SPIS Entire Agreement Clauses

The Ontario Court of Appeal, in Soboczynski v Beauchamp, 2015 ONCA 282, analyzed when a Seller Property Information Statement (“SPIS”) can be relied on and its status as a representation as well as the impact of the “entire agreement clause” in an APS.

Facts

In 2007, the Beauchamps (“Sellers”) sold their house to the Soboczynskis (“Buyers”) without a realtor.

In 2005, Sellers decided to upgrade the basement by replacing some panelling and installed new carpet throughout.

On November 21, 2007, the Buyers signed an Agreement of Purchase and Sale (“APS”). The APS contained two conditions: 1) satisfactory home inspection & 2) satisfactory financing. Furthermore, the APS contained a clause that read:

[The APS] including any Schedule attached hereto, shall constitute the entire Agreement between Buyer and Seller. There is no representation, warranty, collateral agreement or condition, which affects [the APS] other than as expressed herein. (the “entire agreement clause”)

The next day, on November 22, 2007, the Buyers gave an SPIS to the Sellers to fill out after already picking up the signed APS. The Sellers filled out the SPIS. The SPIS concluded with the following statement:

Any important changes to this information known to the sellers will be disclosed by the sellers prior to closing.

On November 28, 2007, the Buyers waived both conditions.

The closing date was set for January 18, 2008. On January 9, 2008, the basement flooded and water entered the basement through window wells. The Sellers elected to spend $1,648.59 repairing damage but did not tell the Buyers about the incident. The Sellers reasoned this was an isolated incident and not an “important change”.

The sale closed on January 19, 2008. On February 6, 2008, after closing, the basement flooded again. The Buyers hired an expert to ensure the basement would not flood again and determined that to correct the flooding issues in the basement it would cost $22,598.17.

Eventually, the Buyers found out about the January 9, 2008 flood and commenced an action against the Sellers for damages based on fraudulent or negligent representations.

The trial judge found that the entire agreement clause acted as a bar to the action. The Buyers appealed.

Entire Agreement Clauses in Action

The Court of Appeal judge ruled the SPIS signed after the APS did not apply to the APS by virtue of the entire agreement clause. This is summed up nicely where Justice Epstein states at paragraph 41:

In my view, the answer to the question is that, in the circumstances of this case, any consequences flowing from representations made in the SPIS were outside the reach of the entire agreement clause. The entire agreement clause in the APS operates retrospectively, not prospectively. In other words, the application of the clause is restricted to limit representations, warranties, collateral agreements, and conditions made prior to or during the negotiations leading up to the signing of the APS. When the appellants made representations in the SPIS, a document completed after the APS had been signed by all parties, the entire agreement clause was spent.

The judge, at paragraph 59, likened the entire agreement clause to saying: “these are the terms of our agreement and nothing that was said beforehand is relevant. You have no basis for relying on anything other than the terms of the agreement. The agreement stands on its own.” Therefore, the purpose of entire agreement clause is to evoke certainty and clarity in contractual dealings. The entire agreement clause defines a hard line to define where the contract and the prior dealings end. Anything not specifically included or referenced in the agreement, even if in writing, will not form part of the APS.

Negligent Representations Aside from the Agreement of Purchase and Sale

In this specific situation, the post-APS conduct of the parties, showed that they intended for the SPIS to be a representation separate from the APS because both parties took the SPIS seriously and by filling out the SPIS (when they technically had no obligation to). Because of this contact, the Sellers created a separate agreement with the SPIS containing representations.  Therefore, if the Buyers could prove the elements of negligent misrepresentation on the SPIS document itself, they could claim damages.   The tort of negligent misrepresentation has five main elements:

(1) a duty of care based upon a special relationship between the plaintiff and defendant;

(2) an untrue, inaccurate or misleading statement by the defendant;

(3) negligence on the part of the defendant in making the statement;

(4) reasonable reliance by the plaintiff on the statement; and

(5) damage suffered by the plaintiff as a result.

Hedley Byrne & Co. v. Heller & Partners Ltd.,[1964] A.C. 465 (U.K. H.L.)

This argument failed primarily because the Buyers failed to prove the element of “reasonable reliance” on the representation. The damage arose from the purchase of the property. The Buyers had already decided to purchase the property prior to the signing of the SPIS- they did not rely on the information in the SPIS to make their decision, it was already made. Therefore, they could not claim that the representations in the SPIS agreement caused them damage because the decision to buy the house was unrelated to the representations made in the SPIS.

Interestingly, even though the claim for negligent misrepresentation did not succeed because of the lack of reliance, it likely would not have been successful in any event because the trial judge stated that it was “doubtful” that the damage from the January 8, 2008 flood was an “important change”. The Court of Appeal agreed with this position.

Takeaways from the Case

It is always best to deal with a qualified real estate representative to assist you in navigating a real estate transaction.

If you are a purchaser, always ensure that you have an SPIS signed prior to making an offer, or at the very latest prior to waiving your inspection condition. If an SPIS is not completed, but the seller has agreed to provide one, it may be worthwhile to add a condition in your APS providing you the ability review and approve the SPIS before the deal is binding.

Always reference the SPIS as a part of the APS, in writing. A simple statement adding the SPIS as a schedule or stating that the SPIS forms part of the agreement should suffice.

The purpose of entire agreement clauses are meant to substantiate everything up to the actual signing of the APS. Anything not included within the agreement (or specifically referred to in the agreement) or obtained after signing cannot be relied upon.

An SPIS can be used to claim negligent misrepresentation separate from the APS depending on the circumstances of the transaction, but the elements of negligent misrepresentation all must still be found to succeed on the claim.

Authors: Rosa Carlino