Although it will probably become known as another stake in the heart of the so-called seller property information statement (also known as voluntary disclosure statements), the recent decision of the Ontario Court of Appeal in
Krawchuk v. Scherbak also expands the scope of Realtor liability and expounds on some arguably counterintuitive doctrines in the law of damages.
The facts of the case are relatively simple. A purchaser buys a home from a vendor for $100,000. (All figures are rounded off for simplicity).
The purchaser foregoes the usual home inspection, ostensibly in reliance on favourable statements from the vendor related to structural fitness contained in the disclosure. Alas, the statements prove false. The foundation walls of the house were sinking badly into the soil, which necessitated extensive repairs costing nearly double the original price.
Luckily, the purchaser had taken out a title insurance policy. Although not a title defect per se, the policy also indemnified the purchaser from “loss or damage as a result of being forced to remove [the] existing structure or a portion of it as a result of any portion of the structure being built without a building permit.”
In addition to shoddy construction, there had been no proper building permit. After a bit of negotiation, the title insurer cut the purchaser a cheque for $100,000, which was effectively the entire original purchase price of the house.
The purchaser, however, also sued the vendor and the vendor’s real estate agent for the full repair costs of just under $200,000.
At trial, Superior Court Justice Robbie Gordon refused to award the purchaser the full $200,000 claimed since it wasn’t reasonable to spend that much to repair a house bought for just over $100,000.
The trial court did, however, award the purchaser a little over $100,000 to reflect what was effectively the obliteration of the house’s value together with a relatively nominal amount for emotional suffering.
In a decision written by Justice Gloria Epstein last month, the Court of Appeal upheld the trial court’s award notwithstanding the fact that the disclosure statement had disclaimer language expressly denying that the information constituted warranties; that it had exculpatory language absolving both the vendor and agent for any misinformation therein; and that the agreement of purchase and sale had “entire contract” language that excluded the disclosure statement altogether.
The Court of Appeal decision has reignited complaints against the use of the disclosure statements. Lawyer Bob Aaron is perhaps the best-known opponent of them. Aaron accurately forecasted the dangers for sellers in using them well before the Krawchuk appeal and remains stalwart in his cautionary approach to the issue.
In a significant reversal of the trial court, the Court of Appeal also found the Realtor to be jointly liable for the misstatements in the disclosure statement. The case is now authority for the proposition that Realtors can also be held accountable for such errors if they’re aware of the true facts surrounding the property.
While other cases have been critical of the disclosure statement, the Krawchuk appeal also guarantees itself immortality as a contract-damage case by implicitly affirming the applicability in Canada of the rule in the U.S. case of Peevyhouse v. Garland Coal & Mining Co.
In Peevyhouse, the Supreme Court of Oklahoma affirmed that “diminution in market value” is the only true quantification of loss for property damage, regardless of how much the owner really needs to spend on repairs.
In Krawchuk, like in Peevyhouse, the purchaser could only recover the diminution in the market value of the house of approximately $100,000 even though it actually cost almost $200,000 to fully repair the sinking foundation.
Krawchuk also expressly reaffirmed the continuing applicability in Canada of the rule in
Cunningham v. Wheeler, a rare exception to the concept of compensatory damages that permits double recovery by a plaintiff already compensated by insurance.
In Krawchuk, there was an argument that because the purchaser had already received approximately $100,000 from the title insurer, it was no longer possible to sue the vendor or the Realtor for losses.
The Court of Appeal applied the rule in Cunningham to permit the purchaser to recover yet another $100,000 from the vendor and the real estate agent.
At the time of writing this article, there was still no word as to whether Krawchuk would be going to the Supreme Court of Canada. But for the time being, the purchaser has double recovery, and title insurers, sellers, and Realtors alike are all talking about the future of disclosure statements.
Jeffrey W. Lem is a partner in the real estate group at Davies Ward Phillips & Vineberg LLP. His e-mail address is [email protected].
