CITATION: Costa v. Wimalasekera, 2012 ONSC 6056
COURT FILE NO.: DC-12-000000-17-0000
DATE: 20121102
ONTARIO
SUPERIOR COURT OF JUSTICE
(DIVISIONAL COURT)
B E T W E E N:
KATINA COSTA and
FERNANDO COSTA
J. Walinga, for the Respondents
Respondents
- and -
JAGARA WIMALASEKERA
A. Raza for the Appellant
Appellant
HEARD: October 5, 2012
JUDGMENT ON APPEAL
K. van Rensburg J.
The Appeal
[1] This is an appeal of the decision of Deputy Judge Filkin dated January 27, 2012. The judgment awarded the plaintiffs damages of $25,000 for misrepresentation against the seller of a residential property located in Erin, Ontario (the “Property”).
[2] The defendant seller appeals the finding of liability made by the deputy judge. Although raised in the notice of appeal, the amount of damages awarded by the judge was not pursued in argument.
Facts
[3] The relevant facts are set out in the first few paragraphs of the judgment. Fernando and Katina Costa purchased the Property from Jagara Wimalasekera pursuant to an agreement of purchase and sale dated July 11, 2008 (the “Agreement”). The sale closed one month later, on August 11, 2008. Within a month of the closing date, Mr. and Mrs. Costa discovered that the backyard of the Property was subject to the accumulation of water to a depth of anywhere from a couple of inches to a foot, when it rained. The water would disappear within a week if there was no further rain. The accumulation of water rendered a large portion of the rear yard of the Property unusable.
[4] The offer to purchase was conditional on the buyers receiving a Seller Property Information Statement (“SPIS”) completed by the seller “with complete and accurate answers, in the best of the seller’s knowledge and belief, to the questions contained therein”, and the buyers accepting the information on the form as satisfactory in their sole and absolute discretion. The SPIS was provided, and the Costas waived the condition.
[5] The SPIS was completed by the seller’s agent and each response was initialled by Mr. Wimalasekera, who signed the form. Under the heading “Environmental”, was Question 3, “Is the property subject to flooding?” The seller responded “No”.
[6] The buyers viewed the Property twice before submitting their offer to purchase, and on each occasion the rear yard was completely dry. In fact, there was a water accumulation problem that was known to the seller. Neighbouring properties had a similar problem, which had been caused by the grading of the land when a contractor had removed too much topsoil. In the course of these proceedings, the seller provided a statutory declaration dated June 8, 2011 (the “Statutory Declaration”) in which he stated that he believed that the accumulation of water in the backyard was ponding and not flooding, based on what he was told by the Credit Valley Conservation Authority (the “CVC”), and that for this reason he had answered the question about flooding in the negative.
Decision of the Trial Judge
[7] The trial judge referred to the authorities of Usenik v. Sidorowicz, 2008 11373 (ON SC), [2008] O.J. No. 1049 (S.C.J.) and Krawchuk v. Scherback, 2011 ONCA, leave to appeal to the Supreme Court of Canada ref’d [2011] S.C.C.A. No. 319, with respect to misrepresentation claims in the context of the sale and purchase of residential properties. Following these authorities, he observed that misstatements made in an SPIS could create liability for fraudulent or negligent misrepresentation, and that the warnings on the form do not absolve the seller of potential liability for any misstatement.
[8] The trial judge considered whether the statement in question was untrue. The seller suggested that “property” referred only to the house, and did not include the land around the house. This was rejected by the judge, who observed that the term “property” in the Agreement included the lands around the house. The trial judge also noted that elsewhere in the SPIS there was a statement respecting moisture and water problems affecting the house; if Question 3 referred to flooding in the house, it would have been redundant. The seller was assisted by an experienced real estate agent in completing the SPIS. The judge concluded that the only reasonable interpretation of the word “property” in Question 3 was that it included all the property as defined in the Agreement.
[9] The trial judge concluded that it was not reasonable for the seller to answer the question in the negative on the basis that the accumulation of water in the rear yard was “ponding” and not “flooding” as defined by the CVC. The judge found the defendant not to be credible on this point. He concluded that, if the seller relied on the CVC definition, or if he interpreted the question to only apply to the house, and not the yard, such interpretations were not only unreasonable but were negligent and deceitful. He concluded that the representation was untrue, inaccurate and misleading.
[10] The trial judge concluded that the representation was a statement of fact which was false and was made by the defendant knowing it to be false, or so recklessly that he did not care whether he was speaking the truth or not. In the alternative, he characterized the seller’s misrepresentation as careless and negligent.
[11] The judge accepted the evidence of Mrs. Costa that the buyers would not have purchased the Property had they known the frequency and severity of the flooding of the rear yard. He concluded that the defect was latent, in that it would not have been disclosed through the buyer’s routine inspection. He rejected the suggestion that a routine inspection would include searches with the Town of Erin and the CVC. Although the buyers examined the rear yard of the Property on two occasions, the flooding problem would not have been identified unless it happened to be raining at the time of the inspection or shortly before. The judge concluded that the problem was a latent defect that rendered the Property dangerous, and a serious safety hazard.
[12] The trial judge then assessed damages at $25,000, based on the evidence of the cost of an engineering study and work to rectify the problem. The quantum of damages is not at issue in this appeal.
Issues
[13] The issues on the appeal, as framed by the appellant’s counsel, were the following:
Did the trial judge err in law in concluding that the accumulation of water in the back yard of the Property constituted “flooding”?
Did the trial judge err in law in concluding that the statement in question was a fraudulent misrepresentation?
Did the trial judge err in law in concluding in the alternative that the statement in question was a negligent misrepresentation, which would entail a finding of a duty of care?
Did the trial judge err in law in concluding that the buyers reasonably relied on the misrepresentation of the seller? In this regard, did the trial judge err in characterizing the water problem as a latent defect?
Did the trial judge err in law in failing to give effect to the “entire agreement” clause in the Agreement?
Analysis and Conclusions
Issue 1: The Trial Judge’s Interpretation of “Flooding”
[14] The fact that there was a pre-existing water accumulation problem at the Property, that was known to the seller, was not denied. The appellant’s counsel submitted that the trial judge erred in his interpretation of the term “flooding”. He asserted that the Property was subject to ponding, but not flooding, based on the terminology employed by the CVC.
[15] Colleen Ditner, a representative of the CVC, testified at trial. She said that the CVC considered the Property to be located within a wetland, and subject to ponding and wetland flow. She stated, “technically there’s no flooding on the property”. For CVC purposes, flooding would require an escape of water from a water course.
[16] Ms Ditner acknowledged however that the general public refers to the ponding that occurred in the vicinity of the Property as “flooding”, although that is not the correct term. She agreed that the CVC has a different definition for what other people call “flooding”. When the seller approached the CVC in the years before the sale, he had also described the problem as “flooding”, although the CVC called it “ponding”.
[17] The trial judge’s conclusion that the water accumulation problem that was known to the seller constituted “flooding” of the Property was a reasonable conclusion, available to him on the evidence. What was relevant was not the technical definition of the term “flooding”, but the understanding that a layman would have in reading the statement in the SPIS. This was the focus of the trial judge’s analysis and he was correct to reject the technical definition of the term used by the CVC in favour of how the term would be understood by the general public.
Issue 2: Fraudulent Misrepresentation
[18] The appellant’s counsel submitted that the trial judge erred in characterizing the misrepresentation as fraudulent where there was no evidence of an intention to deceive.
[19] As Wright J. noted in Usenik at para. 37, “a fraudulent statement is a statement of fact which is false, made by a person knowing it to be false or made so recklessly that the person does not care whether he is speaking the truth or not.”
[20] In Usenik the seller stated that her property was not subject to flooding despite a deluge that had occurred nine years earlier. The court accepted that the seller genuinely and innocently misinterpreted the disclosure as couched in the present, not the past tense. For this reason, the misrepresentation was negligent, and not fraudulent.
[21] In the present case, there was evidence to support the trial judge’s conclusion that the seller, knowing that there was a water accumulation problem in the backyard when it rained, deliberately misrepresented this fact by responding in the negative to the question about flooding in the SPIS. It was open to the trial judge to accept or to reject the seller’s testimony that he believed that he was answering the question accurately. The fact that the seller offered two different explanations for answering the flooding question in the negative was significant to the trial judge. On the one hand, the seller said he believed that the term “property” referred to the house only and did not include the land around the house. In the Statutory Declaration the seller claimed that he answered the question in the negative because of what he had been told by the CVC. It was open to the judge to conclude, as he did, that the seller “would use whatever definition would allow him to answer the question in the negative”, and in finding the defendant not credible on this point.
[22] In argument in the appeal, the seller’s counsel suggested that the seller might have been mistaken because he was disabled and taking prescription drugs, and had relied on his son for the information in the SPIS. The evidence was that Mr. Wimalasekera knew about and had communicated with the CVC on the water accumulation issue, when he expressed concern about the safety of a neighbour’s child. He was not relying on what he was told by others, and at trial he did not suggest that he had been confused or misinformed. The seller’s position at trial was that he did not have to disclose the “flooding” because the “property” referred only to the house, or alternatively because “ponding” is not flooding. Once such assertions were rejected, it was open to the trial judge to conclude that the failure to make the disclosure was intentional.
Issue 3: Negligent Misrepresentation and the Duty of Care
[23] The trial judge found, in the alternative, that the misrepresentation was negligent. The appellant contends that the trial judge erred in concluding that there was liability on this basis in the absence of a specific finding that there was a “special relationship” between the seller and the buyers, and accordingly that there was a duty of care.
[24] The trial judge concluded that the seller knew that the representations made in the SPIS would be relied on by the buyers and used by them in deciding whether to complete the purchase. In Krawchuk, Epstein J.A. observed that it was sufficient to establish a special relationship giving rise to a duty of care that the representations in the SPIS were meant to be disclosed to prospective buyers and that it was reasonable to expect such buyers to rely on those representations (at para. 75).
[25] This ground of appeal is accordingly without merit. The Krawchuk case is authority that a special relationship and a duty of care can arise in circumstances where the seller intends that the representations in the SPIS will be disclosed to prospective buyers to reasonably inform their decisions respecting the purchase of the property.
Issue 4: Reasonable Reliance and Whether the Defect was Latent
[26] The appellant submitted that the trial judge erred in concluding that the buyers in fact relied on the statement that the property was not subject to flooding in proceeding with the purchase, and that such reliance was reasonable. Counsel made three arguments: First, that the water accumulation problem was obvious upon reasonable inspection. The problem was widely known and not within the exclusive knowledge of the seller. The buyers ought to have appreciated the problem because the grading of the land, which caused the problem, was visible. Second, the buyer contacted the CVC because she wanted to understand the restrictions on building and removing vegetation (whether the property was in a “no mow” zone). A reasonable person would have made further inquiries of the CVC, which would, no doubt, have revealed the information in the CVC’s files about flooding at the Property. And finally, the buyers had looked at several properties and this one fit their requirements; they would have purchased the Property even if they had known about the flooding.
[27] A “latent” defect is one that is not discoverable upon reasonable inspection. The SPIS specifically cautioned the buyers to conduct their own inspection. If an inspection would reasonably have disclosed the flooding problem, it would be a patent defect, in respect of which the buyers would have had only themselves to blame if they had not identified the problem
[28] The trial judge’s conclusion that the flooding problem was not discoverable through the buyers’ inspection, except if it had been raining, was supported by the evidence at trial. The fact that the propensity for flooding in the area was not something within the sole knowledge of the sellers, and was in the public domain, did not transform the defect into a patent defect. The question was whether it was discoverable upon the buyers’ reasonable inspection. There was no evidence to suggest that the buyers ought to have determined, from observing the slope of the land, or from knowing that there were building restrictions because of the “wetland” designation, that there was a flooding problem when it rained.
[29] In pointing to information that would have been available from the CVC, if the buyers had made further inquiries, the seller implies that the buyers ought to have disbelieved the statements in the SPIS, or at least approached the statements with suspicion that they were not true. A similar argument was rejected in Krawchuk. The court referred to the caution in the SPIS advising purchasers to make their own inquiries, and observed that, while this clause alerts the purchaser to the possibility that the information in the SPIS may be lacking in some way and puts an onus on the purchaser to make reasonable inquiries, the warning does not absolve the seller of liability for misstatements (paras. 84 and 85). Epstein J.A. noted, at paras. 88 and 90:
…while the SPIS emphasizes the purchaser’s duty to enquire in order to fill in gaps in the vendors’ knowledge, such an inquiry does not necessarily include a duty to challenge the vendor’s honesty and forthrightness.
I agree with Quinn J. in Whaley v. Dennis (2005), 37 R.P.R. (4th) 127 (Ont. S.C.J.), where he rejected, at para. 28, the suggestion that the purchaser is required to investigate the honesty of the vendor:
If Counsel is suggesting that the plaintiffs should have gone beyond the Seller Property Information Statement (and behind the answer given therein regarding the absence of moisture or water problems in the basement), this is a bold and erroneous suggestion: it means that the plaintiffs should have disbelieved [the sellers].
[30] In the present case, with the negative answer in the SPIS to the question of whether, to the knowledge of the seller, the property was subject to flooding, there was nothing to alert the buyers to the need to investigate this issue. If the question had been answered accurately, then no doubt, there would have been further inquiries of both the seller and quite possibly the CVC. There is nothing to suggest however that the inquiries of the CVC made by the buyers about restrictions on the Property ought to have alerted them to the flooding problem.
[31] Finally, the suggestion that the buyers would have purchased the Property in any event had they known of the flooding problem was rejected on the evidence by the trial judge, who accepted the testimony of Mrs. Costa on this point. His conclusion was reasonable, having regard to the anticipated cost of remediation, and the CVC’s direction that the work would require a permit and that all affected properties should be remediated at the same time.
Issue 5: The “Entire Agreement” Clause
[32] The appellant asserts that the judge erred in refusing to give effect to the “entire agreement” clause in the Agreement, which provided:
This Agreement, including any Schedule attached hereto, shall constitute the entire Agreement between Buyer and Seller. There is no representation, warranty, collateral agreement or condition, which affects this Agreement other than as expressed herein.
[33] In Krawchuk, the SPIS was provided before an offer was submitted, and specifically referred to in Schedule A to the agreement in the words, “Included with the offer is the property information statement”. Epstein J.A. refused to exclude liability based on the entire agreement clause because the representations contained therein were not “alien to” the agreement. She noted that, “they have been specifically incorporated into the agreement by the parties and are available to the parties for the purposes of establishing liability if they are found to be untrue, inaccurate or misleading” (at para. 73).
[34] In the present case, the SPIS was prepared after the buyers’ offer had been submitted. Schedule A of the Agreement referred to the SPIS in the following terms:
This Offer is conditional upon the Buyer receiving a Seller Property Information Statement completed by the Seller and the Buyer accepting the information on the form as satisfactory in the Buyer’s sole and absolute discretion. Unless the Buyer gives notice in writing delivered to the Seller not later than 8:00 pm on July 18, 2008, that this condition is fulfilled, this offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer’s sole option by notice in writing to the Seller within the time period stated herein. The Seller hereby agrees to deliver to the Buyer within 48 hours of acceptance of this Agreement a Seller Property Information Statement for the property with complete and accurate answers to the best of the Seller’s knowledge and belief to the questions contained therein.
After the buyers received the SPIS, they waived the condition in the Agreement.
[35] The appellant asserts that Krawchuk turned on the fact that the SPIS was in existence and provided to the purchasers before they submitted their offer, and that, only if it was attached to the offer could it be “incorporated into the agreement”. He submits that the “entire agreement” clause should be given effect in the present case because the SPIS was not attached to the offer at the time it was made.
[36] I do not interpret Epstein J.A.’s reference to the representations in the SPIS being “incorporated into the agreement” in Krawchuk as meaning that, unless the SPIS is physically attached to the offer or the Agreement, the “entire agreement” clause will exclude liability. Rather, the focus was on whether the representation sought to be excluded was contemplated by the Agreement, or was “alien to”, or outside of the Agreement. Having been referred to in the Schedule, incorporated into a condition for the buyers’ benefit, with a specific agreement by the seller to provide complete and accurate answers to the best of his knowledge and belief, the SPIS was intended by the terms of the parties’ agreement to be given legal effect.
[37] Whether the SPIS was available before the buyers submitted their offer or provided before they waived the condition and decided to proceed with the purchase of the Property, it was open to the judge to conclude, as he did, that the statements in the SPIS were relied upon by the buyers in completing the purchase. The fact that the Agreement referred to the delivery of the SPIS and the requirement of the seller to provide complete and accurate answers, consistent with the reasoning in Krawchuk, meant that the “entire agreement” clause did not exclude liability.
Conclusion
[38] The trial judge’s reasons for judgment are comprehensive and clear. In a few pages he identified and applied the correct legal tests and he set out the relevant evidence and his findings that supported his conclusions with respect to liability. Many of the points argued by the appellant have been considered decisively by the Court of Appeal, in Krawchuk, that set out a framework for considering cases of this type. The trial judge followed that framework and applied the law correctly.
[39] The appeal is dismissed with costs to the respondents. If the parties are unable to agree on costs, I will receive written submissions limited to three pages as follows: the respondents’ submissions within 20 days, the appellant’s submissions within ten days of receipt of the respondents’ submissions and reply submissions, if any, within five days of receipt of the responding submissions.
K. van Rensburg J.
Released: November 2, 2012
CITATION: Costa v. Wimalasekera, 2012 ONSC 6056
COURT FILE NO.: DC-12-000000-17-0000
DATE: 20121102
ONTARIO
SUPERIOR COURT OF JUSTICE
(DIVISIONAL COURT)
B E T W E E N:
Katina Costa, Fernando Costa
Respondents
- and –
Jagara Wimalasekera
Appellant
JUDGMENT ON APPEAL
K. van Rensburg J.
Released: November 2, 2012