Caveat Venditor - Let the Seller Beware Too
The well-known Latin expression "caveat emptor" (let the buyer beware) cautions a buyer that s/he is the party that needs to ensure there are no defects in the property that s/he is purchasing. A recent Ontario Court of Appeal decision, Soboczynski v Beauchamp, demonstrates that the vendor or seller must also beware or s/he could be liable for damages related to those defects.
The facts underlying the lawsuit involve a residential real estate transaction. The purchasers, the Beauchamps, and the sellers, the Sobocynzkis, entered into an Agreement of Purchase and Sale ("APS") conditional upon financing and a home inspection. The APS contained a standard form entire agreement clause which stated that the APS was the entire agreement and there were no other representations, conditions or collateral agreements to the purchase. Before closing, the purchasers asked the sellers to fill out a Seller Property Information Statement ("SPIS"). The SPIS stated that the property was not subject to flooding and that the sellers were not aware of any moisture or water problems with the property. Importantly, the SPIS also stated that the sellers would inform the buyers of any "important changes" to the information in the SPIS prior to closing.
Nine days before closing, the basement flooded due to heavy snow and melt. The sellers fixed the damage incurring costs of approximately $1,600.00. The sellers thought this a one time occurrence and did not disclose it to the buyers. Closing occurred without incident. However, about two weeks later, subsequent snow and melt caused additional flooding. As part of the repair, the buyers obtained an expert evaluation of the property which advised them that there was ponding in the backyard and that the basement windows were lower than ground level which made the house subject to flooding. The repair was approximately $22,500.00. The buyers sued the sellers for not telling them about the earlier flooding.
The issue before the court was whether the entire agreement clause in the APS ousted the representations made in the SPIS, which had been signed after the APS. In other words, was the APS truly the entire agreement. In ruling that the representations of the SPIS were actionable, the Court of Appeal clarified the use of entire agreement clauses and the risks assumed by sellers.
Entire agreement clauses provide certainty and clarity to both buyer and seller by limiting the expression to a written form. Effectively, it ousts what was said or represented during or prior to negotiations. It creates the agreement at a discrete point in time. However, an entire agreement clause does not preclude the parties from creating additional obligations or amending the agreement. For an entire agreement clause to apply prospectively, it must contain specific wording stating that it does so.
The sellers argued that caveat emptor should apply and that the buyers assumed the risk of the flooding. The Court disagreed stating "Once a vendor breaks his silence by signing the SPIS, caveat emptor falls away as a defence mechanism and the vendor must speak truthfully." Effectively, caveat venditor (let the seller beware) applies.
Despite winning on the argument that the entire agreement clause did not preclude the SPIS, the buyers were not victorious. They failed to adduce evidence that they had relied on the representations in the SPIS thereby failing to establish the element of reliance necessary to prove their claim of negligent misrepresentation.
The Lesson: Both buyer and seller need to "beware" in transactions. While the buyer assume the majority of the risk in a purchase, the seller can create a positive obligation if s/he breaks silence. In light of this clarification it is prudent for sellers to limit what they say to buyers both before and after a contract is signed. In hindsight it would have also been advisable to clarify what qualified as an "important change" pursuant to the SPIS. Had the parties agreed that any remediation work in excess of a set figure constituted an "important change", the likelihood of conflict would have been reduced.
Soboczynski v Beauchamp, 2015 ONCA 282 https://www.canlii.org/en/on/onca/doc/2015/2015onca282/2015onca282.pdf
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