False Claims in SPIS fall under Protection of Homeowners' Policy

Insurer Must Back Up False Statements Made by Seller

Ontario Real Estate Source

By Brian Madigan LL.B.

In Aiken v. Unifund Assurance Co. the Superior Court in Ontario had to consider whether there was a duty to defend under a homeowners’ policy, where the claim arose as a result of a false Seller Property Information Statement.

A purchaser sued a vendor claiming misrepresentation and fraudulent concealment. The purchaser later amended the claim presented to include negligence. That is an unintentional tort and might be covered under an insurance policy.

In the Amended Statement of Claim, it is alleged that the Applicants:

1.     falsely, knowingly, carelessly or negligently failed to disclose or misrepresented a number of facts about the property in the SPIS,

2.     that they consciously omitted to disclose material information relating to the subject property:

a)     with knowledge that the omissions would mislead the Plaintiff or

b)    were careless as to whether such omissions would mislead the Plaintiff;

3.     that they deliberately failed to disclose information about the subject property; and

4.     that they were negligent in relation to information and renovations relating to the subject property.

The Court commented on the duty to defend as follows:

“An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim.  Similarly, where a claim raises the possibility of indemnity by the insurer, the insurer must defend the action on behalf of their insured.  The recent Supreme Court of Canada decision in Progressive Homes Ltd. V. Lombard General Insurance Co. of Canada found:

                        It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy.”

So, the Court is saying that the duty to defend does not depend upon the merits of the plaintiff’s lawsuit. Whether it would ultimately be successful is not relevant. The insurer must come to the rescue and pay the defence costs. That’s the point of having insurance in the first place.

The Court also reviewed with approval another recent case:

“The case of Poplawski v. McGrimmon involved a similar fact situation to the one at issue.  In Poplawski, home owners were sued by the purchasers after the sale of their home for alleged misrepresentations and negligence as it related to a SPIS.  The homeowner’s insurer refused to provide coverage and claimed an exclusion under the policy applied which placed the claim outside the coverage of the policy and therefore resulted in no duty to defend or to indemnify.  Mr. Justice C. McKinnon disagreed and found the exclusion did not apply and held there was a duty to defend.  His reasons and findings were upheld by the Ontario Court of Appeal.”

Both cases involved an interpretation of the insurance contract, being a limitation to prevent a homeowner from claiming under the policy themselves. In this case, as well as Poplawski, the Court felt that that principle was still intact, since the homeowners had sold their properties.

Comment

If there is insurance, then there will be more claims. Also, why allege fraud, if fraud is not covered under the insurance policy. Just allege negligent behaviour and then the insurance company must come to the rescue.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.
www.OntarioRealEstateSource.com

Unfair Business Practices in Ontario

Consumer Protection ~ Unfair Business Practices (Real Estate)

By Brian Madigan LL.B.

The Business Practices Act was a very good piece of legislation, but not too many people knew about it, so last year the Ontario Government replaced it with the Consumer Protection Act.

When it comes to real estate there are some important provisions. While the conveyance of real estate is exempt from the Act, advertising, the conveyance of chattels and agreements with realtors are all affected.

No one is allowed to engage in an "unfair practice" with a consumer, and specifically it is an unfair practice for a person to make a false, misleading or deceptive representation. These will include the following:

1. A representation that the goods or services have sponsorship, approval, performance characteristics, accessories, uses, ingredients, benefits or qualities they do not have.

2. A representation that the person who is to supply the goods or services has sponsorship, approval, status, affiliation or connection the person does not have.

3. A representation that the goods or services are of a particular standard, quality, grade, style or model, if they are not.

4. A representation that the goods are new, or unused, if they are not or are reconditioned or reclaimed, but the reasonable use of goods to enable the person to service, prepare, test and deliver the goods does not result in the goods being deemed to be used for the purposes of this paragraph.

5. A representation that the goods have been used to an extent that is materially different from the fact.

6. A representation that the goods or services are available for a reason that does not exist.

7. A representation that the goods or services have been supplied in accordance with a previous representation, if they have not.

8. A representation that the goods or services or any part of them are available or can be delivered or performed when the person making the representation knows or ought to know they are not available or cannot be delivered or performed.

9. A representation that the goods or services or any part of them will be available or can be delivered or performed by a specified time when the person making the representation knows or ought to know they will not be available or cannot be delivered or performed by the specified time.

10. A representation that a service, part, replacement or repair is needed or advisable, if it is not.

11. A representation that a specific price advantage exists, if it does not.

12. A representation that misrepresents the authority of a salesperson, representative, employee or agent to negotiate the final terms of the agreement.

13. A representation that the transaction involves or does not involve rights, remedies or obligations if the representation is false, misleading or deceptive.

14. A representation using exaggeration, innuendo or ambiguity as to a material fact or failing to state a material fact if such use or failure deceives or tends to deceive.

15. A representation that misrepresents the purpose or intent of any solicitation of or any communication with a consumer.

16. A representation that misrepresents the purpose of any charge or proposed charge.

17. A representation that misrepresents or exaggerates the benefits that are likely to flow to a consumer if the consumer helps a person obtain new or potential customers. (s. 14 (2))


It is also an unfair practice to make an unconscionable representation, and there are some "rules" which will help determine if this is the case.

A Court may take into that the person making the representation or the person's employer or principal knows or ought to know,

(a) that the consumer is not reasonably able to protect his or her interests because of disability, ignorance, illiteracy, inability to understand the language of an agreement or similar factors;

(b) that the price grossly exceeds the price at which similar goods or services are readily available to like consumers;

(c) that the consumer is unable to receive a substantial benefit from the subject-matter of the representation;

(d) that there is no reasonable probability of payment of the obligation in full by the consumer;

(e) that the consumer transaction is excessively one-sided in favour of someone other than the consumer;

(f) that the terms of the consumer transaction are so adverse to the consumer as to be inequitable;

(g) that a statement of opinion is misleading and the consumer is likely to rely on it to his or her detriment; or

(h) that the consumer is being subjected to undue pressure to enter into a consumer transaction. (s.15(2))

Section 18 provides that "any agreement, whether written, oral or implied, entered into by a consumer after or while a person has engaged in an unfair practice may be rescinded by the consumer and the consumer is entitled to any remedy that is available in law, including damages." These common law remedies are available in addition to the opportunity to report the matter to the Director and have the dispute investigated and resolved under the Act. The Director has been given rather broad powers by the legislation.

And further, "each person who engaged in an unfair practice is liable jointly and severally with the person who entered into the agreement with the consumer for any amount to which the consumer is entitled under this section." So, this means that the particular salesperson is responsible as well as the company.

Although, the actual "conveyance" of real property is not subjecty to the provisions of the Act, the matter of advertising is specifically noted as an included matter.

Under section 109 of the Act, "if the Director believes on reasonable grounds that any person is making a false, misleading or deceptive representation in respect of any consumer transaction in an advertisement, circular, pamphlet or material published by any means, the Director may order the person to cease making the representation; and further order the person to retract the representation or publish a correction of equal prominence to the original publication".

This section applies to any representations involving residential real property. If the purchaser cannot be described as a "consumer", then the Act will not apply. So, commercial transactions are not affected. Houses, and vacation properties are included. There is a real grey area when it comes to farms. Large commercial operating farms would not be included, but a hobby farm might.

You will recall earlier that both principals and agents were jointly and severally responsible. This means that a vendor who provides false and misleading information to his realtor is jointly and severally responsible to the purchaser.

All in all, the Consumer Protection Act should be quite helpful to purchasers and consumers in Ontario.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, or you would like a free market evaluation of your home in Erin Mills, Credit Mills, Credit Woodlands, Sheridan Homelands, Sawmill Valley, Bridlepath, Pheasant Run, Sherwood Forrest or Mississauga Heights, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Mortgage Acceleration Clause

What is an Acceleration Clause?

Ontario Real Estate Source

By Brian Madigan LL.B., Broker

This is a clause in a mortgage which triggers the obligation to repay the entire principal sum outstanding in advance of the time that it is otherwise due.

Consider a borrower who pays $1,200 per month on his $135,000 mortgage. The mortgage runs for five years. If he breaches an important covenant contained in the mortgage like for example failing to provide insurance, the entire $135,000 is due and owing, even if it is just year one in the mortgage.

Some breaches are considered substantial enough to “accelerate” the principal.

This is an option available to the mortgagee (lender). But, in cases, where the rate of interest is high the borrower may wish to have the mortgagee activate this clause which provides the opportunity to pay earlier.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Should Condo Property Managers be Regulated?

Should Condo Property Managers be Regulated?  ~ $ 20 million Fraud

Ontario Real Estate Source                                 

By Brian Madigan LL.B.

The question following a $20 million fraud of at least 7 condominium corporations is whether or not the Ontario Government should take steps to regulate property managers.

Manzoor Khan as the principal of Channel Property Management is alleged to have defrauded lenders and condominiums out of millions by falsely registering mortgages against the titles.

The essential reason is that the board of directors in many residential condominiums are simple, average, unsophisticated homeowners who may have the time to devote to the board but don’t have the necessary qualifications, education or experience for the position.

Retail and commercial owners can fend for themselves. It is the smaller, lower end condo corporation which is vulnerable. As the building gets older and the residents age and lack new sources of income, they become more and more vulnerable to rogue property managers.

I should, of course, point out that there is not a growing trend of rogue property managers, but I suppose one is enough, based upon the damage that one person can do.

It can have a severe impact when millions of dollars are pledged in a series of fraudulent transactions against a condominium.

In one case, a condo unit was purchased for $152,000 but can’t be sold for $70,000 just a few months later. In some cases, it is the working poor who suffer. Many families have immigrated and are often dependent upon a single wage earner in a low end position. There’s not much room left for saving. Others have second and third jobs, and they are the lucky ones, while others on welfare have no other source of income and may eventually face eviction.

If the industry were regulated:

1)     training and education would be provided,

2)     a code of ethics would be followed,

3)     mandatory spot audits would operate as a deterrent, and

4)     basic insurance would be mandatory.

In this case, with respect to insurance I’m referring to bonding the individuals involved with money and having insurance to back up fraud and defalcation.

So, who pays? The condo corporation of the lenders! They were probably both negligent in the handling of the situation. It sounds more like tort liability than contract.
So, who gets paid? Obviously, the lawyers and the auditors!

As a society, we have failed to protect some of our most vulnerable. We have encouraged them to buy, but we have not provided the basic tools to allow them to protect themselves. The condos that were victimized were not the high end expensive downtown condos owned by lawyers, doctors, stock brokers and the like. They were the lower end, poorer condos catering to the working class new Canadians. What a great way to invest in your new country!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Be careful About Condo Fraud in Toronto and the GTA

Is it Safe to Buy a Condo ~ $ 20 million Fraud

Ontario Real Estate Source

By Brian Madigan LL.B.

Channel Property Management operated in Toronto for years under Manzoor Khan of Brampton, Ontario.

Channel specialized in condominium management and gained the confidence in many cases of immigrants who identified with him from his native Bangladesh , where he has now returned.

It appears that Manzoor looked after about 15 residential condominium buildings.

While it does not really seem that sophisticated, here is what he did:

1)     Manzoor had his employees pose as senior officers of the condominium corporation,

2)    As President and Secretary, they could issue certified copies of the by-laws of the company,

3)    They certified a new banking by-law and/or borrowing by-law authorizing certain loans to be negotiated,

4)    The proceeds of the loans were placed in bank accounts over which Manzoor Khan had signing authority,

5)    The total borrowed appears to be about $20 million and such loans are secured against about 7 properties.

The arrangement is simple enough. The fraud is clear and the man has fled the country.

But, are the owners of the residential condominiums at risk? They might be!

The lenders are innocent and the homeowners are innocent. Both were duped by the same person. Hopefully, they all had insurance bonds as against Manzoor and his company. If they did, then they will be compensated.

This may not be just the fault of the lender. At the outset, it will be necessary to determine whether the board of directors might be liable. There may be directors and officers liability insurance. That would be helpful too.

However, the fundamental question for the courts is going to be whether these mortgages were valid.

This is an extremely costly undertaking. And, it could be that one or more of the residential condominium corporations do not have insurance and is therefore at risk of liability.

In the meantime, if you were a purchaser about to close a deal, you would want a very large holdback and if you were looking for a condo to purchase, you would probably avoid these buildings until the issues are resolved.

With all this uncertainty, homeowners will just have to put their lives on hold. And, this could go on for years!

Make sure you see and understand the financial statements of the condominium before you buy. Ask yourself whether the property manager is reputable and whether the board members are sophisticated. Get professional assistance right from the beginning.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

Construction Liens in Ontario

By Brian Madigan LL.B., Broker

If you are planning on any renovations or you are building a new home, then you need to know about the Construction Lien Act.

First, there is a lien which can be registered by anyone who provides work or services or supplies materials which are used for your property. The lien has to be registered within 45 days of the last work being performed or the last supply of goods. Then, the lien has to be "perfected" within 90 days of that same date by instituting an action and registering that on title as well. Many liens are registered but never perfected.

Second, there is a statutory holdback under the Act. Every person responsible for payment is required to holdback 10% of the amount for 45 days to ensure that there are no liens. If you pay this amount, and a lien is registered, then you may have to pay this again. So, be careful!

Third, there are other provisions for liens under the Act, in excess of the 10%. If a sub-contractor gives written notice of a claim for a lien, then that full amount (not just 10%) must be heldback. This is the most risky situation for homeowners.

Many contractors will tell you that you have no right to hold back any money because it's not in the contract. But, don't worry, the Act has you covered. Every contract is deemed to be amended so as to be in conformity with the Construction Lien Act. So, even if it's not in there, it's still part of the contract, and not only do you have the right, but you also have the obligation to holdback sufficient funds.

Let's assume that you are having a hot tub installed. Your price was $10,000.00, so you are obligated to holdback $ 1,000.00 for 45 days, but you receive written notice of a lien from the manufacturer for $ 6,000.00 and one from the installer for $ 1,500.00. So, how much do you holdback? The answer is $ 8,500.00. The full amount of the written notices together with the statutory holdback. But, if you're actually in this situation: don't pay anything! You may still hear from the electrician and the gas installer, both of whom may still have claims. Better safe than sorry, make sure everyone has been paid and get proper releases and authorizations signed. This is a good time to involve your lawyer.

The purpose of the Construction Lien Act is to protect all the suppliers and workmen down the line, so that they all will be paid. It is an Act intended to benefit sub-contractors from the general contractor. It is also designed to protect the general contractor from you if you don't pay. As a lien, it has priority over both unregistered and unsecured interests and it follows mortgages (provided the funds have been advanced) and taxes which have a higher priority.

So, where does title insurance fit in? If you have a valid title insurance policy, then you will be covered for any claims of the manufacturer or installers. You did not have a direct contract with them. However, you may not be covered for the general contractor's claim. You have a contract here, and you may not have lived up to your side of the bargain. If you were supposed to pay in installments, and you failed to do so, then this whole lien mess, may be your fault. If you're in breach of your obligations under the contract with the supplier, then title insurance won't save you. However, maybe they brought the wrong unit and you were quite within your rights to refuse payment. Here, title insurance will be helpful.

There are a couple of matters that are important considerations under the Act. What is the last day work was performed and material was supplied to the property? Who certified completion? What wage rates are paid to the workmen? Have all payments been paid to date? What about WCB payments? Is there a performance bond? If these issues arise, then you will have to see a lawyer. The Act can be tricky and somewhat complicated in parts.

It is also important to note that you can't use any of the holdback moneys for defects or repairs. Those funds are constituted as "trust funds" and may only be used for the purposes of the trust. If you borrowed money from a bank to finance the hot tub, then those funds may be subject to the trust provisions under the Act. It would be better just to arrange a general loan from the bank. It's far less risky! It's bad enough not to get what you paid for, but it's even worse to have to pay twice.

Ultimately, if a homeowner refuses to pay for proper work, services or materials supplied, the Court has authority to order the sale of the property. Before this occurs, the mortgagee will likely have intervened. And, there's an interesting provision contained in the mortgage, they have the right to pay the claim and add it to your mortgage with interest.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com