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Do sellers have to tell buyers about the neighbouring sex offender?

|Written By Kenneth Jackson

Ottawa real estate lawyer Bruce Marks sums up seller property disclosure statements in two words: potentially dangerous.

Bruce Marks believes the ambiguity of disclosure statements can cause problems.

Marks doesn’t like them and doesn’t recommend them. Why not? He believes their ambiguity can open his clients to frivolous lawsuits.

The seller property information statement asks 48 questions. One of them, for example, asks whether the seller is aware of possible environmental problems or soil contamination on the property or the immediate area.

“Well, first off, what’s immediate area?” asks Marks. “How far away is the immediate area? You may be in an aquifer that stretches several kilometres and there is contamination three blocks down and it’s contaminating the soil in your area and you don’t even know about it.”

If the new homeowner finds out there’s dirty soil upon moving in, the sellers may be liable. The sellers may not have known about the problem when they checked no on the statement.

Of course, there are those who argue that they might have lied, should have known about the problem or could have hired someone to find out.

“The implication is now homeowners are put in a situation where they are forced to give answers regarding a property they may not have answers to,” says Marks.

It’s not mandatory for sellers to fill out a seller property information statement. But many lawyers say real estate agents like them and push for them, especially as they can help secure deals faster and more easily.

“Typically, real estate agents love them,” says Marks. “Although it says it’s not going to be relied upon, you are actually providing a statement to someone. Why would you be providing it unless you were going to have the person rely upon it? If you’re not going to have a person rely upon it, just don’t make any statement at all.”

Faced with a potential sale, homeowners may feel obligated to complete a disclosure statement only to find themselves facing costly litigation later on.

Toronto real estate lawyer Bob Aaron doesn’t like the statements either. He keeps writing about them in his Toronto Star column.

Aaron wrote in a Jan. 22, 2011, column that there have been 49 reported court decisions resulting from the use of the statements in Ontario since their introduction in the 1990s and a further 153 matters from the other provinces and territories in Canada.

That gives a total of 202 cases.

“I cannot think of any other single document which has accounted for so much litigation in the same time period,” he wrote.

“Why real estate associations across the country continue to foist these dangerous disclosure forms on their clients continues to amaze me,” he added.

Aaron wasn’t done. He wrote about the issue again in November. He noted the property disclosure statements remain a hot topic in the real estate community with an even split among those who are for and against them.

Manitoba’s move to mandate them for every sale has only added to the debate. Aaron noted Britain has reversed its decision to require them with every transaction.

“The major difference between the disclosure form created by the Manitoba Real Estate Association and the Ontario Real Estate Association version is their length and complexity,” he said.

“The Manitoba form has 19 questions, the basic Ontario form has 48. I am a devout opponent of these forms, but given a choice, I would take the Manitoba form any day.”

The questions in the Ontario statement can raise more issues. For instance, do sellers have to tell the buyers about a sex offender who lives across the street? There’s no question about that on the form, but do the sellers have to tell them anyway? What if they don’t know?

They may have an obligation. At least, that’s what a judge has said.

In the case, Jason Dennis and Rebecca Bound bought a home in Bracebridge, Ont., from William and Helen Gray.

But before they moved in, they learned a neighbour had been found guilty of possession of child pornography a decade earlier.

The buyers have two young children and claim they had to sell the property at a loss. They then launched a lawsuit against the sellers.

They allege in their lawsuit that the entire neighbourhood, including the sellers, knew about the neighbour. They claim it’s something the sellers should have told them about prior to the purchase.

But even if the sellers did know about the neighbour, which they deny, they allege they wouldn’t have an obligation to disclose the information because it doesn’t qualify as a defect in the home.

In March, the sellers asked the Superior Court to toss out the application.

But the judge didn’t agree to dismiss the claim and allowed it to proceed.

The main legal issue referred to in this case is the principle in real estate law known as caveat emptor, or buyer beware, according to Barrie, Ont., lawyer Shari Elliott.

Elliott notes the case involves common law defences. The buyers are saying they should have been told, while the sellers are saying they had no obligation and it’s up to the purchasers to do their research, she says.

“This principle indicates that if the buyer of a property fails to complete a reasonable inspection, he/she cannot later complain about defects which are inconsistent with the way the sellers have represented the property unless deceit or misrepresentation was involved,” Elliott explained in an October newsletter.

“This principle requires sellers to disclose latent (hidden) defects that could render a property unfit for habitation; however, the onus is on the buyer to conduct a reasonable inspection of the property.

Therefore, the sellers are not required to disclose information that a reasonable home inspection would reveal.”

Elliott doesn’t believe cases like this come down to how sellers fill out the forms or if they fill them out at all. “In my opinion, whether one exists, whether you sign it or whether you don’t sign it, the seller information form isn’t the story.

The story is what is the agent required to do? What is their standard of care?” she says, pointing to the recent case of Krawchuk v. Scherbak.

The case began in 2004 when Zoriana Krawchuk, a first-time homebuyer, purchased a house in Sudbury, Ont., that had serious foundation problems.

The house was sinking and subsequent plumbing problems caused the sewers to back up throughout the year. The agent who sold the home represented both sides.

The new homeowner sued both the sellers, Timothy and Cherese Scherbak, and the agent, Wendy Weddell, for damages. The courts found the sellers liable for $110,000 for negligent misrepresentation.

The agent had helped the vendors with completing the disclsoure statement. When asked if there were structural problems, they responded that the northwest corner had settled 17 years earlier.

“Are you aware of any problems with the plumbing system?” they were asked. Their response was no even though there had been several backups.

The agent was let off the hook, but the buyers appealed.

This time, the Ontario Court of Appeal said the agent should have done a better job in acting for the buyers, who didn’t get a home inspection.

“The Scherbaks knew that the foundation of the house was seriously compromised and that there were ongoing plumbing problems,” wrote Justice Gloria Epstein.

“The Scherbaks made incomplete disclosure about these problems to Ms. Krawchuk. Ms. Weddell took no steps to verify the accuracy of the information supplied by the Scherbaks or to otherwise protect Ms. Krawchuk from the adverse consequences of this inaccurate information.

Misinformed by the Scherbaks and badly served by Ms. Weddell, Ms. Krawchuk purchased a house with serious latent defects. She was forced to move out while she repaired her home at considerable expense.”

The cost to fix the home was $110,100. That was $100 more than Krawchuk paid for the home.

“This case was about the disclosure form and the obligation for the agent acting on both sides to make appropriate

inquiries to properly represent both sides,” says Elliott, who believes the courts are holding real estate agents to a higher standard than they have in the past. She has two reasons for this.

“Firstly, the fact that many agents are acting on both sides and this conflict requires a higher level of disclosure to both sides,” says Elliott.

“Secondly, that the commissions paid are high enough that more is expected of the agents. Agents are expected to ask questions appropriate for the property and convey that information. Agents are expected to encourage clients to rely upon the appropriate experts for the situation as required.”

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