Deferred Taxes due if Use Changes
This is a case in the province of New Brunswick involving the use of the Property Condition Statement and the liability of the agent who assisted the vendor in the completion of the document.
The case is interesting from a procedural perspective. Mr. Bond purchased a property which was subject to certain deferred taxes under the Farm Lands identification Program (FLIP). If Mr. Bond changed the use of the property these deferred taxes would become payable.
So, he sued his own lawyer Ms. Richardson for negligence. His lawyer then sued the vendor for improperly completing the Property Condition Statement. The vendor then sued his own agent for improper advice concerning the completion of the document. All matters were heard in one proceeding.
The purchaser grew up on the property which is the subject of the sale. His family sold the property in 1975 and he saw it advertised in 2003. He contacted the agent, Paul Langlais who agreed to act in a dual agency capacity for he and the vendors, Mr. and Mrs. Kerr.
The FLIP program is designed to keep property as farming lands. If the use changes, the owner is responsible for the current taxes and 15 years of deferred taxes. Mr. Bond wishes to use some of the lands for a commercial auction which is his business. This change in use would trigger 15 years of back taxes. In the interim, Mr. Bond leased out the land for farming.
Liability of the Purchaser’s solititor
The Court concluded that the purchaser’s solicitor had failed to properly check the taxes prior to closing and this constituted negligence. Mr. Bond has suffered damages as a result of that negligence in that he is restricted in the use he can make of his property without incurring a cost and, by her failure to advise him of the deferred taxes, Ms. Richardson deprived him of the opportunity to reduce, eliminate or even negotiate those costs prior to closing.
Liability of the Vendors
There is also the matter of the vendor’s liability, since the purchaser’s solicitor claimed over as against them.
James Kerr, the vendor testified that he and his wife lived on the property for 15 years. It was registered in the FLIP when they bought it in 1988 and it was still in the program when they sold it in 2003. He regarded it as a tax break. He testified that all he knew about the program was that it resulted in lower taxes for him and that he was not aware that he would have to pay taxes back if the use of the property changed. He further testified that at the time of the sale to Mr. Bond he was not aware that Mr. Bond may have to pay the deferred taxes.
As part of the agreement, the vendors agreed to sign a Property Condition Statement.
In the first section of the Property Condition Statement, which deals with general information about the property, the vendors answered “no” to the following two questions:
4. Are you aware of or have you been charged any local improvement levies/charges?
5. Have you received any other notice or claim affecting the property from any person or public body?
The trial Judge said “the purpose of that Statement is disclosure. If they didn’t have a duty to answer the questions both honestly and accurately that purpose would be defeated and the Statement would be meaningless.”
And, the Judge made the following comment:
“It is clear……, James and Carole Kerr, made misrepresentations to Mr. Bond when they completed the Property Condition Statement. Mr. Kerr was aware of the FLIP taxes and while he regarded them as a benefit as opposed to an encumbrance, that did not excuse him from disclosing their existence, particularly when he answered the questions on the Property Condition Statement about whether or not he had received any notices from a public body affecting the property and whether or not the property was under the jurisdiction of any Conservation Authority. Both of those answers were clearly wrong and Mr. Kerr knew or ought to have known they were wrong since he knew from the time they bought the property that it was registered in the FLIP and he executed a document in 1997 in which he opted to continue to have the property registered in the FLIP.”
The trial Judge determined that there was no intention to deceive it was an oversight. So, even though there was no finding of fraud, there was still a negligent statement. This statement met the 5 part test set out by the Supreme Court of Canada in Queen v. Cognos to establish liability.
The Judge also commented that there was a special relationship between the parties, that is, they were negotiating an agreement, and that gave rise to a positive duty to provide honest and accurate answers:
“The representor’s belief in the truth of his or her representations is irrelevant to the standard of care.”
On the issue of the completion of the PCS, the Judge observed the following:
“In my view, if Mr. Kerr, in completing the Property Condition Statement, had given some thought to those questions he answered incorrectly, it is more likely than not that he would have realized that the FLIP should be disclosed in answering them.
I find that he did not exercise the care that an objective, reasonable person would have exercised in order to ensure the answers he gave were accurate and he was therefore negligent.
Mrs. Kerr was also negligent because she merely relied on the answers given by Mr. Kerr in signing the statement and made no effort on her own to ensure that the answers were accurate.”
Liability of the Real Estate Agent
Paul Langlais had only been an agent for 2 years when he came across this situation. He was unfamiliar with farm properties, and although he obtained a tax statement referring to the FLIP, he knew nothing of the program or its deferred tax provisions.
The Court concluded:
· By failing to make himself and his clients aware of this essential and pertinent fact in a timely manner I find that Mr. Langlais failed to write the agreement in compliance with Article 6 of the Standards as it is not clear and understandable because it does not set out whose obligation it is to pay the deferred taxes.
· It follows, and I find, that Mr. Langlais failed to comply with the standard of care required of a realtor as set out in the Canadian Real Estate Association’s Standards of Business Practice and thereby breached the duty he owed to Mr. Bond.
· I further find that Mr. Bond has sustained damages as a result of that breach. It follows, and I find, that Mr. Langlais was negligent.
Accodingly, the Court awarded a judgment in favour of the full amount of the deferred taxes to the purchaser. On the third party claim, the purchaser’s solicitor was entitled to claim two thirds from the vendors and the real estate agent, ….
the result being that the
- the vendors and
- the vendors’ agent
each bore one third of the loss.
This case again stresses the importance of the PCS. Be careful, when you are providing responses. If you are a realtor, you must counsel your client in terms of its execution. And, the mere fact the purchaser’s lawyer made a mistake was not enough to relieve the vendors or the real estate agent from liability.
Brian Madigan LL.B., Broker