August, 2012

Over the last 10 years, the use of property disclosure statements in residential real estate transactions has substantially increased in Canada.  Manitoba is no exception.  Essentially, a property disclosure statement (a/the "PDS") is a series of statements by a seller to a potential (or actual) purchaser of the seller's residential property pertaining to the seller's knowledge (or lack of knowledge) of various elements of the property which would, in most cases, be of interest and/or concern to the purchaser.

The current form of residential real estate offer to purchase mandated for use where a real estate agent or broker is involved (a/the "Standard Offer") contains a promise by the seller that the seller will, within a short period of time (typically, 24 to 48 hours) provide the purchaser with a PDS.  The purchaser then has a short period of time (again, typically, 24 to 48 hours) to decide if the purchaser is - or is not - satisfied with the contents of the PDS.  If the seller fails to deliver the PDS, or the purchaser is not satisfied with the contents of the PDS, then the contract is terminated.  The Standard Offer also provides that immediately upon provision of the PDS to the purchaser, the PDS "forms part of this agreement".  Additionally, the Standard Offer contemplates that if the parties are agreeable to this, the seller is not obligated to provide any PDS to the purchaser.

On a related note, the Standard Offer additionally contains a promise by the seller that (again) within a short period of time, the purchaser is entitled to have the property inspected and that if the results of the inspection are not satisfactory to the purchaser, the agreement is terminated.  Again, the parties can agree to the removal of this promise from their agreement.

After a residential real estate transaction has been consummated and the purchaser moves in, the purchaser may discover certain "defects" in the property.  The defects may be sufficiently serious (at least in the purchaser's mind) that the purchaser will want to undo the transaction.  Or the aggrieved purchaser may wish to receive compensation from the seller for the costs incurred in remedying the defects (or, in effect, to lower the purchase and sale price by virtue of the loss in value created by reason of the existence of the defects).  When such an aggrieved purchaser has had the seller's PDS incorporated into the contract, what is the legal effect of such incorporation?  The British Columbia case of Hanslo and Barry (British Columbia Supreme Court, judgment given November 29, 2011, hereinafter, the "Barry Case") provides a very useful analysis of the role which is typically played by the incorporation of a PDS into a purchase and sale of residential real estate contract.  The Barry Case contains a useful review of the role of caveat emptor ("buyer beware") and the exceptions to that rule which the Courts have worked out over the years.

In essence, caveat emptor means that as a general rule, a buyer of real estate runs the risk of acquiring it subject to defects and that it is up to the purchaser to do/conduct its own inspections and due diligence to ensure the absence of defects before unequivocally committing himself/herself.  The seller is - again, as a general rule - not obligated to "disparage" the seller's own property and generally has no obligation to divulge the existence of defects.

What are the exceptions to the caveat emptor rule?  A review of the relevant jurisprudence, a fair amount of which is cited by the Court in the Barry Case, would indicate the following exceptions:

1. where the seller fraudulently misrepresents or conceals a defect;
2. where a seller knows of a latent defect rendering house unfit for human habitation;
3. where a seller is reckless as to the truth or falsity of the seller's statements made relating to the fitness of the property for habitation; and
4. where the seller knows of a latent defect rendering the property dangerous (clearly, this is fairly similar to #2 above).

Although not really an exception the caveat emptor rule, it should be remembered that where a seller actually promises, as a term of the contract, that a defect does not exist, or if it does exist, that it will be remedied at the seller's cost by closing, the seller cannot then rely on the rule of caveat emptor if such promise is breached.

The facts in the Barry Case were fairly simple and not in dispute (there was some question as to credibility which the Court decided in favour of the plaintiffs).  The defendant's home was situated on land located downstream from a creek; before the creek reached the defendant's property line, it ran into an underground culvert which carried the creek water under the defendant's home.  On more than one occasion, the creek had overflowed with the result that the culvert was not able to contain all of the expanded creek water and this resulting in flooding into the defendant's home.  Mould had built up in those areas where such flooding had occurred.  The plaintiffs entered into an agreement with the defendant to purchase the defendant's home, and as part of the transaction, the defendant provided the plaintiffs with a PDS.  In the PDS, the defendant stated that he was not aware of the existence of any moisture and/or water problems in the walls, basement or crawl space, that he was not aware of any damage due to wind, fire or water, and, that he was not aware of the existence of any unregistered easements or unregistered rights-of-way.  The Court held that the defendant's said statements were false and that the plaintiffs had relied on the truthfulness of such statements to induce them into obligating themselves to purchase the defendant's property, with the plaintiff subsequently suffering loss as a result of such reliance (the costs to repair the flooding/mould damage).

The Court had to decide what was the effect of incorporating the PDS into the contract. 

It was argued for the plaintiffs that incorporation of the seller's statements in the PDS constituted those statements as contractual warranties.  After reviewing previous relevant case law, the Court held that, at least in this case, the seller's statements did not constitute contractual warranties.  Citing an earlier British Columbia case, the Court held that, notwithstanding the incorporation of the PDS into the contract, the same was "…not necessarily a warranty.  Its main purpose is to put purchasers on notice with respect to known problems.".  On the other hand, the Court determined that the seller's PDS statements constituted representations, and that it was reasonable to conclude that the purchasers had relied on same and were thereby induced into entering the contract, ultimately to their detriment.  The Court stated that if the seller had made correct statements, it is almost certain that the purchasers would have made investigations which would have lead them to become aware of the flooding problem and of the fact that what amounted to an unregistered right-of-way (for the culvert carrying water under the house) affected the property. 

From the perspective of a "traditional" legal analysis, the concept of a representation forming part of a contract is somewhat odd; statements pertaining to the subject matter of a contract which are actually included within the "body" of the contract are usually considered to be warranties (or promissory conditions).  Statements relating to the subject matter of a contract which are not incorporated into the contract, but which nevertheless are relied upon by one of the parties, thereby inducing such party to commit itself, are considered to be representations.  Nevertheless, for the purpose of the Barry Case, whether "incorporated" into the contract or not, the Court held that the defendant was responsible to the plaintiffs for the plaintiffs' flooding/mould damage remediation costs, on the basis of misrepresentation(s).

The provisions in the form of residential property offer to purchase utilized in British Columbia and in the Standard Offer, as well as the provisions contained in the form of PDS used in the Barry Case and in the more or less standardized form of PDS used by realtors in Manitoba are  fairly similar.  In particular:

(a)          both forms of contract specify that there are no "representations, warranties, promises or agreements" other than what is set forth in the contract and what is set forth in the PDS, if PDS is incorporated into the contract;

(b)          both forms of contract provide that where the parties agree upon it, the PDS is incorporated into or forms part of the contract; and

(c)           the Manitoba form of PDS specifically says that the seller's statements do not constitute warranties as to the actual condition of the property (notwithstanding that such statements are incorporated into the contract), and, the seller's statements in the British Columbia form of PDS were confirmed by the Court in the Barry Case to constitute representations, not contractual warranties.

Thus it appears (at least in British Columbia and Manitoba) that when statements contained in a PDS, although not warranties, are relied upon by a purchaser, and it turns out that they are falsely made (at least when so made intentionally, recklessly or negligently), and the purchaser relies on same and thereby suffers loss, the purchaser will have a remedy against the seller.

A few other elements of the Barry Case which should be of interest to potential sellers, buyers, realtors and counsel are:

(i)         the defendants argued that when, after the plaintiff had been provided with a PDS which the plaintiff was satisfied with, the plaintiff then signed a confirmation "removing" the plaintiff's requirement of obtaining a satisfactory PDS, this meant that the PDS no longer existed for the purposes of the contract.  Not surprisingly, the Court held that such "removal" was not a complete waiver of the purchaser's rights under or with respect to the PDS, but merely a confirmation of fulfillment of the seller's obligation to provide a satisfactory PDS.

(ii)        the plaintiffs argued that the seller's answer to the question: "Are you aware of any damage due to wind, fire or water?" should have included information, not only to existing damage, put also to past damage, even if the past damage had been repaired.  The Court disagreed and held that the question refers only to existing damage.  In support of this argument, the Court pointed to several other questions in the PDS where a seller is asked to advise as to whether or not there has "ever" been a problem or problems of certain types.

(iii)       the defendants argued that because the plaintiffs obtained a building inspection report for the property and did not terminate the transaction by virtue of the information provided therein, the plaintiffs had ceased to rely on the statements contained in the PDS.  The Court disagreed and held that, at least in the Barry Case, the plaintiffs did not cease relying on the PDS, and were in fact, entitled to rely on both the PDS and the building inspector's report.