Mar 11, 2019

Compensating the Buyer in a Case of Real Estate Agent Negligence

Bowman v. Martineau, 2019 ONSC 1468 (CanLII)

Introduction

This case is a relatively straightforward finding of professional negligence by a real estate agent. It is remarkable mainly for the large dollar value of the damages awarded. The plaintiffs bought a house for $180,000 which proved to be uninhabitable. They were awarded damages much greater than that, in the amount of $450,000. This is based on the standard rule of tort law, of paying the amount that restores the injured party to his original position. However, there is some room for debate about how that ought to be calculated in a case of this type.

The facts in the case are simple. The plaintiffs purchased a house in a rural area near Bracebridge in 2014 for a price of $180,000. The purchasers had limited funds and a low credit rating. One of the inducements to buying this particular property was that the vendors were willing to take back a mortgage for 95 percent of the purchase price. The house on the property was visibly in poor condition and had a bad smell inside. A friend of the purchasers, who declined to provide a loan, is reported to have described it as a “tear-down” (para. 143).

Once the purchase was completed, the plaintiff Mr. Bowman started doing renovations and took out a wall. He found that the material inside was severely damaged by water leakage, and mouldy. The plaintiffs were unable to occupy the house and it could not be heated. That resulted in additional deterioration, including damage to the foundations.

Professional negligence on the part of the real estate agent

The real estate agent had acted for both sides, vendors and purchasers, which increases the risk of being negligent towards one or the other.

The judge found that the real estate agent had been at least partly alerted by the vendors about the water leakage problem, but had not followed up by probing the issue, and had not passed the information on to the purchasers. The vendors had filled out a “seller property information statement” (SPIS), a standard form for disclosure designed by the Ontario Real Estate Association. In the SPIS, the vendors had mentioned some water leakage issues, but the full extent of the problem was not clearly stated.

There was a factual dispute about whether Ms. Martineau, the real estate agent, had passed on the SPIS to the purchasers at all, but the judge resolved this disagreement in favour of the plaintiffs. Generally, she was found to have failed in her professional responsibility to probe the issue and ensure that the purchasers were fully informed:

[172] Furthermore, Shelley Emond and Ms. Martineau had different views of the meaning of the answers to questions 9b and 9d regarding roof leakage. Shelley Emond stated that these answers conveyed a problem of ongoing leakage while Ms. Martineau believed they conveyed past leakage. Had Ms. Martineau in fact reviewed these answers with the Emonds, she would have detected and corrected the incorrect answers. More importantly, she would have understood that Shelley Emond was conveying that the Property suffered from ongoing leakage and she would have been able to convey this information to the Bowmans and to Studholme [the inspector].

[174] I find Ms. Martineau failed to give the Bowmans the SPIS, that she failed to review the SPIS with the Bowmans, and that she failed to review the SPIS with the Emonds. Mr. Lebow confirmed that each of these failures constitutes a breach of her professional obligations to the Bowmans. I accept his evidence. Ms. Martineau thus breached her duty of care owed to the Bowmans and is therefore liable for the consequent damages.

The judge found the total damages to be $450,000. The liability was apportioned, with 30 percent of the liability for damages to the vendors, and 70 percent to the real estate agent, Ms. Martineau.

Diminution of Value versus Cost of Repair

The defendants provided an appraisal report. It estimated the current value of the property at $125,000. Since the plaintiffs had paid $180,000, the defendants argued that the damage was only $55,000.

The judge rejected this:

[213] I reject the diminution in value approach for the following reasons. This approach fails to take into account the purpose of damages in a tort claim – to ensure that “the damages awarded to a plaintiff should put him or her in the same position as they would have been in had they not sustained the wrong for which they are receiving compensation or reparation.” In the context of property loss matters, where a purchaser believes it had purchased a home free of defects, “the fairest measure of damages is that which would provide the [plaintiffs] with what they bargained for – a home free of defects.” [Jarbeau v. McLean, 2017 ONCA 115 (CanLII), paras. 53-54].

The judge therefore awarded $332,706 based on an expert report of how much it would cost to repair the house. The balance of damages was mainly for the cost of paying rent for the plaintiffs’ alternative accommodation.

The Principle of restitutio in integrum

The universally accepted principle in tort law is that injured plaintiffs are entitled to damages that restore them to the position they were in prior to the injury. In Latin, this was referred to as restitutio in integrum, roughly translatable as “making whole.” As stated in a classic 19th century decision, “the principle is clear, restitutio in integrum; the application often difficult.”[1]

The reality is that it is often impossible to restore injured plaintiffs to the exact physical condition they were in before. There is then room for argument about what alternative arrangement is the equivalent, in monetary terms. For example, with permanently disabled accident victims, there is the question of the alternative living conditions to which they are entitled.[2]

In the case of an old building that has been seriously damaged, restoring it will often make it considerably better than it was prior to the damage. That gives rise to the question of whether the plaintiff is entitled to receive a level of compensation that might appear to make him better off than he was before, or whether there should be a monetary deduction for the value of the improvement. The general view is that the plaintiff is entitled to have a fully useable building, and if it is not possible to do that without making it newer or better than it was before, the plaintiff is not required to contribute to the cost.

The Precedents behind the Judge’s Reasoning on Damages in Bowman v Martineau

It is possible to trace the cases backwards in time in a straight line, given the way each judge relied primarily on a single earlier precedent.

The case relied on by the trial judge in Bowman was Jarbeau v. McLean, 2017 ONCA 115. In that case, an engineer had negligently certified the design of the the plaintiffs’ newly constructed home. It did not meet building code standards and it leaked. The trial judge awarded damages based on the diminution of value, $190,000 based on an estimate of what the house could be sold for to a purchaser who had been informed of the problem. The Court of Appeal allowed their appeal, and awarded an amount of $433,000, which was the estimated cost of demolishing and rebuilding the house.[3]

It can be suggested that there are some significant factual differences between Jarbeau and Bowman, that might have justified distinguishing Jarbeau. Unusually, Jarbeau was a jury trial, and it was the jury that had concluded that $433,000 was the proper amount. The trial judge had “characterized the cost of repair finding as perverse.” The Court of Appeal, canvassing the principles for deciding when a jury’s decision could be considered perverse, found that the criteria were not met. It was not conducting an appellate review of the jury’s award, per se, but merely upholding it as being defensible.

On the general principle underlying damages, the Court of Appeal in Jarbeau relied primarily on James Street Hardware and Furniture Co. v. Spizziri (1987), 1987 CanLII 4172 (ON CA), 62 O.R. (2d) 385 (C.A.). That was a case where negligence by a welder had caused a fire that severely damaged a commercial building. The trial judge did not allow the plaintiff the full cost of repair, instead making deductions for the fact that the restored building was better and newer than it had been before the fire. The Court of Appeal allowed most of the plaintiff’s claim. It recognized that it was not possible to rebuild with old materials. Part of the improvement was required due to a change in the building code, which led to an unavoidable increase in building costs.

The Ontario Court of Appeal in James Street relied heavily on the reasoning in an English Court of Appeal case, Harbutt's "Plasticine" Ltd. v. Wayne Tank & Pump Co. Ltd., [1970] 1 Q.B. 447, from which it quoted at length. This case relied on a principle quite analogous to specific performance in property transactions, where the plaintiff desires a specific piece of property for a specific purpose. In Harbutt’s, a fire had destroyed a factory through negligence. Due to changes in the building code, the owners had to construct a quite different and improved building compared to the old one. The defendants argued that they should only be required to compensate for the value of the old building that was destroyed, rather than for the cost of replacing it with a brand new one. Lord Denning explained why that would not be the right verdict in the cast of a unique property such as a specific type of factory:

The destruction of a building is different from the destruction of a chattel. If a second-hand car is destroyed, the owner only gets its value; because he can go into the market and get another second-hand car to replace it. He cannot charge the other party with the cost of replacing it with a new car. But when this mill was destroyed, the plasticine company had no choice. They were bound to replace it as soon as they could, not only to keep their business going, but also to mitigate the loss of profit (for which they would be able to charge the defendants). They replaced it in the only possible way, without adding any extras. I think they should be allowed the cost of replacement. True it is that they got new for old; but I do not think the wrongdoer can diminish the claim on that account.

This is effectively the principle of specific performance on the basis that a property is unique. A BC Court of Appeal decision that followed Harbutt’s (and was also cited by the Ontario Court of Appeal in Jarbeau) is Nan v. Black Pine Manufacturing Ltd., 1991 CanLII 1144 (BC CA), which also emphasizes a similar principle in the context of residential property. There, a house had been destroyed through the defendant’s negligence. The plaintiffs sought the whole cost of rebuilding their home, while it would have been cheaper to just buy a different older home in the same area. The BC court ruled that the plaintiffs were entitled to be made whole in this way (quoting with approval from an Australian decision:

The question is whether it was reasonable for the plaintiffs to desire to reinstate their property. In my opinion, there is only one answer. It undoubtedly was. They had, in effect, lost their family home. [emphasis added] That is the nature of their damage and not some diminution in the value of their land. Fair compensation requires that they be given back what they had before; and the only way in which that purpose can be achieved is to award them the sum reasonably necessary to restore their property to the condition in which it was before the defendants effectively destroyed it…. If that turns out to be more expensive than another, the wrongdoer has no one but himself to blame.

Conclusion

These older cases quoted above are based on clear reasoning about how to restore the plaintiff to its original position, as it was before the harm occurred. These plaintiffs had owned buildings, that were destroyed or damaged due to the negligence of the defendants. Where somebody has an established attachment to a specific piece of property, it is easy to conclude that they are entitled to be compensated for the cost of having that specific piece of property restored.

It is somewhat less clear in a case such as Bowman v Martineau. There, no damage was done to a property the plaintiffs already owned. Instead, they bought a defective property, being unaware of its defect due to the fault of somebody who should have informed them. Absent that misrepresentation, they would at best have bought a different old house in the neighborhood. They might not have bought any property at all. The plaintiffs had expected to receive a run-down house, albeit not one that leaked badly.

The standard remedy when there is serious misrepresentation in a real estate deal is rescission, where the vendor refunds the purchase price and takes back the defective property. There could also be some additional monetary compensation, where appropriate, for the loss of opportunity to buy an alternative property while prices were low. That would normally be what restores a person who buys a defective house due to misrepresentation to his original level of welfare.

In a case such as that, it might have been more appropriate to canvass the price of alternative older properties, rather than compensate for the cost of building a new house on the existing property.

In practice, the plaintiff would not have been able to afford to buy another property until the current dispute was resolved, and therefore the appropriate measure of damages would be based on house prices at the time of trial. Given the general increase in house prices between 2014 and 2019, that might still have led to an award considerably larger than the original purchase price of the property.


[1] Crocket J. in The King v. Hochelaga Shipping & Towing Co. Ltd., [1940] SCR 153, citing "H.M.S. Inflexible," (1857) 1 Swabey 200, at 204.

[2] For example, in a case where the plaintiff had become a quadriplegic, Andrews v. Grand & Toy Alberta Ltd., [1978] 2 SCR 229, the question was about the standard of care he would receive: “…there is no duty to mitigate, in the sense of being forced to accept less than real loss…. It does not mean that Andrews must languish in an institution which on all evidence is inappropriate for him.”

[3] Further muddying the situation, the damages award was not against the engineer. Rather, it was against the plaintiffs’ previous lawyer, who was found negligent for not making a claim against the engineer within the limitation period.