Case dismissed against sellers of house with hidden defects

Bob Aaron in Legal

Back in April, 2006, Walter and Shelley Cotton signed an agreement to buy their dream home in Brantford. After closing, the house turned out to be the worst nightmare they could have imagined, requiring them to spend more than $85,000 to bring it up to building code.

Before the Cottons signed the offer to purchase, they reviewed the Sellers Property Information Statement (SPIS) provided by the sellers, Gary, Laurie and Carey Monahan.

The Cottons and their agent went over each question and answer thoroughly. The form disclosed that extensive renovations had been done to the house by the sellers without any building permit.

Finding themselves in the midst of a “hot” real estate market, the Cottons instructed their real estate agent to submit an unconditional offer without a home inspection clause — despite the agent’s advice to the contrary.

It was only after the transaction closed that the buyers conducted a home inspection and an electrical safety inspection, both of which revealed numerous problems.

Eventually, the Cottons had to gut a significant portion of the house so repairs could be done. The house, they said, was “in chaos” for the next six months.

The Cottons then sued the Monahans for the cost of the repairs, alleging that the Monahans actively concealed the many hidden defects in the house. The defence was that the Monahans did not actively conceal anything that they knew to be a defect, that they honestly answered the questions in the SPIS, and that the buyers failed to exercise due diligence by conducting a home inspection before committing themselves to the purchase.

The trial of the case took 10 days last December and January. My own estimate of the combined legal fees involved for a court case and trial of this length would be well north of $100,000.

Justice Harrison Arrell released his 19-page decision in late April. He began his analysis with the often-quoted words of the late professor (and subsequently Chief Justice) Bora Laskin in a 1960 Law Society lecture, when he said, “Absent fraud, mistake or misrepresentation, a purchaser takes existing property as he finds it . . . unless he protects himself by contract terms.”

Arrell also quoted a 1979 decision of the Ontario Court of Appeal which stated that a seller who is aware of a hidden (or latent) defect in a resale house has an obligation to disclose it to the purchaser only if it makes the house dangerous or unfit for habitation. Otherwise, a seller is not obligated to disclose either hidden or obvious defects in a house.

To be successful in a lawsuit, purchasers like the Cottons have to prove that there are hidden defects in a property making it dangerous or unliveable, and that the defects were known to the sellers who purposely concealed them — or that the sellers recklessly disregarded the truth or falseness of any representations made about known defects.

The judge dismissed the Cottons’ claim. He ruled that the defects in the house were not known to the sellers and that there was no evidence that the Monahans purposely or knowingly concealed any defects. He also decided that the sellers accurately and truthfully filled out the questions in the SPIS form.

This case is just the latest in a long string of recent cases which would never have gone to court but for the existence of the SPIS form.

In my opinion, the SPIS form, which is published and promoted by the Ontario Real Estate Association, is probably the single most frequent cause of Ontario real estate litigation. It poses huge, unjustified risks to buyers and sellers of real estate.

Two lessons emerge from the Cotton v. Monahan case:

First, unless you enjoy expensive court battles, never sign a Seller Property Information Statement. Agents who encourage their use may not be protecting the best interests of their clients.

And second, buying a house without conducting a professional home inspection is a very risky business indeed.

Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto and a board member of the Tarion Warranty Corp.  Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears Saturdays in The Toronto Star and weekly on Move Smartly.  E-mail

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