SPIS Case Comment - Krawchuk v Scherbak

We regularly speak at the Durham Region Association of Realtors’ Education Day. Every time, we are bombarded with questions regarding the Seller Property Information Sheet ("SPIS"). In 2009, we spoke about the Sudbury case of Krawchuk v. Scherbak, a 2009 case of the Superior Court of Justice.

In 2004, the Scherbaks met real estate agent Wendy Weddell at an open house. They hired her to buy a house and also retained her to list their house. Ms. Weddell met with them and they signed a listing agreement and completed an SPIS for the property.

Some background: The house is built on a peat bog and had experienced significant settling. It was clear to the naked eye that it had settled. The floors were sloped and the lines of bricks showed a sloping to a corner. There was significant evidence of foundation cracking and repairs.

The Scherbaks disclosed the following on the SPIS: "NW corner settled – to the best of our knowledge the house has settled. No further problems in 17 years."

On top of that, in the basement, there was a pit covered over with a steel plate. The sewage from the house flowed into the pit and then drained into the municipal sewage system. The Scherbak’s answer to the question "Are you aware of any problems with the plumbing system?" was"No."

The house was listed for $100,000. Ms. Krawchuk, a first-time buyer, attended an open house conducted by Ms. Weddell. There were a lot of interested people. (Apparently, sloping floors is not such a big deal in Sudbury.)

Ms. Krawchuk retained Ms. Weddell, who was then acting as a dual agent. Ms. Weddell had drafted, prior to the open house, drafted the APS in anticipation of getting an offer. The draft included conditions on financing and for home inspection. Ms. Weddell"encouraged" Ms. Krawchuk to sign a "clean" offer and to offer as much as she wanted to pay, so that her offer would be the one accepted. Accordingly, the conditions were removed. She offered $110,100 for the house and got it.

When Ms. Krawchuk moved in, she noticed an accumulation of sand in the crawl space. She cleaned it up. A few days later, there was more. Investigation disclosed that there were serious structural issues as a result of past and ongoing settling. As a result, the house had to be lifted off the foundation, the foundation had to be removed, along with significant subsoil, and replaced with engineered fill. New footings, foundation and a basement floor were poured and the housed placed on the new foundation. Removing and replacing the house caused significant cracking and repairs were required as a result.

Ms. Krawchuk sued a lot of people and there were a lot of crossclaims by the parties against each other.

Here are some of the other facts:

When Ms. Krawchuk viewed the house, there was significant chalk graffiti on the exterior concrete wall where the cracking had occurred and been repaired, making it harder to notice. Coincidence? I doubt it.

The vendors had put an air freshener on the underside of the steel plate in the basement.

The Agreement of Purchase and Sale referred to the SPIS as "Schedule A"

At trial, this is what happened:

Action against the Sellers

Ms. Krawchuk sued the Scherbaks for breach of contract, fraudulent misrepresentation and negligent misrepresentation.

She did not succeed in breach of contract. The court found that, while some of the foundation issues were patent defects, the extent of the problem was a latent defect. The judge also found that the plumbing issue was a latent defect. The judge also found that the vendors were aware of both defects. However, the judge found that the sellers did not conceal the defects with an intent to mislead the buyer. I am not convinced by the judge’s reasoning in this regard.

Ms. Krawchuk also did not succeed in fraudulent misrepresentation. The judge’s finding that the sellers did not intend to mislead Ms. Krawchuk means that there cannot be any fraud. Again, I am not convinced by the reasoning. Why else would you put an air freshener on the underside of the pit cover in the basement?

However, the judge did find that the sellers made negligent misrepresentations to Ms. Krawchuk and she succeeded on that basis. The misrepresentations were in the SPIS. The court found that, despite the representations in the SPIS were not warranties, "it is clear that the Scherbaks in completing the SPIS were making representations about the property that were meant to be disclosed to prospective buyers and that it would be reasonable to expect such buyers to rely upon those representations. In such circumstances, I am content that there existed a special relationship between these sellers and Mr. Krawchuk as buyer such as to give rise to a duty of care."

Action against the Agent

Ms. Krawchuk sued the agent and the broker for passing on the representations of the seller and for and negligence for failing to ensure that she got a home inspection.

She lost at trial. The judge found that the buyer was aware of the risk and that the benefit of a "clean offer" made the risk one that she was prepared to take. We said in 2009 that we were not convinced by this reasoning.

　

The case was appealed.

The Sellers appealed the judgment against them. Ms. Krawchuk appealed the dismissal of her case against the agent and broker.

Appeal Decision

Sellers’ Appeal

The sellers argued two things: (1) that, as the representations in the SPIS are not warranties, there can be no liability unless there is fraud or deliberate concealment; and (2) that the "entire agreement" clause in the APS precluded an reliance on the representations.

With respect to the warranty argument, the Court of Appeal quoted a 2007 Ontario Superior Court case with approval:

"As can be seen in the opening words of para. 1, "ANSWERS MUST BE COMPLETE AND ACCURATE". While this paragraph goes on to say that the answers do not constitute warranties, there cannot be any doubt that they can have legal consequences as representations, especially if they were read by the purchasers before submitting their offer, as here, and were then incorporated into the terms and conditions of the agreement."

Two things are important here:

First: the SPIS means something. While this may seem obvious, there are some people who think that an SPIS contains throw-away representations. Wrong. Once you decide to make such representations, the notion of "buyer beware" is significantly modified.

Second, the word "especially" means that the court is holding open the notion that there will be liability even if the SPIS is not attached to the APS.

The sellers second argument is that there cannot be a "duty of care" (which is a necessary component of negligence) when there is an "entire agreement" clause. The Court found that, as the SPIS was attached the APS, the clause did not apply.

I wonder what would have happened if the SPIS was NOT attached?

The sellers lost the appeal.

Buyer’s Appeal against Agent

The appeal court started this analysis by examining the standard of care required of an agent. The Court referred to RECO’s Code of Ethics to gain some insight.

The Court referred to the part of the Code that stated that an agent "shall not discourage the Parties to a Transaction from seeking outside professional advice. A Licensee shall encourage the Parties to a Transaction to seek appropriate outside professional advice when appropriate."

The Court also quoted the Rule that stated that an agent is required to "discover and verify the pertinent facts relating to the Property..." The Court went on to cite decisions dealing with these provisions.

The Court found that the agent, having been in business for 30 years and aware of the settling problems in the neighbourhood, had to have doubted the honesty of the sellers when they said nothing had happened in 17 years. Her evidence that SHE had not noticed any signs of recent settling was not useful, because she had also testified that she was not qualified as a home inspector. In light of the obvious signs of settling, she should have made inquiries to verify the accuracy of the sellers’ statements.

She also should have recommended, in the strongest terms, that Ms. Krawchuk get a home inspection.

Her failure to verify the sellers’ representations and her failure to strongly recommend a home inspection, in the face of the obvious problems, was a departure from the standard of care and was negligent.

The Buyer won the appeal against the agent and broker.

Some Numbers:

The cost of repairs was about $191,000 - almost twice the selling price.

Ms. Krawchuk recovered $105,742.32 under the title insurance policy.

The house sold in 2004. Lawsuit started in 2005. The trial was 12 days in 2009.

She was awarded damages of $110,742.32 against the Scherbaks at trial.

We don’t know what the trial costs award was, but I am sure that it will be improved upon, thanks to her successful appeal against the agents.

She was awarded interest which now totals $27,780.