Cellar Flood Among Wave of Lawsuits From Disclosure Form

Bob Aaron in Legal, Home Selling, Home Buying

House flood
In the wake of
widespread flooding in Toronto last week, I’ve had a number of phone
calls and emails from people trying to sell their properties. They ask
about their legal obligation to advise the buyers of a flood which
occurred after the signing of a purchase and sale agreement, but prior
to closing.

That was the exact issue which came before Ontario’s Divisional Court this past May.

Don and Louise
Beauchamp decided to sell their property on Gardenvale Cr., in London,
back in 2007. After inspecting the property, Adam and Olga Soboczynski
submitted an offer which was prepared by an agent who was a friend of
the Beauchamps — the sellers of the home. The offer was accepted with a
price of $290,000.

Before the offer
conditions were waived, the sellers delivered to the buyers a Seller
Property Information Statement (SPIS) which was provided to them by the
agent. The form is published by the Ontario Real Estate Association

Regular readers of
this column know that I am a staunch critic of this form, which has been
responsible for about 225 reported Canadian court cases since 1997. The
dispute between the Beauchamps and the Soboczynskis has now been added
to the list, which is growing at the rate of about one case a month.

In the SPIS, the
Beauchamps stated the property was not subject to flooding and they were
not aware of any moisture or water problems. At the bottom, the form
states that the sellers will disclose any “important changes” to the
buyers before closing.

After receiving a favourable home inspection report, the buyers waived the conditions making the offer firm and binding.

Nine days before
closing in January, 2008, water entered the basement. The Beauchamps
dried out the wet rug and replaced the underpad.

The transaction closed
as scheduled without disclosure of the flood to the buyers. Three weeks
later, the basement flooded again and the buyers cleaned up at their
own expense. Later in 2008, the new owners learned of the January flood.
They felt that the sellers had misrepresented the water issues and
started a lawsuit.

At trial, deputy judge
Anthony Little found that the Beauchamps did not disclose the January
flood because they honestly believed it was a one-off occurrence. He
ruled that the SPIS did not form part of the purchase agreement, and
dismissed the case.

In April, 2013, the
Soboczynskis appealed to a three-judge Divisional Court panel. Writing
for the court in May, Justice Thea Herman referred to a half dozen
previous decisions on the SPIS, and ruled that the trial judge was in
error on the issue of pre-closing disclosure of the flood.

Based on the wording
of the SPIS, the court held that the sellers should have advised the
buyers of the pre-closing flood. The flood was an “important change” to
the information provided in the SPIS.

The Beauchamps were ordered to pay $25,000 to the buyers for negligent misrepresentation.

Several lessons emerge from this case:

  • Sellers are liable for misrepresentation, even if the misrepresentation is innocent.
  • If there was no SPIS form in this case, the sellers would probably have not have been ruled responsible.
  • Whether
    sellers have to disclose a pre-closing flood which caused no damage, in
    the absence of an SPIS, remains an open question.
  • Clearly the SPIS form causes more litigation than it prevents.

    Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron
    in Toronto and a past 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 alternate Fridays in The Toronto Star and alternate weeks on Move Smartly.  E-mail bob@aaron.ca

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