Ms. Krawchuk.  

[19]         Ms. Krawchuk walked through the house on her own and with Ms. Weddell.  She also asked two friends to come over and look at the house with her.  Ms. Krawchuk admitted to noticing a number of visible defects in the home, including the sloped floors, the foam-filled crack in the northwest corner of the crawl space, and the sloping brick and block work at the exterior of the northwest corner of the home.  Ms. Krawchuk discussed the significance of these visible defects with Ms. Weddell, who told Ms. Krawchuk that the Scherbaks had advised her that the house had settled, been repaired, and that there had been no further problems in 17 years.  Ms. Krawchuk and Ms. Weddell discussed the listing documents, including the SPIS, and a confirmation of Ms. Weddell’s role as a dual agent.  They also discussed terms of a possible offer to purchase, including whether or not it should be conditional on a home inspection.

[20]         During the evening of April 18, 2004, Ms. Weddell presented the Scherbaks with Ms. Krawchuk’s offer to purchase.  The offer was for a price $10,100 above asking and contained no conditions.  The Scherbaks accepted the offer with an agreed-upon closing date of June 30, 2004.  

[21]         The sale was completed as scheduled.  On closing, Ms. Krawchuk acquired title insurance through the Stewart Title Guaranty Company (“Stewart Title”). 

[22]         On July 10, 2004, after performing some minor home improvements, Ms. Krawchuk moved into the home.  Within days, she noted recurring accumulations of sand near the north wall of the crawlspace under the living room.

[23]         Upon investigation, it was discovered that the entire north foundation wall and the northern portion of the east and west foundation walls had settled and were continuing to settle.  This settlement resulted in significant weakness in the floor joists and ultimately jeopardized the stability of the building itself.  The investigation of the foundation also disclosed plumbing problems.

[24]         The City of Sudbury was contacted and it ordered that the structural problems be rectified.  Remedying the structural problems required the removal of the house from its foundation, excavation of the cement floor, replacement of the subsoil with engineered fill, installation of new footings, foundation and cement floor and, finally, the replacement of the house on its new foundation.  Further repair was required as a result of significant cracking of the interior finish that was caused by moving the house to the extent necessary to effect the repairs.  Ms. Krawchuk estimated the total money spent on repairs to be $191,414.94.

[25]         Ms. Krawchuk claimed against Stewart Title for her losses.  Stewart Title initially rejected the claim on the basis that the City had not issued any work orders or notices of violation that would qualify Ms. Krawchuk for coverage under her policy.  Later, after the City issued the order to comply, the insurer agreed that Ms. Krawchuk then qualified for coverage under a provision of her policy that Stewart Title said, in a letter to Ms. Krawchuk, provided coverage in the event that the insured “suffers a loss or damage as a result of being forced to remove [the] existing structure or a portion of it as a result of any portion of the structure being built without a building permit from the proper government office or agency, provided one would have been required at the time and the Municipality is forcing its removal as a result of not obtaining a building permit.” 

[26]         After some negotiation, Stewart Title agreed to settle Ms. Krawchuk’s claim for $105,742.32, based on the following calculation:

Your Policy Amount is $110,100.00, this is what you paid for your home. From this amount we subtracted the value of the land itself, without the house on it. The land value was estimated at $41,000.00 by Appraisals North Realty Inc., certified appraisers. Then we added the cost of removing and remediating the soil to allow for building, totalling $29,318.00 and the cost of the Terraprobe report, which cost $4,952.54. Then we added your quote for moving expenses of $2,371.78. Therefore, the calculation is $110,000.00 – $41,000.00 + $29,318.00 + $4,952.54 + $2,371.78 = $105,742.32.

[27]         As part of the final settlement agreement, Ms. Krawchuk agreed to indemnify Stewart Title and her lawyer from any claims by third parties.  In exchange, Stewart Title agreed to transfer its subrogated interest to Ms. Krawchuk.

[28]         Ms. Krawchuk then commenced this action.

[29]         At trial, Ms. Krawchuk submitted a damage claim in the amount of $191,414.94 for the amounts she claimed to have spent or would in the future be spending to place the property in the condition she believed it to be in when she purchased it.  She also sought damages for emotional upset and “loss of health”, as well as aggravated, punitive and exemplary damages.

III.                THE TRIAL DECISION

A.           Ms. Krawchuk’s claim against the Scherbaks

[30]         Two defects formed the basis of Ms. Krawchuk’s claim – the instability of the foundation and the faulty plumbing system.  With respect to the foundation, the trial judge found that the house was constructed on unsuitable soil leaving it without appropriate support.  As a result, the foundation walls were settling into the earth to an unacceptable degree.  With respect to the plumbing, the trial judge concluded that there was a defect in the plumbing system making the house prone to sewer backups.  While the trial judge found that many of the problems, including the sloped floors and cracks, were patent defects that Ms. Krawchuk was obliged to accept, he also found that both the full nature and extent of the structural problems and the existence of the plumbing problem were latent defects.

1.            Claim based on contract

[31]         The trial judge dismissed Ms. Krawchuk’s claim against the Scherbaks in contract.  He noted that, in the absence of any warranties or guarantees as to the fitness of the property or home, the starting point for the analysis is the principle of caveat emptor – “buyer beware”. 

[32]         Ms. Krawchuk argued that there were two reasons why this principle did not apply:  (1) the defects were latent and had been deliberately concealed by the vendors; and (2) the defects were such as to render the home uninhabitable, dangerous or potentially dangerous so that they required disclosure by the Scherbaks. 

[33]         The trial judge rejected both arguments.  He was unable to find, on the evidence, that the Scherbaks concealed problems for the purpose of misleading prospective purchasers.  He also found that the plumbing defects did not render the home uninhabitable, dangerous or potentially dangerous and, with respect to the structural problems, he was unable to conclude that the Scherbaks knew the property to be uninhabitable, dangerous or potentially dangerous, given that they had resided there with their children for 17 years.

2.            Claim based on fraudulent or negligent misrepresentation

[34]         The trial judge’s analysis of Ms. Krawchuk’s claim against the Scherbaks based on fraudulent or negligent misrepresentation focused on the SPIS. 

[35]         He dismissed Ms. Krawchuk’s fraudulent misrepresentation claim.  While he concluded that the Scherbaks knowingly or recklessly made false representations of fact in the SPIS with respect to the foundation and the plumbing, he was not satisfied that the statements were made for the purpose of misleading Ms. Krawchuk.  He accepted that the Scherbaks were attempting to be forthright in their disclosure.

[36]         With respect to the claim of negligent misrepresentation, the trial judge concluded that the Scherbaks intended that the representations they made in the SPIS would be relied upon by prospective purchasers in deciding whether to submit an offer for the property.  He thus found a special relationship between the Scherbaks and Ms. Krawchuk that gave rise to a duty of care. 

[37]         He held that the information provided about the foundation of the house was false in the sense of being incomplete.  The Scherbaks knew that the structural problems were not restricted to the northwest corner of the home and were more serious than they had disclosed.  In 1991 during their renovation of the family room in the eastern half of the basement, the Scherbaks had discovered a significant sinking of the foundation and its rotation in a northward direction.  In dealing with the problem, Mr. Scherbak had carried out “a very perfunctory repair” and drywalled over it without applying for a building permit.

[38]         The trial judge also held that the Scherbaks’ response to the question in the SPIS about the plumbing was false as the Scherbaks had regularly experienced and were continuing to experience sewer backups once or twice per year.

[39]         The trial judge, at paragraph 61, summarized his reasoning behind his conclusion that the Scherbaks were negligent in the manner in which they completed the SPIS, as follows:

Notwithstanding that they had not experienced any difficulties with the foundation during their period of ownership it was known to them that there had been substantial settling of the entire north wall of the foundation.  Although whatever repair had been made had resolved the issue during their period of ownership, it was apparent at least to Mr. Scherbak that the repairs did not accord with good building practices.  I would venture to say that this would be obvious to almost anyone viewing the state of the foundation as it existed in the photographs taken by the Scherbaks during their renovation work in 1991/92.  Although I accept that the representation was not made to mislead Ms. Krawchuk, certainly it was not full, frank, and accurate disclosure of the structural problems of the house.  In my view, a reasonably prudent person in similar circumstances would have disclosed the following:  (1) that there had been significant settlement of the entire north wall of the foundation and the northern portion of both the east and west walls of the foundation prior to their becoming owners of the property; (2) that although there had not been further settlement noted during their 17 years of ownership, they are unaware of what repair work was done to address the settlement before they became owners; (3) that in observing the northern portion of the east wall of the foundation, there was reason to believe that the foundation may not have been properly repaired; (4) and buyers should satisfy themselves that the foundation is sound.  Obviously, the [Scherbaks’] representation with respect to the structure fell far short.  Negligence is established.  It is also my view that the Scherbaks were negligent in indicating that there were no problems with the plumbing.  Reasonably prudent persons in their circumstances would have disclosed that once or twice per year they experienced a sewer line blockage that prevented water and sewage from discharging into the municipal system.

[40]         The trial judge accepted that Ms. Krawchuk reasonably relied upon the truth and accuracy of the Scherbaks’ statements in the SPIS, both with respect to the foundation and with respect to the plumbing. 

[41]         He further accepted Ms. Krawchuk’s evidence that she would not have made the offer had she known of the structural or plumbing problems.  It followed that based on her reliance on the information provided by the Scherbaks in the SPIS, Ms. Krawchuk purchased a defective property and suffered damages as a result.  Thus, the tort of negligent misrepresentation had been made out.

B.            Damages

1.            Quantum of damages

[42]         In addressing the issue of damages, the trial judge identified the general rule that tort damages should, to the extent possible, restore the aggrieved party to the position he or she would have been in had the defendant properly discharged her duty of care. 

[43]         The trial judge held that Ms. Krawchuk did not act reasonably in spending approximately $190,000 to restore property she had purchased for $110,100.  Referencing Messineo et al. v. Beale (1978), 20 O.R. (2d) 49 (C.A.), he held that Ms. Krawchuk was entitled to damages calculated on the basis of the difference between the price paid for the property and its fair market value when the duty to mitigate arose.

[44]         The trial judge found that Ms. Krawchuk’s dealings with Stewart Title, as set out above, provided him with sufficient information to conclude that the appropriate amount of damages in this regard was the value of Ms. Krawchuk’s settlement with Stewart Title:  $105,742.32.

[45]         The trial judge also accepted that Ms. Krawchuk suffered emotional distress as a result of what transpired surrounding the purchase of the home and that such distress was reasonably foreseeable but held that she may have avoided a considerable amount of that stress if she had mitigated her damages by selling the house.  He awarded her $5000 for “emotional upset and loss of health” bringing the total damages to $110,742.32.

[46]         Given his earlier finding that the Scherbaks did not intentionally mislead Ms. Krawchuk, the trial judge dismissed Ms. Krawchuk’s claim for aggravated, punitive and exemplary damages. 

2.            The issue of double recovery

[47]         The trial judge rejected the Scherbaks’ argument that since Ms. Krawchuk had been paid close to the full amount of her compensable damages by her title insurer, to make a further award in her favour would amount to double recovery and run afoul of the established tort principle that an aggrieved person should be entitled to nothing more than compensation for the full amount of his or her loss.  The trial judge held that the private insurance exception, discussed at length in Cunningham v. Wheeler, [1994] 1 S.C.R. 359; see also Kosanovic v. Wawanesa Mutual Insurance Co. (2004), 70 O.R. (3d) 161 (C.A.), at paras. 8-9, applied to Ms. Krawchuk to allow the double recovery. 

C.           Ms. Krawchuk’s claim against the real estate respondents

[48]         The trial judge rejected Ms. Krawchuk’s claim that Ms. Weddell was also liable for her damages based on fraudulent or negligent misrepresentation of the condition of the house and in negligence for failing to take reasonable steps to protect Ms. Krawchuk’s interests by properly advising her in relation to the importance of a home inspection. 

[49]         The trial judge dismissed Ms. Krawchuk’s claim of fraudulent or negligent misrepresentation on the basis that Ms. Weddell relayed to Ms. Krawchuk what was told to her by the Scherbaks, that she had no reason to doubt the veracity of their representations, and that she had no obligation to inquire further about information relevant to the condition of the house.

[50]          In terms of the negligence claim, the trial judge rejected the argument that Ms. Weddell breached her duty of care to Ms. Krawchuk by failing to recommend that she seek professional advice regarding the possible structural problems with the house and failing to advise her of the perils of making an offer that was not conditional on a satisfactory home inspection.

[51]         He noted that, prior to the open house, Ms. Weddell had prepared the offer to purchase that was ultimately used by the parties.  She had included, in Schedule “A”, two conditions for the purchaser’s benefit:  a condition to allow a period of time for the purchaser to obtain financing and a condition that allowed the purchaser an opportunity to obtain a satisfactory home inspection.

[52]         Given the amount of interest in the house, Ms. Krawchuk and Ms. Weddell discussed ways to enhance the attractiveness of Ms. Krawchuk’s offer, one of which was to make the offer unconditional – a “clean offer”.  The trial judge accepted Ms. Weddell’s evidence that Ms. Krawchuk had initially wished to have the inspection clause left in, but that she was instructed to remove it once she advised Ms. Krawchuk that if there were another offer made without conditions, it might be accepted over hers.  He further held that Ms. Krawchuk, with an understanding of the value of having a satisfactory inspection completed as a condition of closing, made her own decision to submit a clean offer.

[53]         In these circumstances, the trial judge found that Ms. Weddell had not breached her duty of care to Ms. Krawchuk and dismissed Ms. Krawchuk’s claim in negligence against the real estate respondents.

D.           The Scherbaks’ crossclaim against the real estate respondents

[54]         The focus of the Scherbaks’ crossclaim against the real estate respondents was the advice Ms. Weddell gave them concerning the SPIS disclosure requirements.  They argued that Ms. Weddell should have warned them about the consequences of completing the SPIS and inquired further of them to ensure that they made full and fair disclosure. 

[55]         The trial judge held that the Scherbaks understood that they had an obligation to complete the SPIS accurately to the best of their knowledge.  They sought Ms. Weddell’s advice about how to answer certain questions and composed their answers based on that advice.  He found that Ms. Weddell had no reason to question the accuracy of the information the Scherbaks were including in the SPIS as it appeared consistent with her visual inspection of the property.

[56]         He concluded that Ms. Weddell met her obligations to the Scherbaks and therefore dismissed the Scherbaks’ crossclaim against the real estate respondents.

E.            The real estate respondents’ crossclaim against the Scherbaks

[57]         The trial judge did not address the real estate respondents’ crossclaim against the Scherbaks in his reasons or in his order. 

IV.                 THE ISSUES

[58]         The Scherbaks’ appeal from the judgment awarded against them in favour of Ms. Krawchuk raises the following issues:

1.      Did the trial judge err in finding the Scherbaks liable for negligent misrepresentation?

2.      Did the trial judge err in granting the judgment he did in favour of Ms. Krawchuk in the light of her recovery from Stewart Title?

[59]         Ms. Krawchuk’s appeal from the dismissal of her claims against the real estate respondents raises the following issues:

1.            Did the trial judge err in his analysis of the standard of care?

2.            If so, is this court able to determine whether the real estate respondents were negligent in their representation of Ms. Krawchuk?

3.            If so, were the real estate respondents negligent in their representation of Ms. Krawchuk?

[60]         The Scherbaks’ appeal from the dismissal of their crossclaim against the real estate respondents, and the real estate respondents’ crossclaim against the Scherbaks raise the following issues:

1.             Was Ms. Weddell negligent in failing to provide adequate guidance to the Scherbaks in their completion of the SPIS?

2.            Were the Scherbaks negligent in their disclosure to Ms. Weddell of information pertaining to the problems associated with the house?

3.            What are the consequences, if any, of a finding of negligence as claimed by the Scherbaks and the real estate respondents against each other?

V.                     ANALYSIS

A.           The Scherbaks’ appeal from the judgment awarded against them in favour of Ms. Krawchuk

1.            Did the trial judge err in finding the Scherbaks liable for negligent misrepresentation?

[61]         Before turning to the Scherbaks’ substantive arguments on this issue, I will deal with two preliminary points.

The pleadings

[62]         First, I will deal briefly with the Scherbaks’ argument that the trial judge erred in finding liability on the basis of a theory of liability not pleaded or dealt with at trial.  The Scherbaks submit that this error caused them prejudice.

[63]         I would dismiss this ground of appeal.

[64]         Paragraphs 16, 29 and 30 of the statement of claim refer to Ms. Krawchuk’s claim in negligence.  Paragraph 30 specifically alleges that the Scherbaks were negligent in the manner of their representations to Ms. Krawchuk through Ms. Weddell.  Paragraph 29 details this representation and para. 16 explains that this same statement was made in the SPIS and was read by Ms. Krawchuk.  The Scherbaks joined issue on this allegation in para. 25 of their statement of defence where they denied that they negligently misrepresented any aspect of the condition of the house.  It would thus appear from the pleadings that the Scherbaks understood that negligent misrepresentation was being alleged by Ms. Krawchuk.

[65]         Furthermore, as the trial judge observed when he was asked to consider this issue after the delivery of his reasons, the tort was not only raised in the claim and responded to in the defence, it was also argued, without objection, by Ms. Krawchuk’s counsel in closing submissions.

Errors in findings of fact

[66]         As will be explained throughout the analysis that follows, the trial judge’s findings in relation to facts material to his conclusions concerning the Scherbaks’ liability were supported by the evidence.  Where the evidence conflicted, he was entitled to choose, on the basis he explained, the version of events he preferred.  I would not, therefore, interfere with any of the trial judge’s findings of fact relevant to his conclusions concerning the Scherbaks’ liability for Ms. Krawchuk’s losses.

The tort of negligent misrepresentation

[67]         I now turn to whether, given his findings of fact, the trial judge erred in concluding that the tort of negligent misrepresentation was made out against the Scherbaks.

[68]         To succeed in her action against the Scherbaks based on negligent misrepresentation, Ms. Krawchuk had to prove that:

·     the Scherbaks owed her a duty of care based on a “special relationship”;

·     the Scherbaks made statement(s) to her that were untrue, inaccurate or misleading;

·     the Scherbaks acted negligently in making the statement(s);

·     she reasonably relied on the statement(s); and

·     she sustained damages as a result.

See Queen v. Cognos Inc., [1993] 1 S.C.R. 87, at p. 110.  

The Scherbaks’ duty of care to Ms. Krawchuk

[69]         The Scherbaks advance two arguments in support of their submission that the trial judge erred in finding a special relationship duty of care based on the statements in the SPIS.  First, they submit that since the statements were not warranties, they cannot give rise to liability, absent fraudulent misrepresentation or deliberate concealment.  Second, they submit that the trial judge erred by ignoring the entire agreement clause contained in the agreement of purchase and sale.

[70]         As for the first argument, I agree with Killeen J.'s conclusion in Kaufmann v. Gibson (2007), 59 R.P.R. (4th) 293 (Ont. S.C.), that even though statements made in an SPIS are not warranties, they may still be the basis of liability as representations.  After citing the complete first two paragraphs in the SPIS, Killeen J. said, at para. 100:

As can be seen in the opening words of para. 1, “ANSWERS MUST BE COMPLETE AND ACCURATE”.  While this paragraph goes on to say that the answers do not constitute warranties, there cannot be any doubt that they can have legal consequences as representations, especially if they were read by the purchasers before submitting their offer, as here, and were then incorporated into the terms and conditions of the agreement. [Emphasis added.]

[71]         This takes me to the Scherbaks’ second argument that the trial judge erred in finding a duty of care in the face of what is commonly referred to as an “entire agreement” clause, also called an “integration clause”, contained in the agreement of purchase and sale.

[72]         The entire agreement clause contains the following wording:

This Agreement including any Schedule attached hereto, shall constitute the entire Agreement between Buyer and Seller. There is no representation, warranty, collateral agreement or condition, which affects this Agreement other than as expressed herein. 

[73]         The clause excludes reliance on representations that are alien to “[t]his Agreement” or “any Schedule attached hereto”.  In this case, the SPIS was specifically referred to in Schedule “A” to the agreement through the wording: “Included with the offer is the property information statement.”  Thus, the representations in the SPIS are not alien to the agreement; they have been specifically incorporated into the agreement by the parties and are available to the parties for the purposes of establishing liability if they are found to be untrue, inaccurate or misleading.

[74]         It follows that neither the fact that the statements in the SPIS were not warranties nor the entire agreement clause precludes a finding that the Scherbaks owed a duty of care to Ms. Krawchuk.

[75]         The trial judge found that the representations made by the Scherbaks in the SPIS were meant to be disclosed to prospective buyers and that it was reasonable to expect such buyers to rely on those representations.  For the reasons discussed above, I agree with his conclusion that these facts are sufficient to establish a special relationship giving rise to a duty of care.

Did the Scherbaks make statements to Ms. Krawchuk that were untrue, inaccurate or misleading?

[76]         The trial judge found that the information the Scherbaks provided in the SPIS was incomplete with respect to the structural issues and false in relation to the plumbing situation.  These findings are well supported by the evidence.  The structural problems were not restricted to the northwest corner of the house and they were more serious than disclosed.  In contrast to their response that there were “no” plumbing problems of which they were aware, the Scherbaks were experiencing varying degrees of sewer backups once or twice per year on an ongoing basis.

Were the Scherbaks negligent as to the truth of the statements?

[77]         Although the completion of an SPIS is not mandatory, once a seller decides to fill one out, he or she must do so honestly and accurately and the purchaser is entitled to rely on the representations contained in the SPIS.  In Kaufmann, Killeen J. held at para. 119 that “once a vendor ‘breaks his silence’ by signing the SPIS, the doctrine of caveat emptor falls away as a defence mechanism and the vendor must speak truthfully and completely about the matters raised in the unambiguous questions at issue”.  See also Alevizos v. Nirula (2003), 180 Man. R. (2d) 186 (C.A.), at para. 38.

[78]         The Scherbaks submit that given the trial judge’s finding of honest intentions on their part, it was an error in law for him to hold them liable to Ms. Krawchuk for their statements.  In support of this argument, the Scherbaks rely on the following statement in Alevizos v. Nirula, at para. 36, adopted by Killeen J. in Kaufmann at para. 113:  “If the vendor answers the PCS honestly and does not deliberately intend to mislead, then liability will not follow even if the representation turns out to be inaccurate.”  

[79]         For a number of reasons, I do not accept this submission.  First, I note that the statement adopted by Killeen J. in Kaufmann is obiter since Alevizos is a case involving fraudulent misrepresentation.  Second, I do not interpret the statement as meaning that honest intentions, by themselves, are sufficient to avoid liability for inaccurate representations.  Third, if that is what the court meant in Alevizos, I respectfully disagree.  The standard of care extends beyond honest intentions.  The obligation is to provide, to the extent possible, accurate and complete information. 

[80]         In this case, the trial judge, correctly in my view, found liability notwithstanding his conclusion that the Scherbaks tried to be honest.  The key to the basis of the Scherbaks' liability is the trial judge’s conclusion, set out at para. 39 above, that a reasonable person in similar circumstances would have disclosed more. 

Did Ms. Krawchuk reasonably rely on the statements?

[81]         In examining the issue of Ms. Krawchuk’s reliance on the statements in the SPIS, the distinction between patent and latent defects must be kept in mind.  Latent defects, unlike patent ones that are obvious, are not readily apparent to someone exercising reasonable care in his or her inspection of the property.

[82]         I agree with the trial judge’s conclusion that many of the defects in the house were patent and thus Ms. Krawchuk was obliged to accept them.  However, I also agree with his further conclusion that the more serious underlying structural defects and the extent of those defects, together with the plumbing problems, were latent.  There were no obvious manifestations of the undisclosed extent of the structural problems or the plumbing problems. 

[83]         The trial judge’s finding that Ms. Krawchuk relied on the representations the Scherbaks made in the SPIS is unassailable.  The evidence supports his  findings that prior to entering into the agreement of purchase and sale, Ms. Krawchuk not only reviewed the SPIS, particularly the information relating to the structure, but also specifically asked Ms. Weddell about the sloping floors and seemed content with the answer.  The trial judge accepted, as he was entitled to do, Ms. Krawchuk’s evidence that she would not have made the offer had she known of the extent of the structural defects and of the plumbing problems.

[84]         But was her reliance reasonable in the light of the wording of the SPIS?  I refer to the clause in the SPIS that provides that, “[b]uyers must still make their own enquiries notwithstanding the information contained on this statement” and urges the buyer to bear in mind that the seller’s knowledge of the property may be incomplete.  This clause alerts the purchaser to the possibility that the information in the SPIS may be lacking in some way and puts an onus on the purchaser to make reasonable inquiries.

[85]         In my view, this warning does not absolve the seller of liability for misstatements.

[86]         In McQueen v. Kelly (1999), 25 R.P.R. (3d) 248 (Ont. S.C.), Kurisko J. found that the purchasers of a house could recover against the vendors even though they had failed to adequately inspect the basement and, consequently, had missed patent defects that were concealed by the vendors.  He held at paras. 63-64:

Ordinarily the [principle of] caveat emptor would have required the Plaintiffs to inspect the basement.  If they had done so, the water stains in the Laundry Room would have been discovered.  However, I accept the Plaintiffs’ explanation for not inspecting before and after signing the Agreement, namely, they relied on the Information Statement and oral assurances of Mr. Kelly [the vendor] there had never been any water problems in the basement.

...

I agree with Mr. Kelly that a person purchasing a $150,000 house should take appropriate steps to discover defects.  The Plaintiffs were foolish not to take advantage of the inspection clause because a vendor is not required to inspect the house as part of the process of completing the Information Statement and may very well be unaware of moisture problems.  However, this does not mean a vendor can aver a lack of awareness with impunity.  The Defendants’ representations coupled with the intentional concealment of the evidence of the water stains vindicate the decision of the Plaintiffs to rely on the Defendants’ representations and absolved the Plaintiffs from inspecting the basement for patent evidence of moisture problems. [Emphasis added.][Footnote omitted.]

[87]         Although McQueen can be distinguished in that it involved patent defects that were actively hidden by the vendors, the decision has been relied upon in other cases that are more similar to the circumstances here.  See, for example, Ohler v. Pye, [2009] O.J. No. 3434 (Sm. Cl. Ct.); St. Germain v. Schaffler (2003), 37 R.P.R. (4th) 116 (Ont. S.C.); and Kaufmann, at paras. 123-124.

[88]         Furthermore, while the SPIS emphasizes the purchaser’s duty to enquire in order to fill in gaps in the vendors’ knowledge, such an inquiry does not necessarily include a duty to challenge the vendor’s honesty and forthrightness.

[89]         In Lyle v. Burdess, 2008 YKSM 5, Cozens Terr. Ct. J. considered the purpose of the Yukon Territory’s equivalent of the SPIS, the Property Disclosure Statement (PDS).  He said at para. 68 that, “[t]he primary purpose of the PDS is to disclose latent defects that would not be easily discoverable to a prospective purchaser in the time frame generally associated with completing a purchase and sale transaction.  A prospective purchaser should be able to rely on the questions and answers in the PDS to inform him or her about past, as well as present, issues.”  He agreed with the comments of Killeen J. in Kaufmann that waiver of a home inspection clause does not waive the right to rely on representations in an SPIS, saying at para. 76:

A home inspection should reveal any patent defects and, if disclosed to the buyer, allow for a more thorough investigation into any latent defect in order to determine the nature of the defect.  A home inspection is not intended to find latent defects.  In circumstances where there is no PDS prepared, a prudent purchaser would be expected to contract for a more thorough home inspection if the buyer wished to avoid future costly surprises.  Where a PDS has been prepared, however, the buyer should be able to rely on the truthfulness and accuracy of the representations in the PDS in deciding the extent to which a contractor will be instructed to conduct a home inspection.  [Emphasis added.]

[90]         I agree with Quinn J. in Whaley v. Dennis (2005), 37 R.P.R. (4th) 127 (Ont. S.C.), where he rejected, at para. 28, the suggestion that the purchaser is required to investigate the honesty of the vendor:

If Counsel is suggesting that the plaintiffs should have gone beyond the Seller Property Information Statement (and behind the answer given therein regarding the absence of moisture or water problems in the basement), this is a bold and erroneous suggestion:  it means that the plaintiffs should have disbelieved [the vendors].

[91]         Thus, there is ample support for the trial judge’s finding that, notwithstanding the warning in the SPIS, Ms. Krawchuk was entitled to rely on the representations that the Scherbaks made in that document.

[92]         Finally, I note that while the SPIS highlights that the purchaser may wish to make further enquiries considering that the “[s]ellers’ knowledge of the property may be incomplete”; this is not what happened here.  The Scherbaks have not been found liable 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 all along the north wall and in the northwest and northeast corners of the house and that there were ongoing sewer problems.  They did not disclose these facts. 

[93]         Thus, in my view, Ms. Krawchuk’s reliance on the information the Scherbaks provided in the SPIS was reasonable.

Did Ms. Krawchuk sustain damages as a result of the Scherbaks’ negligent misrepresentation?

[94]         The trial judge accepted that Ms. Krawchuk would not have made the offer to purchase if she had known the full extent of the structural defects or the plumbing problems.  Her reliance on the Scherbaks’ representations contributed to her decision to offer to purchase and ultimately purchase the house.  She suffered damages as a result.

Conclusion on negligent misrepresentation

[95]         Based on this analysis, I conclude that the trial judge was correct in deciding that Ms. Krawchuk successfully established a claim against the Scherbaks based on negligent misrepresentation.

Contributory negligence

[96]         The Scherbaks argue that Ms. Krawchuk admitted negligence on her part when she stated in her statement of claim that Ms. Weddell caused her to “act improvidently in her acquisition of the home.”  They submit that the trial judge erred by disregarding this “admission” of contributory negligence.

[97]         I disagree.  Ms. Krawchuk’s allegation that Ms. Weddell caused her to “act improvidently”, taken in context, was simply a claim that Ms. Weddell’s advice was a causal factor in her decision to purchase the house that turned out to have serious defects.  I do not see it as an admission of contributory negligence.

2.            Should Ms. Krawchuk be able to recover damages at trial even though she already recovered from Stewart Title for her losses?

[98]         The Scherbaks and the real estate respondents both argued that Ms. Krawchuk suffered little or no loss given her recovery from Stewart Title and that she should not be allowed to “double recover”.

[99]         My rejection of this argument lies in the concept of the private insurance exception, often referred to as the Bradburn rule, which provides that “where a plaintiff recovers under an insurance policy for which he has paid the premiums, the insurance moneys are not deductible from damages payable by the tortfeasor”:  Hussain v. New Taplow Paper Mills Ltd., [1988] 1 All E.R. 541 (H.L.), at pp. 544-45.

[100]     In Cunningham v. Wheeler

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Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.

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