Have you been in a situation where you weren’t sure what to disclose to a buyer’s agent? Kristie Kruger of Royal LePage South Country Real Estate and Dave de la Ronde of REIX answer all your questions about the do’s and don’ts of disclosure!
Have you been in a situation where you weren’t sure what to disclose to a buyer’s agent? Kristie Kruger of Royal LePage South Country Real Estate and Dave de la Ronde of REIX answer all your questions about the do’s and don’ts of disclosure!
Welcome to In Your AREA! A podcast designed by AREA to update, educate, and refresh realtors, brokers, and industry stakeholders on topics that matter most to you. Listen on the go, in your car, at a coffee shop, or wherever your day takes you. This is a podcast designed with today's busy realtor in mind. Now here's today's host, AREA Vice President Kristie Kreuger.
Kristie:Welcome to AREA's podcast. A podcast for Alberta realtors on the move. Podcasting from the board room of the Alberta Real Estate Association, I'm Kristie Kreuger, your host for podcast Episode Two"To Disclose Or Not To Disclose. I'm a realtor and owner at My Life Realty in sunny Lethbridge as well as a sitting member on the Alberta Real Estate Association Board of Directors. Joining me today is Dave de la Ronde of the Real Estate Insurance Exchange(REIX). Dave is the Vice President of Claims and Litigation at REIX and has been there for the past 12 years. Dave, can you tell us a little bit about yourself and why you're here today?
Dave:Sure Kristie and thanks for having me. I've been involved in the Errors and Omission's Professional Negligence Defense working for 32 years. 12 with REIX and 20 with my previous employer which was a company that managed litigation on an international basis. We acted for foreign governments, domestic governments, national insurers, multinational insurers, and I managed their litigation under contract. Most of them were in the United States, did a lot in Canada, and over in the United Kingdom. The reason I came in today is because this podcast is called disclosure and it is probably one of those difficult things that industry members find themselves faced with. From a risk management perspective, we're always concerned about it. It gives rise to claims and we want to stop lawsuits against realtors. It's a great avenue for us to get together and part some information to your people.
Kristie:So do we want to talk about the case study?
Dave:We should. REIX takes the position that disclosure should follow a 2008 case that was in the provincial court in Alberta. The case was heard by a judge who now sits on the Court of Appeal. Without getting really complicated, there are essentially three levels of courts in Alberta. Provincial Court, Court of Queen's Bench, and the Court of Appeals. The rule of thumb is that the judge who writes a decision at the Provincial Court level can get that decision overturned or disagreed with by a judge at the Court of Queen's Bench level, which is the next one up. The case is relatively simple in nature. It highlights the impositions on an industry member, not only when it comes to dealing with another realtor, but also when it comes to dealing with your client, which is probably a more important point. These folks own a property, they have a flood in the property, they get folks in to fix it. The remedial fix consisted of doing some regrading of the exterior of the property and putting in a sump pump. When that work was completed, the contractor that did the work suggested that may do it, on the other hand, it may not, you may need some weeping tile to augment that. Shortly thereafter, these folks listed the property and an offer came in and there was an inspection condition in the offer. That inspection condition was never carried out. The reason for that was the vendors of the property had an inspection done when they bought the property, which was just a tad over a year before. One can gather that they said, why do you want to waste the money on an inspection? You can just have a look at ours. That is what the respective buyers did. They reviewed it and decided not to have their own inspection and away we go. It comes to the prepossession walk-through and the buyers are walking through the house and they notice the sump pump and obviously they asked sellers, why is that there? They were told that it was there because the neighbors recommended it was a good idea. They asked the realtor if there had been any problems with water in the property and sellers realtor said no. Based on all that, they close, they move in, and they're in this property for a very short time and there's no less than three floods. Huge restoration project. Not surprisingly, at the end of all of this, the buyers sued the sellers. What came out of the trial were a whole bunch of interesting things which, is one of the reasons that I want to be here today. There was a discussion at the time of listing between the seller and the seller's real estate agent when the seller disclosed to the real estate agent that there had been a flood and these are the things that we had done. Do we need to disclose this? The realtor being somewhat green, phoned a broker and the broker said, no, you don't need to disclose it. It's fixed. That was the focal point of this lawsuit. It goes to trial and what came out of this trial was fascinating. First of all, the judge heard all the evidence and in his decision, which is quite far reaching, he implies that the buyer has got all the skin in the game. It's their money that's going to make this deal. Now, the seller on the other hand has no skin in the game and they know everything there is to know about this house. Who are they to pick and choose what they're going to tell a prospective buyer about the history of this property. The issue was raised in considerable depth at the trial and the judge in his written decision came out and said that silence was actionable. In simple terms, what that means is if you know something about a property, you're not going to disclose it and the subsequent purchaser of that property incurs damages as a direct result of the nondisclosure, that's a cause of action and you're going to be held liable. In a nutshell, that's the position that REIX takes. The courts have now made it very clear that if you know something about the property, you can't pick and choose what you're going to say. They're hinging on the fact that if there was an issue on the property, who are you to decide whether or not there isn't a problem there anymore? You may recall that earlier I said that when the contractor affected the repairs to this property, he said, look, you know, we put a sump pump, we regraded property and that may not be enough. We may have to put some weeping tile. The court said that you knew that. You knew that there was a very good possibility that this wasn't fixed and it was going to happen again. Sure enough, it did. At the end of the day, the courts are saying if you know something, you have to disclose it and it's in everybody's best interests that it get disclosed. I will tell you that at REIX we are running 250 lawsuits at any given time and not one of them is because somebody disclosed too much.
Kristie:Do you want to explain in terms of the contract that we are working with everyday as realtors, what is the difference between a material latent defect and a patent defect?
Dave:That's a great question. Quite candidly, I wish they wouldn't use those words because they are very misleading. People get confused with them all the time. If we use the words hidden defects for material latent defects and we substituted patent defect for easily discoverable by seeing it defect, that's the difference. With the hidden defect, the seller may know about it and has an obligation to disclose it. The other one is if you walk in and there's a hole in the gyprock, it's pretty visible. That's a patent defect, it's patently obvious. You can take the definition of material latent defect a little bit further by saying it's also a defect that might not be discovered in an inspection. There are things that inspectors don't move. Furniture, rugs, they don't do this, they don't do that. Something as simple as a scratched floor underneath an area rug with a table on top of it can just as easily be a material latent defect as mold in the wall. So simply, material latent defect is not easily discoverable, either visually or through an inspection. Patent defect, you can see it.
Kristie:If one needs to disclose a material latent defect, what clauses in the contract are affected and what steps should we take as realtors to ensure that we are properly executing that contract?
Dave:It actually occurs not only in the purchase, but in the listing contract. The listing contract under section 6 has provisions which all will be illustrated to disclose those material latent defects and define what those material latent defects are to the realtor. The reason that it's in the listing contract is it forces that discussion to happen and that's a really critical part for the listing realtor. If there is lying on the part of the seller, if you can physically sit down and say to me or a judge that I went through every section of that listing contract and we specifically talked about those, you are in good standing. Out of all the points in the listing contract, that's the one you never want to glance over too quickly. If you have a discussion about something that requires disclosure and your seller will not allow you to disclose it and says, put"no" on that section of the listing contract, you're actually acquiescing in putting your client in breach of that listing contract. That listing contract breach is then going to flow over into section 14 of the purchase contract. The listing contract is incredibly important. Section 14 of the purchase contract simply says that if there are material latent defects, this is what they are, I have disclosed them. That is what industry members should be doing to cover themselves and their clients quite candidly. If their clients are telling them to disclose a problem with the property, they have every right to be protected, not from a buyer who comes down the road says, well, you never said that.
Kristie:I had discussions about this at some point early on in my career. One of the simplest ways to talk to a seller about that is to simply ask them, if the new owners are standing outside talking to the neighbors, is there anything that they're going to find out from the neighbors that you haven't told them? That can be a really simple way of just having that discussion about what should we disclose and what shouldn't we disclose.
Dave:I've always felt that if I was going to buy your property, I'd have the property disclosure statement filled out by the neighbors on either side of the property because they know more about it than anybody does. That just speaks to what you're saying. If you're going to get sued it is because of the disclosure the neighbor made every time. People sue on disclosures even though there may not be any damages coming from that. They sue because they think they've been lied to. The big question hanging out there is what else didn't they tell me? That's where you get to prove that the realtor did something wrong and was negligent, but you can't be negligent and there's no damages that flow from that negligence. People unfortunately, a lot of buyers don't get that. They just think, well, the realtor lied to me. I must be entitled to know. So you're tied up in a lawsuit for five years and they're spending all kinds of money without understanding at the end of the day, there isn't gonna be any money there. Again, it just goes back to if that document had been there to begin with, they never would've sued.
Kristie:That kind of leads into the next question that I have for you. What if your seller refuses? What if they want you to check no? What should a professional do in that case?
Dave:The way we approach it is, you can turn it into a sales pitch or you take a negative and turn it into a positive. How do you do that? You have this neighbor that thinks, I don't want to disclose this, well obviously the reason is because it's going to devalue the property. That's why I don't want to go there. The simple response is: you know what? If you don't disclose it, the neighbors will and you're going to be faced with a lawsuit that is going to run you at least five years. If it's a five year lawsuit, depending on the amount of money they're looking for, you're going to spend tens of thousands of dollars defending yourself and how does that translate into having that disclosure now to potentially, and I say potentially having to reduce your house price. It's interesting because experience tells us that the exposures that are made by sellers very seldom turn into a lost sale. In fact, there is a credibility factor that is going on there that nobody sees and it is very rare that somebody is going to walk away with that disclosure. The reason for that is because they walk into the property and they like it. That's why they're asking questions about it. If it's going to be an issue and it still is an issue, the inspection is going to find it. What do you do if they continue to say no, you've got one in two options, you can risk being in a courtroom yourself or you can walk on the listing. Candidly, you should be walking on the listing. What your industry members say to me is Dave, well that's kind of myopic because another realtor from down the block was going to come and take the listing and I agree with them. That's probably going to happen but at the end of the day, it's going to be them standing in a courtroom defending their actions and not you and it's all about reputation. If you're working in smaller centers, do you want to get a reputation as a realtor who's prepared to bend all the rules and do this kind of thing in your practice? It is probably going to go up pretty quickly if that's true.
Kristie:To follow onto that, if I refuse a listing because I have a seller who is not willing to disclose about a material latent defect and a realtor down the street ends up listing it, what obligation do I have to disclose at that point?
Dave:I would say none. It's one of these areas that becomes a slippery slope. How much due diligence do you have as a realtor in the industry? There is a point where how are you going to be found liable for not disclosing something in a transaction which you are not a part of. I say you don't, you don't need to do that. You don't need to go there. In fact, you might be exposing yourself to liability by going there. I suppose you want to wonder if an inspection had been done, how would this be different? Well to start with, the home inspector, if they did a moisture test, it would have picked it up right away. That answers that question right at the starting blocks. That would have been obviously in contradiction to the initial home inspection. Let's say for example, that these buyers looked at that home inspection and got a little queasy and said, let's get our own anyway. Then they get one that's going to give rise to a whole bunch of discussions because these two reports contradict each other. Would it have made a difference? Absolutely. There are a lot of people out there that quite frankly think a home inspection is a waste of money. I totally get that. On the other hand, how much is$400,$500,$600,000 worth to you? it's some measure of comfort. Yes, home inspectors make mistakes. Of course they do, but they have professional liability insurance just like the industry members do. That's why it's there. It's just an extra measure.
Kristie:One more step of due diligence on the buyer side.
Dave:I mean, at the end of the day, the courts are not unsympathetic to buyers that don't take any steps to look after their own interest. I mean the court doesn't impose unbalanced responsibilities on buyers and sellers and I'm certainly not trying to say that, but you know in this particular case the court let them off the hook because they said, you know the home inspection was there, these people deliberately lied to you on the balance of probability that you probably would have done it. Having the home inspection report, they are reading it or looking at it and then deliberately not disclosing it to you. I'm not hanging you out to dry because you did not get the home inspection report, you didn't get it because there was one there.
Kristie:Back to the case. Did the remediation efforts alleviate the responsibilities from the sellers to disclose? Now we've kind of gone over that, but I know that's probably a very grey area for our practicing realtor because a lot of the discussions that we have in the knowledge that we're given or the information that we're given is that if it's been fixed, it's not a problem anymore and you don't have to disclose. Is there a balance between saying just disclose anyways, that's best practice or if in our case study the owners that were selling hadn't lived there for much longer than a year. I guess my question is, does it change if I had purchased a home and had a water issue in year one, remedied it and then sold it seven or eight years later and there hadn't been any issues. Is there a difference there between, to disclose or not to disclose?
Dave:No, our position is, and it's a simple one for the purposes of practice. If you have to have a discussion with your client about whether something needs to be disclosed, guess what? It needs to be disclosed. You know, I get back into the scenario of, I've never seen a lawsuit for too much disclosure. I think the other thing that we never need to lose sight of is that in taking your scenario, if we take an issue or an event that occurred 8 years before and you've disclosed that and there's been no subsequent issues, akin to that event, I don't think that's going to have a memory much longer than 30 seconds in the buyer's mind. Again, time after time after time, we see that disclosures simply do not have an appreciable effect on what people think of the properties. If they really like a property, they're going to let some of this stuff go. The only time it's really an issue is when we run into something like a suicide or violent crime. That's something that people don't care when it happened. We're not moving into this property and we want to know. In terms of damages to property and so on and so forth, the more time that's elapsed, the lesson is, it is an issue for people. You know what? You're adding credibility to both the seller and the seller's realtor by putting it up front.
Kristie:Every buyer is different. At the end of the day, disclosure means the buyer gets to choose whether or not that's something that they can manage. For some they can and for some they can't.
Dave:You know, there's a lot of sellers out there who do keep pretty meticulous paperwork. In our position, if there is an issue there, put all the work on the table, you know, we're going to have an inspection anyway. We can draw that to the inspector's attention. He can take a second look at it, but you know, seven years ago seems like a long time to me.
Kristie:On the day to day in my practice, are there resources that are readily available to determine for myself and my sellers what should be disclosed and what doesn't need to be disclosed, or what we might consider visible through a reasonable inspection?
Dave:You know, it's really difficult because there's no go to. There is no go to place. What I would highly recommend is talk to your broker first. If it's an issue where you need an answer now, call us. We do a lot of that. That's why we're there. Our idea is to stop the lawsuit before it starts and this is an integral part of that process. Alternatively, your broker may say, you know what, I'll get back to you, let me give Dave a call. Disclosure, really, really important, it's a liability issue quite clearly and we'll be able to give you that advice to pass on and help your seller with. If you can say you know, I was concerned about this, I got some advice, here's what I'm being told. If you go back to them and they still say don't disclose it, you're even better to walk away from that potential listing before you walked in there. That's what I would recommend and unfortunately there's no dial 911 for disclosure.
Kristie:Back to this case that we're talking about specifically. Had the leakage and subsequent efforts been disclosed, how would this scenario have been different?
Dave:It would have been very different because the seller or the buyer would have been armed with sufficient information to decide whether or not they wanted to go ahead. I will tell you that they probably would have ignored the prior inspection and got their own. Given the amount of flooding that had been in the property, it was three or four floods, ankle deep water, it would have showed up on every moisture meter that was ever made to man. They would have walked on the deal and there would've been no lawsuit. It's just that simple. It would have been very, very different.
Kristie:Or the sellers might have offered to remedy it with weeping tile or something.
Dave:They might've done that. They might have negotiated a price reduction to deal with it. You know, I'm pretty sure an inspector would have said, well, you better be careful what's behind the wall because if you had this kind of water in here, you know you're going to have damages back there and it might take the form of a lot of the horse trading that went on in High River--it is the same kind of thing. You know, they did price reductions, paid to have gyprock taken off and things tried out. You know people will do that if they're that in love with the property, whether that would have happened here, I don't know but they certainly would have caught onto it.
Kristie:How do I explain to a seller the importance of the disclosure and the consequences of the nondisclosure? Kind of back to my earlier statement of a buyer being able to go in with their eyes wide open. I had a situation where I had a listing of where the basement floor was not level, but where it kind of jacked down in the basement, there was a desk over top that was all built in. It might not have been easily discoverable because they would've had to go underneath that but the current owners knew about that. That was something that we disclosed up front and I said for sure for some people they might not be interested in a property that doesn't have a super flat basement floor, but at the end of the day the buyers are coming in knowing that and either they're going to be okay with it or they're not. I guess really reiterating the fact to the sellers how important it is to make sure that it takes their liability away and that at the end of the day when you talked about devaluing a property, you kind of have to weigh the potential consequences of not disclosing something too. Like you said, tens of thousands of dollars for up to five years in court and then potential damages on top of that. Or maybe you reduced the house by you know, a few thousand dollars.
Dave:You've absolutely got the right approach. What you're really doing is you're selling your client on the fact that you are doing your best to protect them in this transaction, which you are. In doing so, given that hopefully they're going to follow your advice, you're also protecting yourself because at the end of the day, you don't want the liability. It is extremely rare for on a disclosure, someone to ask for a reduction in price and if it does happen, it's usually directly related to the nature of the problem to begin with and how long ago it occurred. If you're going to ask for a price reduction on a sprinkler head that broke in the second bedroom on the third floor five years ago, you're not going to get price reduction. That's not going to happen. If it was a big flood six months ago and it's still under warranty and you're not sure if you got it all, that may be a case where that discussion happens. If it does happen, it is still going to be a lot less than hiring a lawyer to file a lawsuit because you tried to hide it. We now know from this case that you are going to be found accountable in court, there's no question about it.
Kristie:How do I protect a seller contractually on issues that they have or that they want to disclose? I'm going to kind of break that down to a couple of different things that I'd like you to answer. When a seller discloses something we have a few options, we can put that right in our remarks, we can put it in the public remarks, or we can keep it private and just keep it in the realtor remarks. Then we also have to go a step further in terms of not just filling it out in the seller's contractual obligations to us, but also in the offer to purchase. Maybe if you can kind of look at that whole scope and does it depend on what kind of disclosure it is, if it's a disclosure that you think isn't really going to be a big deal but you don't want to scare buyers off by putting it in the remarks? At what point do you disclose and how do you protect your seller for making sure that they're taking the right steps?
Dave:My response to that is there's no cookie cutter solution to this. If you had catastrophic water damage and you're looking at$75,$100,000 for the damage, that's a pretty serious disclosure issue. If you had some water ingress through a basement window that caused pieces of gyprock to be taken out at a price of$5,000 to repair everything. I'm not persuaded that that speaks to either public or private remarks. We're sensitive to the fact that industry members want present their product in the best light that they can and the vehicle of course, for doing that is the MLS. We're never going to do anything to impugn that but at the same time we want to arm industry members with sufficient tools that they don't get themselves in a position where they're over marketing that product. Prudence would suggest it's a judgment call. I don't see a need for putting a whole lot of things in the public or realtor's remarks. There is the disclaimer on it if you want to put it in there but if you don't think it's that serious of an issue and your seller has given you the okay to disclose it, I think it's completely sufficient to disclose that at the time an offer is going to be either presented or you get wind of the fact that it is going to be presented. When it does get presented, I would simply make that disclosure right then or right there and send it back with an addendum. I prefer to see it as a term, but I'm sensitive to the fact that there may be financing considerations and things like that where it may not look that attractive to a lender as a term. I'm more concerned that it forms a part of the contract, not necessarily where it is. If that's put in as an addendum, it does the same thing. I'm fine with that. It puts it in writing and both parties know it. They both sign on it. It's all out there on the table. You know what's happened is everybody's protected because that disclosure has been made to the buyer. Everybody's being upfront, out in the open, in writing, signed off, and we now know the courts say you have to do that, you can't pick and choose what you want to tell them because you can get sued.
Kristie:The most important part of the disclosure comes when an offer to purchase comes in ensuring that it's in writing and both parties have signed to it. Acknowledging that that exists and that they're signing off, that they're okay with it.
Dave:It's what's in writing that counts because it's like a chattel. If you haven't explained properly and all of a sudden you show up and that's not the same stuff that's in there. You can't all sit in the court two years from now and say well, we said, it's not going to cut it. You know, if it's real estate, it's gotta be in writing.
Kristie:Fantastic. Thank-you so much Dave, for your wisdom. AREA members we want to hear from you. Your feedback and suggestions for future podcast episodes will be critical to making sure we make this the strongest resource for you. We invite you to send that feedback through communications@albertarealtor.ca. Thanks to all who took time to listen. We hope to see you the next time we are in your AREA!