BASEMENT APARTMENTS    31/03/2011

A recent case concerning the issue of the lack of warranty of retrofit status of a basement apartment has recently been brought to my attention. This case is of significant interest as there are numerous instances of Agreements of Purchase and Sale involving properties containing basement apartments. Very often the Listings and the resultant Agreements contain a provision essentially stating that neither the Listing Agent nor the Seller “warrant the retrofit status of the basement apartment”.

In the particular case a property was listed for sale by a real estate agent (Agent). The listing information described the property as:

“Magnificent house in Prestigious Court, elegant design
with apartment in the basement ($1,150.00 income),
all window coverings, all existing light fixtures, CAC, CVAC,
security systems, garage opener, three fridges, three stoves,
a washer and a dryer. Seller and Agent do not warrant retrofit
status of basement apartment.

An individual Buyer engaged the Agent to prepare an Agreement of Purchase and Sale to purchase the property in question. The Agent advised the Buyer that the property would be an excellent purchase for investment purposes as there was a separate entrance to the basement apartment. As a result the Agent advised that the property could be rented to two different Tenants because of the separate entrance.

The Agent did not insert any provision either in the Agreement of Purchase and Sale, or in any other ancillary documentation, to ensure that the Buyer was protected nor to ensure that the Buyer was fully informed of the possible illegality, and the suitability or the lack of suitability of the basement apartment for the Buyer’s stated purpose of renting out the basement apartment to provide rental income from the basement apartment. Following the closing of the transaction, as a result of the Agent’s failure to protect the Buyer commencing to rent the basement apartment for income purposes, the Buyer incurred a number of legal and financial issues and setback. Amongst other matters the issues included:

1. The Municipality advising the Complainant that the basement
entrance was not built in compliance with the Building Code Act 1992;
2. An order being issued by the Municipality for the violation of the
Building Code Act 1992 because the basement apartment was not in
Compliance with the Building Code Act;
3. Water damage to the basement apartment of about $50,000.00 due to the improper Building of the basement door;
4. The Buyer being taken to the Ontario Rental Housing Tribunal by the Tenants due to the problems the Tenants had with the door;
5. The Buyer having to file for bankruptcy as he could not carry the mortgage when the Tenants stopped paying rent due to the damage to their living space.

Accordingly the Agent acted unprofessionally when he/she;

1. Failed to verify the retrofit status and/or intended use of the basement apartment on behalf of his client, the Complainant.

2. Failed to insert a clause in the offer to ensure that the Complainant received assurances and/or information from the Municipality regarding the legality of the retrofit of the basement apartment before the offer became binding.

The Agent breached the following Provisions of the REBBA 2002 Code of Ethics:

Section 3 – Fairness and honesty
A registrant shall treat every person the registrant deals with in the course of a trade in real estate fairly, honestly and with integrity.

Section 4 – Best interests
A registrant shall promote and protect the best interests of the registrant’s clients.

Section 5 – Conscientious and competent service, etc.
A registrant shall provide conscientious service to the registrant's clients and customers and shall demonstrate reasonable knowledge, skill, judgment and competence in providing those services.

Section 6(1) – Providing opinions, etc.
A registrant shall demonstrate reasonable knowledge, skill, judgment and competence in providing opinions, advice or information to any person in respect of a trade in real estate.

Section 21(1) – Material facts
A broker or salesperson who has a client in respect of the acquisition or disposition of a particular interest in real estate shall take reasonable steps to determine the material facts relating to the acquisition or disposition and, at the earliest practicable opportunity, shall disclose the material facts to the client.

Section 38 – Error, misrepresentation, fraud
A registrant shall use the registrant’s best efforts to prevent error, misrepresentation, fraud or any unethical practice in respect of a trade in real estate.

This was a case decided by the Discipline Committee (REBBA 2002) in March 2010.