Liability For False Statement about Flooding
The case of Costa v. Wimalasekera was an action in Small Claims Court in Erin, near Orangeville Ontario in 2012. The case was appealed to the Divisional Court which held in favour of the plaintiffs (the buyers).
• Fernando and Katina Costa purchased the Property from Jagara Wimalasekera pursuant to an agreement of purchase and sale dated July 11, 2008.
• The sale closed one month later, on August 11, 2008.
• Within a month of the closing date, Mr. and Mrs. Costa discovered that the backyard of the Property was subject to the accumulation of water to a depth of anywhere from a couple of inches to a foot, when it rained.
• The water would disappear within a week if there was no further rain. The accumulation of water rendered a large portion of the rear yard of the Property unusable.
• The offer to purchase was conditional on the buyers receiving a Seller Property Information Statement (“SPIS”) completed by the seller “with complete and accurate answers, in the best of the seller’s knowledge and belief, to the questions contained therein”, and the buyers accepting the information on the form as satisfactory in their sole and absolute discretion.
• The SPIS was provided, and the Costas waived the condition.
• The SPIS was completed by the seller’s agent and each response was initialled by Mr. Wimalasekera, who signed the form. Under the heading “Environmental”, was Question 3, “Is the property subject to flooding?” The seller responded “No”.
• The buyers viewed the Property twice before submitting their offer to purchase, and on each occasion the rear yard was completely dry.
• In fact, there was a water accumulation problem that was known to the seller.
• The seller provided a statutory declaration dated June 8, 2011 in which he stated that the accumulation of water in the backyard was ponding and not flooding, based on what he was told by the Credit Valley Conservation Authority (the “CVC”), and that for this reason he had answered the question about flooding in the negative.
The issues on appeal were:
1) Interpretation of Flooding
2) Fraudulent Misrepresentation
3) Negligent Misrepresentation
4) Reliance and whether Defect was Latent
5) Entire Agreement Clause
The Conservation Authority referred to this water accumulation technically as “ponding’, since “flooding” would refer to an overflow from a watercourse.
The appeal court said:
“What was relevant was not the technical definition of the term “flooding”, but the understanding that a layman would have in reading the statement in the SPIS. This was the focus of the trial judge’s analysis and he was correct to reject the technical definition of the term used by the CVC in favour of how the term would be understood by the general public.”
The seller knew about the substantial accumulation of water in the rear yard. In fact, he investigated this matter with the conservation Authority. When asked about his reason for saying “no” to the flooding question, the seller offered two explanations:
a) the technical terminology by CVC that the correct term was “ponding”,
b) he believed that the term property only related to the building.
The appeal court was convinced that the trial judge drew a reasonable conclusion that the seller by his response intended to deceive.
The trial judge also made a finding in negligence against the seller. The appeal court said:
“The Krawchuk case is authority that a special relationship and a duty of care can arise in circumstances where the seller intends that the representations in the SPIS will be disclosed to prospective buyers to reasonably inform their decisions respecting the purchase of the property.”
Reliance and Latent Defect
Here the Court commented:
“A “latent” defect is one that is not discoverable upon reasonable inspection. The SPIS specifically cautioned the buyers to conduct their own inspection. If an inspection would reasonably have disclosed the flooding problem, it would be a patent defect, in respect of which the buyers would have had only themselves to blame if they had not identified the problem
The trial judge’s conclusion that the flooding problem was not discoverable through the buyers’ inspection, except if it had been raining, was supported by the evidence at trial. The fact that the propensity for flooding in the area was not something within the sole knowledge of the sellers, and was in the public domain, did not transform the defect into a patent defect. The question was whether it was discoverable upon the buyers’ reasonable inspection.”
The SPIS alerts the buyer to make their own inquiries, but the court adopting the wording from Krawchuk noted:
“…while the SPIS emphasizes the purchaser’s duty to enquire in order to fill in gaps in the vendors’ knowledge, such an inquiry does not necessarily include a duty to challenge the vendor’s honesty and forthrightness.”
The trial Judge accepted the fact that the buyers would not have proceeded with the purchase had they known about the water problem.
Entire Agreement Clause
This clause is intended to restrict the parties to those documents that are part of the agreement. In Krawchuk, the SPIS was made a schedule. In this case, there was a condition that called for the completion of the SPIS. When it was supplied the condition was waived.
The Divisional Court dismissed the appeal, and upheld the judgment in favour of the buyers for $25,000.00 plus their costs.
Once the SPIS is signed, caveat emptor has gone by the wayside. It is incumbent upon the seller to answer all the questions reasonably and provide “disclosure”. The document is not intended to be filled with cute technical wording which will allow a seller to trick the buyer with some form of deception.
So, water is water. And a whole lot of water in the rear yard should be disclosed rather than concealed.
It is also noteworthy that there was a finding of negligence. This would be covered under a homeowners’ policy while fraud would not be covered.
Brian Madigan LL.B., Broker is a Manager at RE/MAX West Realty Inc., Brokerage 416-745-2300.