When entering into a contract for the purchase or sale of residential real property, there are many documents to complete. One document that you may be presented with is an optional form commonly referred to as a ‘Seller Property Information Statement’ (the “SPIS”). The blank SPIS, with pre-filled statements to be completed by a seller, was created by the Ontario Real Estate Association and is a convenient way for sellers to provide buyers with important advance information about the condition of the property being sold.
The SPIS is an optional document. A buyer can request – or demand – that this form be provided prior to closing, but a seller is not obliged to include the requirement for a SPIS in the contract. The buyer’s agent and counsel will usually recommend that a SPIS be provided, while the seller’s counsel may advise against granting that request. This document may become a crucial bargaining tool, and it is important that all parties to the transaction fully understand the effects that the SPIS may have.
Countless stories exist with respect to home purchases gone awry, and on many occasions it is caveat emptor (buyer beware). For example, a buyer, who did not ask for a SPIS in his contract, may move into a new home only to find that the property is full of defects, which were not readily apparent after a home inspection. As a result, the buyer may be required to spend a great deal of money to repair each defect. What effect would a SPIS have in this situation? In other words, what happens if the seller completes a SPIS prior to closing, free of noted defects, and submits it to the buyer? If the buyer believes that the information on this form was inaccurate or incomplete, is the buyer entitled to sue the seller?
To answer these questions, we must look at how the contract between the buyer and seller was structured. For example, in Krawchuk v. Scherbak (“Krawchuk”) the contract between the buyer and the seller specifically incorporated the requirement for a SPIS into the agreement. The seller made a number of incorrect statements on the form, and failed to disclose numerous defects that resulted in a costly set of repairs. In Krawchuk, the Ontario Court of Appeal concluded that, while the concept of “buyer beware” still generally applies to real estate transactions, once a seller completes the SPIS, they effectively “break their silence”. In other words, if a seller consents to the completion of a SPIS, he or she must complete the document honestly and accurately. In Krawchuk, the Court found that the seller failed to disclose all information about the property required under the circumstances. The SPIS was incorporated directly into the contract between the buyer and the seller, thus enabling the buyer to rely on the information in it. As a result, the buyer successfully recovered its costs to repair the property.
Despite the ruling Krawchuk, claims based on the SPIS are not always successful. The structure of your contract is paramount. For example, in Soboczynski v. Beauchamp (“Soboczynski”), the Ontario Superior Court ruled in favour of the seller. In this case, the buyer asked the seller to fill out a SPIS the day after the buyer’s offer to purchase was accepted. Unlike in Krawchuk, the requirement for a SPIS was not written into the contract. When the basement of the house flooded a week after the deal closed, the buyer sued the seller and claimed that it was misled by the SPIS. As there was no reference to the SPIS in the contract, the claim against the seller was dismissed.
The message derived from Krawchuk and Soboczynski is clear: the legal effect of the SPIS depends on exactly how it is incorporated into a transaction. In both cases, one party was met with an unpleasant surprise, because each didn’t understand how the SPIS fit into the transaction. In Krawchuk, the seller didn’t recognize its potential liability because the SPIS was written directly into the contract. In Soboczynski, the buyer did not appreciate that information in the SPIS could not be relied upon because it was delivered after the contract was signed.
In light of these findings, the best way for the buyer or seller to avoid an unpleasant surprise is to seek advice from counsel prior to completing the contract. Whether or not the SPIS is incorporated into the contract itself – and whether the buyer is entitled to rely on the information set out therein – may be the subject of negotiation between the parties. While it may be tricky to sort out, negotiating the legal effect of the SPIS at an early stage can avoid a costly debate in the future.
Notwithstanding the content of this article, it may seem wise, at least from the seller’s perspective, to avoid the SPIS altogether. That may not be the best strategy. In most cases where the buyer sues the seller for defects found after closing (and there are many), a common thread is the debate over whether enough information was disclosed by the seller to the buyer about the property at the negotiation phase and before closing. The litigation process is lengthy and expensive. Regardless of whether the SPIS is used, or how your contract is structured, the best way to avoid post-closing legal battles is full and frank disclosure about the property’s condition before that property is sold.
Eli Udell is an Associate at BrazeauSeller.LLP. He practices real estate law. To find out more about Eli, please visit www.brazeauseller.com. To contact Eli, email firstname.lastname@example.org or call 613-237-4000 ext. 204. Eli would like to thank David Reid for his assistance with this article.