One of the most common questions we receive here at REIX is on the subject of disclosure. What do I have to disclose? When do I have to disclose? Do material latent defects have to be disclosed if they have been rectified? How much is considered material? What if my seller doesn’t want me to disclose?
To further complicate the issue, there has been conflicting instruction regarding disclosure in recent years. During the education of industry members, the position on disclosure became one of “no you don’t have to disclose a defect that has been corrected, if the sellers feel there is no further problem”. The belief was that by disclosing a previous defect one could be jeopardizing the seller’s chance of getting the highest possible price for their property.
Of course, REIX has been instructing otherwise. We believe that full disclosure is always the best policy. By not disclosing a previous defect the seller may get a few more dollars for their property but may end up spending that much and potential much more in legal costs down the road. While they may be depending on your agency relationship with its fiduciary obligations as an excuse for not disclosing, remember that you and your seller could very easily have a whole new relationship – co-defendants in a lawsuit!
A relevant civil trial offers a good example of what can happen when disclosure is withheld. A REALTOR® sold a home to a couple subject to a home inspection. The inspection checked out and they took possession. A year later they called and told him of another property they were interested in. He showed it to them, and they put in an offer subject to the sale of their other home. When he was listing their current dwelling, he asked them whether there were any latent defects and they told him of some flooding the previous spring. They explained they had re-graded the back yard, installed a sump pump and had no further problems.
The REALTOR® checked with his manager and was told that since they had rectified the problem to the best of their ability, and had not had further incidents, that this would not have to be disclosed. This instruction was in keeping with recent courses on agency they had taken. The REALTOR® proceeded with the listing.
The house was sold a short time later by another brokerage. During the walk-through the buyers discovered the sump pump and had their REALTOR® inquire about it from the lister. They were informed that a neighbour had recommended it would be a good idea to install the pump. The buyer’s agent was asked specifically whether there had been a water issue and was told no. Within a week of taking possession, the new buyers called their REALTOR® to report heavy flooding in the basement. The called the lister, who then related the previous flooding and their position on why it had not been disclosed.
The new buyers sued the seller for their damages claiming $25,000.00. The sellers defended and based their defense on the belief and instruction they had received from their REALTOR® that a former defect did not have to be disclosed if you believed it to be rectified. They even called the REALTOR® as a witness. The judge found in favour of the buyers and awarded them the full $25,000.00 plus costs.
Among other things, the judge found that:
- There was a defect, it was not visible and it may have rendered the property dangerous if uninhabitable.
- There was an obligation to disclose based on clause 6.1 (h) of the Purchase Contract.
- When one has a positive obligation to disclose, silence may very well be a cause for a lawsuit.
- There was no basis for believing the problem had been rectified. The judge stated “The defendants realtors appear to have been of the mistaken view that so long as the defect had been addressed, it need not be disclosed. Addressing a latent defect and hoping it had been rectified is not the same as having a good, sound reason to believe that the defect had been rectified.”
- The defect was not a patent defect, in other words, it was not easily discoverable by a proper inspection as the defendants had argued.
- There was a duty to disclose possibilities of which the sellers are aware if those possibilities are potentially dangerous or if they might render the property unfit for habitation.
The moral of the story is this: never advise clients against disclosure. Full disclosure is always the best policy. Resist the temptation to take a listing where the seller is instructing you against disclosure. It could be that is not a lawful instruction.