By Peter Ewanchuk
All real estate transactions are expected to be built on a foundation of trust and transparency. In a variety of circumstances, sellers may also be legally obligated to disclose information about the property’s condition and history that could materially influence a buyer’s decision.
So what happens when the seller makes a misrepresentation about the property in a home sales agreement? That depends on the nature of the misrepresentation and its effect. But in most instances, there will be legal and financial repercussions.
That is because disclosure is an essential element of real estate transactions. Full and honest disclosure enables buyers to make informed decisions about the property’s value, potential risks and suitability for their needs. Often, sellers do not want to disclose information that they feel may adversely affect their sale, however that can have costly consequences.
For sellers, proper and thorough disclosure reduces the risk of future legal disputes and financial liabilities.
Material facts
Material facts are significant details about a property that may influence a buyer’s decision-making process. They include:
- Defects and structural issues such as a cracked foundation that has been covered up.
- Environmental hazards such as the presence of lead-based paint, asbestos or mould.
- Poorly done renovations that could pose a risk to the home’s inhabitants, such as electrical work that does not meet provincial standards or without permits and proper inspections.
- Property history, such as a basement that always floods during heavy rains.
- Past illegal activities at the home, such as the property being once used as a grow-op for cannabis. Mould and mildew, chemical residue and illegal rewiring are often found in such structures.
If the seller knows the home has any of the above shortcomings and fails to disclose those material facts to potential buyers, the buyer may be able to launch legal action to get out of the purchase and recover their deposit, or to recover damages to remedy the defects.
On the other hand, people accused of misrepresenting material facts regarding a residential home during the sale process may be able to argue that they were not aware of any material defect in the home. The success of this argument will depend on the defect and how likely it is that it would have gone unnoticed by the seller while they occupied the home, or for example if previous repairs were conducted pertaining to the defect.
Real estate agents also have a duty to disclose material facts about the home’s shortcomings to buyers. Agents who fail to do so could face legal consequences and disciplinary action from the Real Estate Council of Alberta.
Legal counsel is important
In any home ownership transaction, both buyers and sellers can benefit from dealing with an experienced real estate lawyer. A lawyer can ensure compliance with disclosure requirements and assist sellers in preparing accurate and comprehensive disclosure statements, reducing the risk of disputes and legal actions.
For buyers, legal counsel can review disclosure statements, conduct due diligence and advise on potential legal remedies if material facts are discovered after the purchase.
Once an Offer to Purchase has been accepted, the contract contains specific provisions which the seller is then obligated to comply with. These include representations regarding the property, and compliance with bylaws, zoning and other requirements including permits and inspections.
Three types of misrepresentation
Generally speaking, three types of misrepresentations may arise in real estate transactions.
- Innocent misrepresentation occurs when a false statement is made without intent to deceive. The person making the statement believes it to be true. For example, someone may say the home is free of asbestos, a statement they assume to be true because it was not discovered during their residency there, or was not previously disclosed to them when they purchased the home.
- Negligent misrepresentation happens when someone makes a false statement carelessly, without verifying the accuracy of the information. Perhaps they say that permits were obtained for a basement development completed before they purchased the home without checking if that was in fact true.
- Fraudulent misrepresentation involves intentional deceit, where one party knowingly makes a false statement to induce the other party to enter into the contract. This would include not disclosing that the home has serious structural defects and plumbing problems.
If any of these forms of misrepresentation become evident after a home purchase agreement has been signed, a real estate agent can work with the buyer to rescind the contract and recover their deposit.
In cases of fraudulent misrepresentation, the buyer may want to pursue punitive damages. The seller could also face legal penalties or criminal charges if the fraud is particularly egregious.
In all cases of suspected misrepresentation, the buyer needs to consult a lawyer who specializes in real estate law to explore their options and the appropriate legal action.
Changes after a purchase offer was accepted
Section 4.6 of the Alberta Real Estate Association residential purchase contract states: “When the Buyer obtains possession, the Property will be in substantially the same condition as it was in when this Contract was accepted.”
Phrased another way, the buyer must not substantially alter the property between the time of acceptance and the time of closing. If changes are made that were not authorized by the buyer, they may have grounds to terminate the agreement.
A 2010 decision of Alberta’s Court of Queen’s Bench reinforces this principle.
According to court documents, the buyers were impressed by an enclosed courtyard behind a home as that would provide a safe place for their children to play as the mother watched them through a kitchen window.
But unknown to them, one wall of the courtyard encroached on a neighbour’s property by four inches. The sellers were aware of the encroachment prior to the offer being accepted and they were also aware that the neighbour would not sign an encroachment agreement.
The encroachment was not disclosed to the buyer, despite the buyer’s agent asking if there was a real property report (RPR) with a compliance stamp on it. The sellers’ agent advised the buyer that there was a RPR with a compliance stamp, but they did not disclose that the RPR indicated a significant encroachment problem and that the neighbour was not cooperative.
To remedy the encroachment, the sellers demolished the courtyard wall prior to the closing date without notifying the buyers. The buyers sought to rescind the contract on the basis of misrepresentation but the seller refused to return the $100,000 deposit, resulting in litigation.
The court found that the breach was substantial with respect to the home’s aesthetics and utility, even though the cost to rebuild the courtyard wall was small compared to the total value of the property. The court also stated that the courtyard was a “key feature” of the property and noted its importance to the buyer.
The court held that the breach was sufficiently serious to allow the purchasers to consider the contract terminated and have the deposit returned.
Contact us for assistance
People buying or selling a residential property are well advised to consult with an experienced real estate lawyer before signing any agreement. The team at Demas Schaefer serves all of northern Alberta. Contact us for a free consultation.