By Patrick J. Heinsen and Shamsha Damji
Generally, the law imposes a duty upon sales reps to disclose all material facts known to them that could affect a purchaser’s willingness to enter into a contract of purchase and sale (Walls v. Ross & Barta & Whitehouse et. al., 2001 BCPC 0187). It is well established that a known defect that has not been fixed must be disclosed. However, can the same be said of a defect that has been “addressed” and not necessarily “rectified”? The case of Connie v. Sampson, 2009 ABPC 36, a 2009 decision of the Alberta Provincial Court, clarifies the obligation of disclosure respecting known defects that have been addressed but not rectified.
In the case, the plaintiffs’ offer to purchase (the “contract”) was subject to a satisfactory home inspection, which the plaintiffs chose to forego, instead relying on an inspection report that had been previously completed for the defendant vendors. As it turns out, the previously completed inspection report was authored prior to the defendants themselves having experienced flooding. In an effort to remedy the flooding, the defendants installed a sump pump.
On the pre-inspection walk-through, the plaintiffs discovered the sump pump and inquired, through their sales rep, whether there had been previous flooding issues. The defendant’s sales rep replied that there had not.
Less than a week after moving in, the plaintiffs noticed water in the basement and brought a claim against the defendants for failing to disclose the defect. The defendants knew about the prior flood. Both they and their sales rep confirmed at trial that they had discussed whether there was any obligation on their part to disclose it to the plaintiffs. As there had been no issues since the installation of the sump-pump, the defendants’ sales rep advised them that they need not disclose it. Clause 6.1(h) of the offer to purchase provided as follows:
“The Seller represents and warrants to the Buyer that except as otherwise disclosed, the Seller is not aware of any defects that are not visible and that may render the Property dangerous or potentially dangerous to occupation or unfit for habitation.”
At trial, Judge O’Ferrall held that a defect is “a shortcoming, failing or lack of something essential” and that the prior flood occurrence was a “defect” as contemplated by Clause 6.1(h) of the contract. While the defendants had made efforts to address the flooding, importantly, the court found that they did not have sound reason to believe that the defect had been “rectified” because the sump pump installer advised them that it might not prevent further flooding.
In the decision, Judge O’Ferrall noted that the defendants had a broad duty of disclosure in light of the specific language of clause 6.1(h) addressing defects that may render the property unfit. He held that “the obligation is to disclose possibilities of which the sellers are aware if those possibilities are potentially dangerous or if they might render the property unfit for habitation”.
In this regard, it is significant that the court accepted as fact that it was made known to the defendants that the sump pump may not have been able prevent future flooding. While there was no finding of liability respecting the listing sales rep, the court nevertheless noted that the recommendation made by the sales rep was “mistaken” in nature.
Applying the reasoning employed in Connie to the general duty of disclosure, it can be surmised that a latent defect that has been addressed but not rectified is a material fact that could affect a purchaser’s willingness to enter the contract of purchase.
Therefore, sales reps and brokers must be exceedingly careful in the disclosure advice they provide to their clients in this regard.
On the other side of the coin, Connie v. Sampson can be read as to restrict the scope of the obligation of a sales rep or vendor to disclose those latent defects that have been addressed but not rectified. Suffice it to say, real estate professionals have an obligation to take reasonable steps to ensure that rectification has actually occurred. The extent of inquiry required of the sales rep will be fact dependent, but caution should be exercised in relying solely upon the representation of one’s client.
Patrick J. Heinsen and Shamsha Damji are associates in the Calgary office of Borden Ladner Gervais LLP. Heinsen specializes in claims against Realtors.