Can a Vendor’s Agents be Held Liable to a Purchaser for their Client’s Non-Disclosure of a Major Latent Defect?

When/whether the Vendor’s agent will be held liable to the Purchaser for latent defects?

Consider, if you will, that you purchase a property and many months after the closing, you find out about a defect that was not discovered through the standard home inspection you conducted nor was it disclosed to you by the vendor. What legal recourse do you have?

Ontario jurisprudence establishes that you can potentially sue the vendor, your own real estate agent, and the home inspector you retained – assuming it was a defect that went towards danger, habitability, or health (“major latent defect”).[1][2] But caselaw remains largely silent on whether you have any recourse against the vendor’s agent. This article will explore and assess whether a purchaser can successfully claim against a vendor’s agent for any losses suffered.

This issue was considered in 2016 by the Ontario Superior Court of Justice (“ONSC”) in Fischer v Volpe decision. In that case, the plaintiff, Frederick Fischer – who unwittingly purchased a property that was previously used as a marijuana grow operation (“grow op”) – brought a claim against the vendor, the vendor’s agent, and his own agent. He then moved for summary judgment.

It was undisputed that the previous use created an increased risk of mold and electrical damage to the property, and therefore constituted a major latent defect.[3] However, the issue in dispute was the level of knowledge of each defendants with respect to the grow-op and applicable standard of care. The complicating factor in that case was the fact that the vendor’s agent died prior to the motion.[4] As such, although the court engaged in a discussion of the caselaw surrounding agent responsibility, ultimately it was not able to determine the potential duties owing by the vendor’s agent to Mr. Fisher regarding disclosure of latent defects.

Ontario courts have, in recent years, increased the scope of responsibility of vendors’ agents to ensure that the clients they represent meet their disclosure obligations towards purchasers. For instance, in the landmark decision of Krawchuk v Scherbak, the court held that the vendor’s agent was liable for not taking adequate steps towards preventing the vendor from making material misrepresentations towards the purchaser.

We believe the future trend we can expect to see by the courts is a further expansion of the Krawchuk ruling, that is to say, in certain circumstances, we can expect to see a finding that the vendor’s agent can and will be held liable vis-à-vis the purchaser, for not taking reasonable steps towards ensuring full and proper disclosure was made by the vendor of any known major latent defects.

Latent Defects – an Overview

The law surrounding latent defects is in conflict with the general principle of caveat emptor – which holds that buyers alone are responsible for ensuring that the house they wish to purchase meets their expectations. The “buyer beware” principle entails that it is the purchasers’ responsibility to protect themselves by seeking express warranties and doing their own investigations rather than placing the responsibility on vendors to reveal defects in the home[5]

Although this principle still generally applies, it has steadily been corroded over time, especially in the context of latent defects. A latent defect in the context of real estate law is a physical defect that cannot be discovered through a reasonable home inspection. Vendors do not have a general duty to disclose latent defects, although they do have a duty to disclose any defects that go to danger, habitability, and health.[6] Examples of latent defects that have been found to satisfy this requirement include radioactive contamination,[7] the existence of urea formaldehyde foam insulation,[8] and persistent basement flooding.[9]

This exception to caveat emptor was recognized relatively recently in Ontario in the obiter dicta of the Ontario Court of Appeal (“ONCA”) decision of McGrath v MacLean. It was first successfully applied in the case of Sevidal v Chopra, supra. In the latter case, the vendors were held liable for not disclosing the existence of potential radioactive contamination in the property’s backyard. The court reasoned that “the [vendors] were guilty of concealment of facts so detrimental to the [purchasers] that it amounted to a fraud upon them, and, therefore, the [vendors] are liable in deceit.”

This reasoning was accepted in later cases, where courts held that “silence about a known major latent defect is the equivalent of an intention to deceive.”[10] In other words, non-disclosure of a known major latent defect is tantamount to a form of non-innocent misrepresentation.

The question that arises, therefore, is if non-disclosure of latent major defects constitutes deception, should vendor’s agents be held liable in any way for the deceptions of their clients? Turning to the recent landmark decision of Krawchuk v Scherbak will help shed some light on this question.

Krawchuk v Scherbak

In this Court of Appeal decision, the Scherbaks completed the Seller Property Information Sheet (SPIS) with the assistance of Ms. Wendell who had a multiple representation mandate. The SPIS is a standard form that summarizes the property’s defects which vendors can supply purchasers.[11] Although vendors are not obliged to provide this form, once they do, they have a duty to “speak truthfully and completely,” and can be held liable to purchasers for a breach of this duty.[12]

In the SPIS completed by the Scherbaks, they falsely represented that the property did not contain certain structural and plumbing problems. They were later held liable for negligent misrepresentation.[13] Interestingly, the ONCA also held that Ms. Wendell was liable for the vendor’s misrepresentations in the SPIS because she had good reason to suspect the Scherbaks’ (false) representations regarding the structure and plumbing of the property. It was the view of the Court of Appeal that the agent had a duty to further investigate the claims in order to ensure their accuracy.[14] By not doing so, Ms. Wendell was held liable to the purchaser, Ms. Krawchuk for negligent misrepresentation.[15] This finding has been extended in later cases to apply to agents who exclusively represent vendors.[16]

One of the big takeaways from Krawchuk and its subsequent judicial applications is that a vendors’ agent has a duty of care towards a purchaser to take reasonable care to ensure that the vendor does not make material false representations. A breach of this duty can establish a finding of liability for negligent misrepresentation against the agent in favor of the purchaser.

Krawchuk and Major Latent Defects

A finding of liability against vendors’ agents for not taking adequate steps towards ensuring the disclosure of major latent defects seems to follow directly from the conceptual characterization of latent defects in Sevidal, and the ratio of Krawchuk.

Krawchuk tells us that a vendor’s agent has a duty of care towards a purchaser to take reasonable care to ensure that the vendor does not materially deceive the purchaser. Sevidal tells us that a non-disclosure of a major latent defect is tantamount to deception. As such, a vendor’s agent ought to be found to have a duty towards the purchaser to take reasonable steps to ensure that the vendor discloses all major latent defects.

Multiple Representation Agents

In the ONSC Hennessy v. Russell decision, the buyer purchased a property that was inhabited by Loggerhead Shrikes – an endangered species.[17] The existence of the Loggerheads prevented the purchaser from building their planned residence on the property – given that Loggerheads are protected under the Endangered Species Act.[18] The court held that this constituted a major latent defect. The existence of this latent defect was not disclosed to the purchaser by either the vendor or the multiple representation agent, both of whom were aware of the defect. As a result, the court found the agent liable for negligent misrepresentation.[19]

Clearly, purchasers’ agents – who owe fiduciary obligations towards their client – owe certain obligations towards their purchaser clients that a vendor’s agent does not. Thus, it cannot be confidently determined whether the agent’s liability in Hennessy flowed from the multiple representation agent’s fiduciary duties towards the purchaser, or whether it could have been based solely on his disclosure duties as the vendor’s agent.

The important point is that we have a case where a court has found an agent, granted one who was represented both sides, liable for the vendors’ non-disclosure of a major latent defect. Thus, a finding of liability for single representation agents would arguably be a possibility and would merely constitute an incremental expansion of the law.

Conclusion

Ontario courts have in recent years chipped away at the principle of caveat emptor and have encouraged more and more disclosure in the context of real estate transactions. With the arrival of Krawchuk, courts have further recognized the pivotal role that vendor’s agents play in ensuring that vendors properly satisfy their disclosure obligations to purchasers. On the basis that Ontario courts conceptualize the non-disclosure of a major latent defect as a form of deception, it is likely that a court will expect a vendor’s agent to take reasonable precautions to ensure that their client discloses such defects – and thus does not, by omission, deceive the purchaser.

Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.