By Mark Weisleder
Basement flooding. Mould behind the walls. Cracks in the foundation. These are just some of the surprises that home buyers across Canada have discovered in their property after closing, which were not disclosed by the seller. I have reviewed many articles written by legal commentators who have taken the position that sellers should rarely complete a Property Condition Statement or PCS because of potential liability that may result. In Ontario, this statement is called a Seller’s Property Information Statement, or SPIS.
In order to properly understand these issues, we need to first review the law as to what disclosure a seller is legally obliged to make to a buyer when selling their property.
There are two kinds of defects; patent defects and latent defects. A patent defect is a defect that is obvious when you walk into the home; for example a broken window. The buyer cannot complain about this defect because they can easily see it when viewing the home. They are thus governed by the legal doctrine of caveat emptor or buyer beware, and have to accept these defects on closing, unless they include a clause in their agreement that the seller will repair the defect.
A latent defect is hidden and cannot be observed on a normal inspection. The law here is that if the seller knows about a latent defect that makes the home either uninhabitable by the buyer, unfit for the buyer’s intended purpose or dangerous, then the seller must disclose this defect to the buyer. In addition, the seller cannot intentionally conceal what would otherwise be a patent defect. Examples of latent defects that should be disclosed include a problem with the foundation, an illegal basement apartment or a serious basement or roof water problem that has not been repaired.
The real estate industry introduced property condition statements as a means for sellers to put buyers on notice of any physical problems with the property, to alert buyers and to provide buyers with the opportunity to make further inquiries when necessary. It states right on the form that it is not intended to be a warranty and the buyer must conduct their own independent investigation or property inspection. This is why almost every home purchase includes a home inspection condition for the benefit of the buyer.
When completing the statement, the seller is asked to respond either “yes,” “no,” “unknown,” or “not applicable” to questions such as, “Are you aware of any water problems” or “Are you aware of any structural problems.”
These statements have been completed by sellers for years in hundreds of thousands of real estate transactions across Canada, without any liability, especially when they completed the statement truthfully and to the best of their knowledge. In fact, in many communities across Canada, when the statement was not provided, buyers were suspicious that sellers had something to hide, and thus offered less money than they otherwise would have.
Yet there have also been cases where sellers who signed the statement were held liable for the buyer’s damages when problems were discovered after closing. In my review of most of these decisions, the judge determined on a factual basis that the seller either knew that what they were saying was false or had deliberately concealed a defect that was found out afterwards. It was not the PCS statement that got the seller in trouble. It was about not telling the truth when completing the statement. In other words, even if the statement was not completed, the sellers could still have been found liable as they knew of a serious latent defect that was not disclosed.
In some cases, filling out the disclosure statement can save the seller from liability. In the case of Gesner v. Ernst, which was decided in Nova Scotia in 2007, the seller had provided a PCS form to the buyer that indicated they had experienced water problems with the roof and had installed a new roof to try and repair the problem. The buyer did not investigate this further and it turned out after closing that the water leakage problem was much more serious and the home had to be destroyed. However, the buyer could not prove that the seller knew about any of these structural problems. The judge even commented that by answering “yes” on the PCS form about the history of water problems, the sellers had made proper disclosure and the buyers should have investigated further. Since they didn’t, they could not go after the sellers unless they could prove that the seller actually knew about the foundation problems.
I could sum up the discussion about property condition statements as follows: for buyers, it is Buyers Beware, for sellers, it is Liars Beware.
However, there are many cases when sellers cannot complete the PCS form, such as when the property is rented and they have no personal knowledge about the physical condition, the seller is infirm and cannot understand the questions on the PCS form, or if the property is being sold by an estate trustee or by a bank under power of sale.
So what should buyers, sellers and salespeople do when a seller either refuses or their lawyer tells them not to sign the disclosure statement?
I wish to face the issue from a different perspective; namely, I would ask all sellers, do you want to get the highest price that you can for your property, or not? Let us take the example of a bank that is selling a property under power of sale, when a mortgage goes into default. Since the bank knows nothing about the property, they make it very clear in any agreement of purchase and sale that the buyer will be buying the property on an “as is” basis, and the bank takes no responsibility whatsoever for any defect that may be in the home. “As is” clauses will generally protect the bank from any liability for a defect that may be discovered by a buyer after closing.
For all buyers, if you were buying a home from a bank under these circumstances, would you pay anything close to the asking price, or would you offer a discount, based on the probability that you will have to pay for repairs after closing? My guess is that most buyers who are asked to accept the property “as is,” will not pay top dollar for the property and will expect a discount.
Similarly, when a seller says they will not disclose anything about a property, wouldn’t most buyers have the exact same suspicions, and thus offer less for the property? In many communities across Canada, this tactic usually creates a stigma on the property and buyers tend to offer less than for similar properties where disclosure is provided. Some sellers also try and insert “as is” clauses to protect themselves from liability. Yet there was a case when even a bank selling under power of sale with an “as is” clause was still held liable to the buyer after closing when it turned out that they had information about an environmental problem on the property in their files and failed to disclose it.
The bottom line is that while refusing to sign an SPIS form may provide a little edge in a potential lawsuit, it does not totally prevent a seller from being sued after closing, and the seller will likely obtain less money for the property than if they had provided complete disclosure.
When a seller cannot provide the SPIS statement, I recommend in these cases that the seller obtain a pre-listing home inspection report from a reputable home inspection company. The seller will have the opportunity to correct any deficiencies noted on the report itself. The seller should then give the report out to any prospective buyer. This will put the buyer on notice for any potential problems and will also demonstrate a higher degree of integrity on behalf of the seller, which should give comfort to any prospective buyer. The buyer should still make the transaction conditional on being satisfied with the results of their own home inspection report before committing to the purchase.
In commercial transactions, most buyers insist on complete disclosure in advance, especially regarding the rental income and the details regarding all of the tenancies. Owners who are forthright in providing this information typically obtain the best buyers. The same principle should apply in any residential transaction as well.
In addition, buyers and buyer salespeople should always ask sellers and the sellers’ salesperson point blank if there are any hidden defects in the property that they should know about, and make a note about anything that is said to you.
Sellers should be aware that the more complete and accurate their disclosure, especially of defects in your property, they will find that not only will their chances of being sued virtually disappear, they will also likely obtain a higher price for their home from a satisfied buyer.
Mark Weisleder is a lawyer, author and speaker to the real estate industry. He practiced law for 25 years in private law firms and as in-house counsel and has educated Realtors since 1986 as an OREA instructor. www.markweisleder.com.