Risky Real Estate

Property sellers could be exposed to significant legal liability for not warning buyers about past damage and potential risks to their property relating to natural hazards. In a recent case, the Ontario Superior Court of Justice found sellers of a home and their real estate agent liable for tens of thousands of dollars in damages for failing to disclose past flooding and other water-related problems to the buyer (Fors v Overacker, 2014 ONSC 3084). 

In 2008, Vance and Dorothy Overacker listed their Thunder Bay home for sale. Prior to selling, they experienced significant water problems for the three years that they owned their home. In 2005, the Overackers’ basement flooded, costing their insurance company $35,000 in repairs. From 2005-2008, the Overackers also experienced problems with their sump-pump system and septic field. The Overackers sold their house to Daniel Fors for $392,000. Prior to closing, their real estate agent Jack Mallon assisted the Overackers in completing a Seller Property Information Statement (SPIS) for the buyer-a form that is not required by law but that must be completed honestly and accurately if the seller opts to fill it out (see also Krawchuck v Scherbak, 2011 ONCA 352).

When completing the SPIS, Mallon advised the Overackers that they were not required to disclose problems that had already been addressed, such as the 2005 flood. Following this advice, the Overackers did not disclose the 2005 basement flood or subsequent problems they experienced with the sump pump system, the septic field, moisture in the basement or leakage from the skylight.

After the close of sale, Fors, the buyer, experienced similar water-related problems in the house. Having not been informed of these issues prior to purchase, Fors sued the Overackers for negligent misrepresentation in completing the SPIS, alleging that certain of the answers the Overackers provided on the SPIS form were false. The Overackers, in turn, brought a third party claim against Mallon, their real estate agent, for providing them with poor advice. The Court awarded Fors $117,830.50 in damages (representing about 30% of the purchase price of the house) against the Overackers, finding that the Overackers acted negligently in completing the SPIS form. The Court also allowed the third party claim against Mallon, granting the Overackers $42,459.75 in damages relating to Mallon’s negligent advice.

The Fors case is one of many litigations concerning seller liability relating to disclosure of property defects (see also Costa v Wimalasekera, 2012 ONSC 6056, 2012). Often the defects at issue relate to past flooding or water problems, which, in light of climate change, will only become more prevalent. Particularly in the face of rising sea levels and increased storm surges, cases like this raise some interesting questions regarding what type of property information should be disclosed by sellers of property and their agents. For instance, should it be mandatory to disclose whether a property has been subject flooding or other natural hazards in the past? Similarly, should there be disclosure requirements concerning whether a property is at risk of experiencing hazards in the future?

In Ontario the concept of “buyer beware” generally applies to real estate transactions (Robb-Sim v Solomes, 2013 CarswellOnt 9432). That is, absent fraud, mistake or misrepresentation, a buyer takes an existing property as he or she found it. However, there is a growing trend toward greater disclosure by home sellers to prospective buyers-both in Ontario and in other jurisdictions. For instance, buyers are increasingly asking sellers to complete SPISs in Ontario real estate transactions. The SPIS asks questions such as:

• Is the property subject to flooding?

• Are you aware of any moisture and/or water problems?

• Are you aware of any damage due to wind, fire, water, insects, termites, rodents, pets or wood rot?

• Are you aware of any problems with the plumbing system?

If a seller elects to fill out a SPIS he or she must complete it accurately and honestly, or face potential legal liability for misrepresentation (see Krawchuk).

Other jurisdictions have made disclosure of certain property risks mandatory. For instance, under California’s Natural Hazards Disclosure Act, sellers of real property and their agents are required to disclose when property being sold is located within flood hazard zones, fire hazard zones and earthquake fault zones, among others (Cal. Civ. Code, section 1103 c). This information is provided in a “Natural Hazard Disclosure Statement.” A study conducted by the California Policy Research Center suggests that the disclosure requirements under this Act have been well adhered to and, at least in some cases, have had a noticeable effect on property prices (Austin Troy & Jeff Romm, “An Assessment of the 1998 California Natural Hazard Disclosure Law (AB 1195)” (2006), online: California Policy Research Center  at vii-viii).

In light of these developments, sellers would be wise to carefully consider any disclosures made in order to ensure the information provided does not negligently mislead prospective buyers. As climate change intensifies and flooding becomes more common, these disclosures promise to be more important to both buyers and sellers and will be an interesting area to watch as risks increase.

Joanna Kyriazis and Laura Zizzo are members of Zizzo Allan DeMarco LLP in Toronto.