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Real Estate Litigation and Caveat Emptor

When purchasing goods or property from a seller, the Latin maxim, “caveat emptor” or “let the buyer beware” is generally a good rule of thumb to follow. However, in the case of real estate, there are circumstances in which the vendor can be held liable for conditions with respect to a property which are discovered post-closing as is illustrated in a recent Ontario Court of Appeal Decision.

In Soboczynski et. al. v. Beauchamp et. al. (2015 Ont. C.A.), the parties entered into an agreement of purchase and sale (“APS”) for a residence. The APS included an “entire agreement clause.” The clause provided that the APS contained all terms of the agreement and that there were no representations binding aside from those set out in the APS.

After executing the APS but prior to closing the vendors signed a standard seller property information form (“SPIS”) in which they stated that the subject property was not subject to flooding and they further undertook to notify the purchasers of any important information contained in the form.

As luck would have it for the vendors, the home flooded sometime after the APS and SPIS forms were signed but prior to closing. The vendors consulted their lawyer about the flood but did not inform the purchasers of the incident. Evidently, the vendors believed that the flood was an isolated occurrence and did not invoke the notification clause called for under the SPIS.

After closing the purchasers learned of the flood and sued the vendors for damages. At trial, the judge found that the “entire agreement clause” in the APS “prevails to exclude” the representations made in the SPIS since the SPIS was not incorporated into the agreement of purchase and sale. In other words, the purchasers could not rely upon the SPIS to establish that the vendors failed to make proper representations because this form was not part of the agreement of purchase and sale.

The purchasers appealed to the Divisional Court which allowed the appeal. According to the Divisional Court, the entire agreement clause in the APS did not affect the purchasers’ claim with respect to the representations made in the SPIS.

The vendors appealed to the Court of Appeal for Ontario. The basis of the vendor’s position on appeal was of course that the entire agreement clause in the APS precludes a claim for anything not based in the APS. Since the SPIS was not part of the APS, the purchasers could not rely upon the SPIS as a basis for their claim.

The Court of Appeal ruled that the claim could proceed despite the APS “entire agreement clause.” Since the SPIS was given after the entire agreement clause was signed, the claim was not captured by the entire agreement provision. The Court noted with interest that any other ruling would have rendered the provision of the SPIS a “meaningless exchange” since in order for the form to have meaning, there must be consequences to the representations made (or in this case, not made).

In terms of “caveat emptor”, the Court cautioned as follows: “once a vendor ‘breaks his silence’ by signing the SPIS, the doctrine of caveat emptor falls away as a defence mechanism and the vendor must speak truthfully and completely about the matters raised in the unambiguous questions at issue.”

In an interesting twist, although the claim was allowed to proceed, the Court of Appeal deemed that it failed because the purchasers had not established that they acted to their detriment as a result of the representations. Since the damage caused by the flood was repaired by the time the property exchanged hands, there was no damages to the purchasers. Further, the damage, even if not repaired, was not substantial enough to allow the purchasers to rescind the contract. Since there was no damages established and no evidence that the purchasers in any way acted to their detriment, their claim based on negligent representations failed and was dismissed.

Given the above, one wonders why the unsatisfied purchasers invested the time and resources involved in bringing a lawsuit. In any event, while the claim did not result in any damages, it makes for an interesting read on the law dealing with entire agreement clauses.

Thanks for reading,