Tuesday, August 11, 2015

Legal Duty of a Real Estate Listing Agent to the Buyer

This issue was recently discussed in the Superior Court decision of Ratté v. Lévesque, 2015 QCCS 2769.

The buyer purchased a duplex in 2008 that was listed at $249,000 for only $210,000 but without legal warranty. Subsequent to the sale, the buyer discovered water infiltration and mold in the basement which cost in excess of $64,000 to repair.

When a property is sold in Quebec, the seller is bound by law to warrant that the property is at the time of sale, free of hidden defects which render it unfit for the use for which it was intended or which so diminish its usefulness that the buyer would not have bought it or paid so high a price if he had been aware of it. (Article 1726, Civil Code of Quebec). This implied warranty applies whether or not it is written in the sales contract although the parties may exclude it by express mutual consent.

In the present case, the owner of the property authorized his mortgage creditor to sell the property in order to minimize the cost of foreclosure proceedings. The mortgage creditor was not personally familiar with the physical condition of the property so insisted that it be sold without legal warranty.

The agent recommended that the buyer make an offer because in his opinion, it was an excellent property for a first-time buyer with limited financial means.

To decide the case, the Court proceeded to examine the extent of the duty of the agent in the context of a sale without legal warranty, taking into account the availability and importance of a pre-purchase inspection.

The Court commenced its analysis by reviewing the basic legal obligations of a real estate agent. A listing agent is contractually bound only to the seller. In addition, when consulted by a buyer, the agent assumes a legal obligation to provide advice with skill and diligence and in conformity with the real estate agent code of ethics.

The agent must avoid conflicts of interest, such as concluding a sale at all costs in order to earn a commission. With respect to inspections and the discovery of hidden defects, the agent is required to identify apparent defects and ensure that the description of the property in the listing is accurate. The agent must advise all parties to a transaction objectively. When it is in the best interests of any party to a transaction, the agent should recommend the hiring of an expert.

The Court found that the standard of the duty of the agent to advise is higher when the legal warranty is excluded.

Although the Offer to Purchase included the standard inspection clause, the Court found that when the agent was questioned by the buyer regarding the necessity of a pre-inspection, the agent was non-committal. The Court found that the agent should have explained the usefulness, if not the necessity, of a pre-inspection to the buyer when the legal warranty is excluded and the seller is the mortgage creditor who has no personal knowledge of the physical condition of the property.

The Court concluded that the agent was in breach of his duty to advise and was liable to indemnify the buyer for the cost to repair the hidden defect.

It is interesting to contrast the legal philosophies underpinning such contracts in Quebec as compared to, for example, the State of Florida, where the legal warranty of quality does not exist and where the principle caveat emptor (buyer beware) prevails.

In Quebec, the legal burden to disclose defects is on the seller, the rationale being that he is the one who is most familiar with the property. However, there are many situations where hidden defects exist without the knowledge of the seller. In buyer beware jurisdictions, the philosophical assumption is that every individual is responsible for his or her own transactions and risks and therefore, the reliance upon due diligence investigations by the buyer assumes a greater importance in order to minimize such risks.

The legal warranty in Quebec has, on occasion, produced surprising circumstances. Where it was proven that a hidden defect had existed for a very long period of time, the most recent buyer who first discovered it could sue his seller who in turn could sue his seller and so on until the date that it is determined when the hidden defect first arose. For example, a building may have been constructed in 1960 and sold four (4) times since with a hidden defect in the building or the land. Each of the sellers of the four transactions could be liable to indemnify his particular buyer. Someone who sold a property 25 years ago or his heirs could suddenly find themselves facing such a lawsuit. The statute of limitations would only begin to run when the hidden defect is discovered which, in theory, could be decades later.

The law often casts a wide net in order to attempt to prevent perceived potential abuses but by doing so, it can often lead to unforeseen circumstances that are themselves, unjust.