BUYER BEWARE: CRITICAL PRINCIPAL TO REMEMBER WHEN PURCHASING

By Alan Silverstein (The Dotted Line)

Caveat emptor – buyer beware. An aged but critical principal to remember when buying real estate. With caveat emptor, sellers are under no obligation to divulge obvious (or “patent”) defects in the physical condition of a home. Nor do vendors have a duty to disclose not-so-obvious (or “latent”) defects, unless they render the premises dangerous or unfit for habitation. That means sellers need not volunteer information about latent defects that negatively affect a property’s value, unless they also pose a health or safety risk. (All this presumes the vendor has not concealed the latent defect, or distorted the truth when asked about it). The onus is on the buyers to inquire, inspect and discover, even though sellers have more intimate knowledge about a property.

 

Over the past decade, “seller disclosure” has gained momentum in the U.S., one of the most significant changes to the buyer/seller relationship in decades. Who has been spearheading the move for sellers to reveal property defects to prospective buyers” Not buyers. Not sellers. But the real estate industry itself, as a shield against lawsuits launched by disgruntled buyers who discover problems after closing. Seller disclosure arrived in Canada in September, 1993, when the British Columbia Real Estate Association made completion of its property disclosure form mandatory for all MLS® listings. In Ontario, the Ontario Real Estate Association has developed a Vendor Property Information Statement (or VPIS). Yet, only a handful of local boards have adopted it, Toronto being one no-table holdout.

 

SELLERS, AGENTS INSULATED

Many clauses in the VPIS insulate both sellers and agents. “This statement is designed in part to protect vendors by establishing that correct information concerning the property is being provided to purchasers. (Note the use of the word “establishing,” not “ensuring”)…Purchasers must still make their own inquiries…The Vendors state that the above information is true, based on (their) current actual knowledge…The Broker/Sales Representative shall not be held responsible for the accuracy of any information.”

 

A nagging question has always been: What is the legal impact of the information in a VPIS? Is it a mere representation which, if made innocently (i.e. without fraud), gives no cause of action for damages after closing, even if untrue? Is it a warranty, a secondary or collateral term, the breach of which allows the innocent party to claim damages after closing? Or is it a condition, an essential term of the contract which, if breached, allows the aggrieved party to cancel the contract before closing? A recent unreported case shed light on this issue. Though only rendered by a Small Claims Court judge, its analysis is very convincing. The standard form Agreement of Purchase and Sale said, “There is no representation, warranty, collateral agreement or condition . . . on which reliance is placed by any party . . . other than as expressed herein.”

 

Of the numerous answers to VPIS, only three specifically appeared as warranties in the Agreement of Purchase and Sale. Therefore, all other statements in the VPIS could not be warranties. Nor could they be conditions, since conditions carry even more serious legal consequences than warranties. The statement and answers in the VPIS were found to be mere representations. Provided they weren’t made fraudulently, a buyer could not successfully sue a vendor for damages after closing, even if the statements or answers in the VPIS turned out to be untrue. The quoted clauses in the Agreement of Purchase and Sale excluded “all representations made in the (VPIS) except those which were made warranties in the Agreement.”

 

Two results should flow from this decision. Sellers should be less reluctant to complete and sign the VPIS, since they are furnishing little more than an opinion about their property. And buyers concerned about the information in a VPIS will have to specifically translate those issues into either warranties or conditions in an offer, to properly safeguard their interests.