Fundamental Difference Disclosure

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Stigma Disclosure in Canada Revisited

For years, I followed what I believed to be the traditional advice of lawyers concerning disclosure and caveat emptor.

Basically, there had to be a material latent defect known to the Seller which:

  1. Rendered the premises structurally unsound, or
  2. Unfit for human habitation,

in order to get around the caveat emptor principle of “let the buyer beware”.

The caveat emptor principle is found in Fraser-Reid v. Droumtsekas, [1980] 1 SCR 720.

Here’s what Chief Justice Dickson said:

“….notwithstanding new methods of house merchandising and, in general, increased concern for consumer protection, caveat emptor remains a force to be reckoned with by the credulous or indolent purchaser of housing property.

Lacking express warranties, he may be in difficulty because there is no implied warranty of fitness for human habitation upon the purchase of a house already completed at the time of sale.

The rationale stems from the laissez-faire attitudes of the eighteenth and nineteenth centuries and the notion that a purchaser must fend for himself, seeking protection by express warranty or by independent examination of the premises.

If he fails to do either, he is without remedy either at law or in equity, in the absence of

fraud or

fundamental difference between that which was bargained for and that obtained.”

Historically, I noted the fraud exception and it made sense.

But, have a look at the rest of the sentence, there is one more exception and that is:

  1. fundamental difference
  2. between that which was bargained for and
  3. that obtained.

So, this is really saying that there’s one more issue to consider, It’s separate and distinct from fraud. It has nothing to do with fraud. Fraud is a completely different matter.

It is a consideration that goes to the actual “trade” in the contract, that is, “money for goods”, the” actual bargain or the exchange.”

The argument here is not that the goods were simply deficient. They were so significantly deficient that there was a fundamental difference between:

  1. the goods that were the subject of the bargain, and
  2. the goods that were, in fact, delivered.

Let’s consider a former marihuana grow house. It’s been remediated, so there’s nothing physically wrong with it now.

One little problem: no one wants it.

So, if you were a Seller, you could try to trick someone into taking it off your hands. You would have to be clever and avoid any false representations.

Value is a significant component of any real estate. Mortgageability and and insurability are two important factors and go to the root of value.

A material fact means “a fact that would affect a reasonable person’s decision to acquire or dispose of an interest in real estate”.

Let’s assume a property is worth $1,000,000 in normal market circumstances.

If that property becomes a marihuana grow house, Banks will not loan on it and Insurance companies will not insure it. Unless you have all your own cash, you can’t buy it.

Most solutions result in demolition of the building. However, let’s assume that the property was remediated. Still, it’s not likely worth more than $600,000. That’s a 40% discount due strictly to the stigma. It was a grow house, it’s been fixed and it’s no longer a grow house.

But, it used to be!

How important is that? Do you have to tell?

I would say, based on the “fundamental difference between that which was bargained for and that obtained”, that the Seller would have to tell.

The Seller is trying to trick the Buyer into accepting a $600,000 property (with a stigma) for a $1,000,000 property (without a stigma).

Of significant importance is the fact that it can be insured and mortgaged. That alone would bump the value back up to close to $1,000,000. However, that deficiency is concealed.

This substantial difference would, in my opinion, also obligate a registrant, that is, a Listing Agent, to disclose this “stigma” to a prospective Buyer based upon the obligations:

  1. to treat everyone with honesty, fairness and integrity,
  2. to not knowingly make an inaccurate representation, and
  3. to use best efforts to prevent error, misrepresentation, fraud or any unethical practice.

You will appreciate that the Fraser-Reid case has been around since November 1979, but I just noticed that further qualification and it is my current understanding that there are stigma cases that would fall within that second exception to the caveat emptor principle.

And, it makes good sense and is ethically and legally sound.

Brian Madigan LL.B., Broker

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