Vendor has Obligation to Disclose “Prohibition Order”
The Supreme Court of British Columbia dealt with the matter of the vendor’s duty to disclose Pavenham Development Corp. v. Sladen(1997).
•· The vendor owned a property that he rented out.
•· An Environmental Health Officer visited the property and concluded that the septic system was malfunctioning.
•· An order was issued prohibiting the rental of the house as a residence until the system was repaired or replaced.
•· The tenant vacated the property and the vendor listed it for sale.
•· The septic system was never repaired or replaced.
The Disclosure Statement
•· The vendor completed a disclosure statement
•· One of the questions on the disclosure form asked about septic problems.
•· The vendor, in answering the question, failed to mention the order prohibiting the property from being rented due to septic problems,
•· He did indicate a “leakage” issue.
The Purchaser’s Knowledge
•· The purchaser wanted to buy the property for rental purposes.
•· The vendor and the vendor’s agent knew this.
•· They also knew that the purchaser was not aware of the Environmental Health Order that prohibited the house from being rented.
•· The disclosure statement was never provided to the purchaser.
•· The purchaser rented out the house.
•· The Environmental Health Officer became aware of this,
•· The tenancy had to be terminated.
•· The purchaser was held liable to the tenants for their damages.
Fraudulent Misrepresentation by Vendor
•· The trial judge held that the manner in which the vendor filled out the disclosure statement represented to potential purchasers that the house could be occupied as a residence
•· The vendor failed to disclose that an Environmental Health Order precluded the house from being occupied as a residence.
•· The vendor was therefore found liable to the purchaser for fraudulent misrepresentation.
The Vendor’s Agent’s Liability
•· The vendor’s agent was also found liable to the purchaser in negligence.
•· The agent should have delivered the disclosure document to the purchaser’s agent.
•· He also should have inquired of the vendor as to the meaning of the entries on the disclosure statement.
•· In failing to do so, he did not satisfy his duties to provide the purchaser with all the information he had about the property and to ensure he had taken reasonable steps in obtaining listing information.
•· The trial judge concluded that the damages arising from the lack of disclosure were two thirds (2/3) attributable to the vendor’s insufficient disclosure, and
•· one third (1/3) attributable to the agent’s failure to make inquiries and carelessness in failing to pass on the disclosure form.
This case was quoted with approval by the Ontario Court of Appeal in Krawchuk v. Scherbak and therefore becomes part of Ontario common law too.
It is not entirely clear what the BC regulations provide in terms of delivery of the disclosure document.
The Ontario obligation seems less imposing. It places the onus upon the purchaser’s agent. The listing agent must then co-operate by producing a copy but not necessarily delivering a copy. Ontario courts have yet to rule on that specific point.
Clearly, there is an obligation to be forthright and complete if one chooses to induce the purchaser with a disclosure statement. Don’t point out one problem while overlooking another. The full or complete truth must be offered. Otherwise, continue to exercise your right to remain silent. But, if you decide to volunteer information in order to attract a purchaser and a higher price, then the whole truth is required. Half-truths are dangerous.
Both the vendor and the listing agent had to know that this entire matter was going to blow up in the face of the buyer and backfire, which is precisely what it did.
In this case the agent incurred liability in negligence:
1. By failing to seek additional information from the vendor,
2. By participating in the concealment of information,
3. By failing to deliver the disclosure document.
It should not be overlooked that the vendor committed a fraudulent misrepresentation as against the purchaser. That is much more serious than negligence and usually leads to an onerous assessment by the Courts in terms of costs.
The trial Judge was lenient in respect to the agent in this regard. Likely, this was not pleaded and therefore not open to the Judge to draw that conclusion. However, in the next case, it will be pleaded. So, be careful. If necessary an agent should seek the advice and assistance of their own lawyer in times of uncertainty.
Brian Madigan LL.B., Broker