Beware a House of Lies: Negligent Misrepresentation in Real Estate

December 15th, 2015 by

By Ivan Merrow

Negligent misrepresentation is a more specific type of negligence claim used to compensate victims of lies or misinformation that cause them harm. In general, people are most vulnerable when relying on professional advice to decide what to do next. For example, when buying a home, people rely on the advice of their real estate agent and the representations made by the seller when making their decision. If either the seller or real estate agent knowingly deceives the buyer during the sale, the deceptive party may become liable for negligent misrepresentation.

That was exactly the situation in the leading negligent misrepresentation case Krawchuk v. Scherbak, which was decided in the Ontario Court of Appeal in 2011. Krawchuk epitomizes every homebuyer’ nightmare: after purchasing her first home, the plaintiff Ms. Krawchuk discovered that the house had serious structural defects and plumbing problems. The sellers knew there were problems with the home, but did not disclose the defects. Ms. Krawchuk moved in and noticed the foundation was shifting. She also soon found out that the plumbing was ramshackle. The eventual repair costs exceeded the value of the entire home’s purchase price by $80,000.

Krawchuk tells us the case the plaintiff has to meet for a negligent misrepresentation claim to succeed:

  • the defendant owed the plaintiff a duty of care based on a “special relationship”;
  • the defendant made statement(s) to the plaintiff that were untrue, inaccurate or misleading;
  • the defendant acted negligently in making the statement(s);
  • the defendant reasonably relied on the statement(s); and
  • the defendant sustained damages as a result.

Ms. Krawchuk was found to have a special relationship with the sellers. They had a duty to disclose known defects and errors in the home to potential buyers. The sellers’ statements were found by the court to be plainly untrue. The Court found that the sellers were also negligent, because once a home seller chooses to “break the silence” about the condition of their home, they must speak truthfully and completely.

Importantly, Ms. Krawchuk was able to demonstrate that she relied on the sellers’ statements to make the purchase. She may not have been successful if there was evidence that the lies or misinformation were not a determining factor in her purchase. Ms. Krawchuck actually asked the sellers about the sloping floors and seemed content with their answer. Little did she know that the floors were sloping because the structure was falling apart.

The sellers attempted to argue that the sloping floors were a “patent defect” that was obvious, and it was Ms. Krawchuk’s fault for failing to inspect the house properly. The Court disagreed, because the purpose of the sellers’ information form was to tell the buyer about any known defects. Home buyers do not have a duty to challenge the honesty of home sellers—they should be able to reasonably rely on the sellers’ disclosure.

Finally, Ms. Krawchuk was in fact damaged by her reliance on the sellers’ statements. Ms. Krawchuk was compensated for her losses after a long battle. The lesson for home sellers is this: disclose all known defects in your home, or remain completely silent so buyers know they have to investigate it for themselves. Home buyers should ask plenty of questions and retain independent legal counsel when purchasing a home.

If you have any questions about negligent misrepresentation, real estate transactions, or other legal issues, contact the lawyers at Devry Smith Frank LLP at 1-416-449-1400.

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