September 1st - 2011

RECO Decision: Buyer faces host of problems with basement apartment

The following decision from RECO Discipline and Appeals Hearings has been condensed and all individual and corporate names have been changed.

The following decision from RECO Discipline and Appeals Hearings has been condensed and all individual and corporate names have been changed.

The facts
Joe wanted to buy an investment property and liked a house listed by Lexam Brokerage, with Ray as the sales representative. The MLS® System listing described the property as a “magnificent house on prestigious court, elegant design with two apartments in the basement ($1,150.00 income)...Seller and Agent do not warrant retrofit status of basement apartment.” The house was listed at $555,000.

Ray told Joe the house was excellent for investment purposes since the previous owner had built a separate entrance to the basement and that this would make it possible to rent to two separate tenants. Joe decided to buy the house, asking Ray to draft an offer for $520,000. Included with the offer was a Confirmation of Representation form indicating that Joe had signed a Buyer Representation Agreement and was a client of Lexam, and that the brokerage represented both Joe as the buyer and the sellers, Meg and Tim.

In the offer, Ray included a clause requiring the sellers to provide, on acceptance, an existing property survey showing current structures, buildings, improvements, easements, rights of way and encroachments along with a declaration confirming that no additions, buildings or improvements had been done since the date of the survey. The sellers signed back the offer at $542,000 and Joe accepted it. Ray inserted the survey clause in the offer, but he never followed through on whether the survey was provided to Joe by the sellers.

Ray had protected Meg, Tim and the brokerage by including a statement in the MLS® that the retrofit status of the basement apartment was not warranted by the brokerage and seller. However, Ray didn’t take any steps to protect Joe, his buyer client, such as inserting appropriate clauses in the Agreement of Purchase and Sale or preparing other documents to ensure that Joe was fully informed of the legality and suitability of the secondary unit (basement apartment) for his intended use.

After the sale closed, Joe ran into a host of problems. The city issued an order that the basement apartment and its entrance violated the building code. The basement flooded, and because the basement door was not built properly, $50,000 of water damage occurred. The tenants took Joe to court and stopped paying rent. Joe eventually filed for bankruptcy.

The findings
The RECO panel concluded that Ray acted unprofessionally when he failed to: verify the retrofit status and/or intended use of the basement apartment on behalf of his client; follow through regarding the production of the survey and declaration as to improvements and structural changes; insert a clause in the offer to ensure that Joe received assurances and/or information from the city on the legality of the basement apartment’s retrofit before the offer became binding. The RECO panel concluded that Ray breached the following sections of the REBBA 2002 Code of Ethics: 3 – Fairness and Honesty; 4 – Best interests; 5 – Conscientious and competent service, etc.; 6(1) – Providing opinions, etc.; 21(1) – Material facts; and 38 – Error, misrepresentation, fraud.

Penalties
Ray was ordered to pay a fine of $7,500 and to successfully complete the Real Estate Institute of Canada’s ethics and business practice course. The full case is dated 2010/03/15 and can be viewed at www.reco.on.ca. Look under “Complaints and Enforcement” and then scroll down to “Disciplines and Appeals Hearings and Decisions”. Choose the appropriate year and search by date only.

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