OREA FORM 225 and the "LAW"
In OREA’s new Form 225, there are two statements made about the law of disclosure in real estate:
"Whether or not the seller completes an SPIS, the law requires a seller to disclose known hidden material defects to a property. In addition, the Real Estate and Business Brokers Act, 2002 requires registrants to determine and disclose “material facts” when a buyer is purchasing a property. The Seller Property Information Statement can be useful in fulfilling these obligations."
1) The Seller’s Obligation
The statement here is that the seller must disclose hidden, material defects to a property.
Naturally, the first question that comes to mind is: is this correct?
The seller’s obligations are based upon the analysis of whether a defect is latent or patent.
There is no duty to tell about patent defects. Those are the ones that are clear to see. In other words: you don’t have to point out the obvious.
The law only imposes an obligation on certain latent defects. These defects are the ones that may require some testing. You might not be able to see mould behind the walls, but a thermal imaging camera might.
However, the seller has to have KNOWLEDGE of these defects. So, the duty only arises in respect to known latent defects. If the seller doesn’t know about the mould behind the drywall in the basement, then there is no duty to advise.
The next step is that these particular latent defects must be:
1) structural, effecting the integrity of the building, or
2) would render the premises unfit for human habitation.
So, in that regard, these particular latent defects which create the duty to disclose must be quite serious and significant. And, not all latent defects are necessarily "hidden".
The statement uses the adjective “material”. That term does have meaning in law, but is not well-defined in the context of latent defects. If such a term were construed to just those defects which trigger the duty to disclose, then the statement about the law would be correct. On the other hand, if the term were to draw its definition from the Real Estate and Business Brokers Act, 2002, then the statement would be incorrect. It would be too broad and overreaching.
Briefly, "material" is a broader concept than the limited duty imposed upon the seller. To use the term "material" would be to overstate the seller's duty.
Don't forget that a mortgagee selling under power of sale doesn't want to say anything more about the property than absolutely required.
2) Agent’s Obligation
The Form goes on to state that the Act (REBBA, 2002) “requires registrants to determine and disclose “material facts” when a buyer is purchasing a property.
Again, is this a correct statement about the law?
Here are the specific relevant sections under the Code of Ethics:
“material fact” means, with respect to the acquisition or disposition of an interest in real estate, a fact that would affect a reasonable person’s decision to acquire or dispose of the interest;
21. (1) A broker or salesperson who has a client in respect of the acquisition or disposition of a particular interest in real estate shall take reasonable steps to determine the material facts relating to the acquisition or disposition and, at the earliest practicable opportunity, shall disclose the material facts to the client.
21(2) A broker or salesperson who has a customer in respect of the acquisition or disposition of a particular interest in real estate shall, at the earliest practicable opportunity, disclose to the customer the material facts relating to the acquisition or disposition that are known by or ought to be known by the broker or salesperson.
You will see that now the obligation placed upon the agent is much higher than that imposed upon the seller. Clearly, there are circumstances in which an agent has a duty to disclose and the seller has the right to maintain his silence.
Also, have a look at the two subsections of s.21. They are different. There is one duty for “clients” and another duty for “customers”. So, to describe the duty of the agent as one owing to buyers, would overstate the duty. That would assume that all buyers are clients, and ignore the customer classification under the Act.
The term"material" is very relevant for agents, but overstates the seller's duty.
The new OREA Form 225 is generally quite helpful in seeking and securing the co-operation and consent of the seller to its use. In my view, while it does overreach and stretch the current law, it is fairly accurate in its general statements.
Practitioners should be cautioned that in circumstances where it is appropriate a more detailed review of the law may be necessary for some sellers.
Agents should be aware that there are two standards and they must secure the seller's informed consent if they wish the seller to disclose those facts where the seller has the right to remain silent, and it is only the agent who has the duty to disclose.
Brian Madigan LL.B., Broker is a Manager at RE/MAX West Realty Inc., Brokerage 416-745-2300.