October 10th - 2010

REALTORS® have a duty to disclose defects

Basement flooding, cracks in the foundation, mould – what do sellers need to disclose and what do REALTORS® need to find out?

Basement flooding, cracks in the foundation, mould – what do sellers need to disclose and what do REALTORS® need to find out? 

Real estate professionals have a duty to discover and disclose facts about a property that is being listed or shown to a buyer that could be relevant to a buyer’s decision to buy. As a REALTOR®, your codes of ethics require you to discover facts pertaining to every property for which you accept an agency. The disclosure issue is covered in Article 4 of the CREA Code and Section 21 of the REBBA Code.

In a new OREA continuing education course called Defects and the Importance of Disclosure, author and course developer Mark Weisleder says all defects should be disclosed in advance. “I believe that REALTORS® should show the SPIS (Seller Property Information Statement) to every potential buyer, especially if they are told in advance that there are defects in the property. If you disclose everything, then it is extremely unlikely that you or your seller will be sued by any buyer. If you do not disclose, there is always the possibility that proceedings will be brought against you as well as your seller client.”

Weisleder also says that if you are not sure whether the information is something you should disclose, simply ask yourself if it’s something you would want to know if you were buying the property yourself. “If the answer is yes, then you know you should be disclosing this information to the buyer.”

As a general rule, sellers of real estate and their listing agents have a duty to disclose any hidden (latent) defects that they are aware of in the property that could affect a reasonable buyer’s use and enjoyment and/or perceived value of the property.

Physical Defects - Patent and Latent Defects
There are two kinds of potential physical defects in a property -- patent defects and latent defects. A patent defect is a defect that is obvious when you walk into the home; for example a broken window. The buyer cannot complain about this defect because they can easily see it when viewing the home. They are thus governed by the legal doctrine of caveat emptor or buyer beware, and have to accept these defects on closing, unless they include a clause in their agreement that the seller will repair the defect.

A latent defect is a hidden defect, which cannot be observed on a normal inspection. The law is that if the seller knows about a latent defect that makes the home either uninhabitable by the buyer; unfit for the buyer’s intended purpose; or dangerous, then the seller must disclose this defect to the buyer. In addition, the seller cannot intentionally conceal what would otherwise be a patent defect. Examples of latent defects that should be disclosed include a problem with the foundation, or a very serious basement or roof water problem that has not been repaired.

“The Ontario Real Estate Association introduced the SPIS as a means for sellers to put buyers on notice of any physical problems with the property, to alert buyers and to provide buyers with the opportunity to make further inquiries when necessary,” says Weisleder. “It states right on the form that the form is not intended to be a warranty and the buyer must conduct their own independent investigation or property inspection.”

When completing the statement, the seller is asked to respond either “yes,” “no,” “unknown” or “not applicable” to questions such as “are you aware of any water problems” or “are you aware of any structural problems.” These statements have been completed by sellers for years in hundreds of thousands of real estate transactions across Canada, without any liability, especially when they completed the statement truthfully and to the best of their knowledge.

Yet there have also been cases where sellers who signed the statement were held liable for the buyer’s damages when problems were discovered after closing. In a review of these decisions, the judge determined on a factual basis that the seller either knew that what they were saying was false or had deliberately concealed a defect which was found out afterwards. “It was not the SPIS form that got the seller in trouble,” says Weisleder. “It was about not telling the truth when completing the form.”

Finally, Weisleder stresses, “Even if you or your seller are not required by law to disclose the information, the bar in terms of the level of professionalism required of REALTORS® continues to move higher. By fulfilling your legal and ethical duties regarding the detection and disclosure of defects, you will insulate yourself and your clients from a lot of unnecessary pain and suffering.”

For more information about OREA’s Defects and the Importance of Disclosure online course visit www.orea.com.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246