November 21, 2011

Krawchuk v. Scherbak et al – Implications for Real Estate Agents and Vendors

The Ontario Court of Appeal released a decision in Krawchuk v. Scherbak et al. that has significant implications for real estate agents and their vendor clients with respect to statements made to potential buyers and in preparing a Seller Property Information Sheet (SPIS).

The SPIS is a questionnaire that can be completed by the vendor and used by the real estate agent in the course of showing the property to prospective buyers. The questionnaire includes questions about the vendor’s knowledge of any issues with the house (such as structural or plumbing). Despite the fact that information provided in a SPIS is not a warranty, the Court of Appeal has found that it could still form the basis for liability.

In this case, the vendors were aware of plumbing issues with the house but responded in the negative as to whether they had knowledge of any plumbing defects in completing the SPIS. The buyer was shown the SPIS at the open house and relied upon it when purchasing the property. The vendors were also aware that the house had issues with the foundation’s settling. Despite this fact, they told their real estate agent that the house had not faced settling issues for 17 years. That information was conveyed by the agent to the buyer.

The trial judge determined that the vendors were liable for negligent misrepresentation but dismissed the plaintiff’s claim against the real estate agent.

The Court of Appeal agreed with the trial judge with respect to the vendors’ negligence. The court reasoned that although preparing a SPIS is not mandatory, once it is used, the buyer is entitled to rely upon it. The warning found in most SPIS forms, stating that the buyer must undertake his or her own enquires despite information contained in the form, was found not to absolve the vendors’ liability. The Court also referenced the trial judge’s distinction between patent and latent defects. Patent defects are easily visible to the buyer and must be accepted upon purchase, whereas latent defects (such as structural defects) are not readily identifiable and the buyer relies on the vendor’s representations, if any are contained in the agreement.

However, the Court also extended liability to the real estate agent. The Court used the due diligence requirements found in the Real Estate Council of Ontario’s Code of Ethics to establish the agent’s standard of care. It concluded that the agent should have been apprehensive about the information provided by the vendors. In this case, the agent knew about the house’s history of settlement problems, and could also have discovered signs of problems through the agent’s visual inspection of the property. Those factors should have prompted the agent to verify the accuracy of the vendors’ statements.

Ultimately, the Court decided to apportion 50% fault to both the vendors and the agent. The agent should have informed the vendors about the implications of misrepresenting information in the SPIS. The vendors should not have offered misrepresented statements to the agent and in the SPIS.

This decision provides informative instructions to future vendors and agents. Vendors should be wary about offering information about their property that they know to be false. Real estate agents should counsel their vendor clients and should either take measures to verify the information provided by vendors or strongly recommend to buyers that they undertake an inspection of the property and make the closing conditional upon passing the inspection and obtain a statement confirming that the buyers are not relying upon the SPIS.