In the last few months, I have been working on various real estate and construction related litigation files. As the proverb goes, “qui terre a guerre a”. I have learned a lot from my competent and wise colleagues. As always, I keep reading newly published judgments and doctrines to prepare myself for the unpredictables. This post aims to summarize the analysis of the Honorable Jeffrey Edwards, J.S.C. on the Gestion NW inc. c. Yin, 2023 QCCS 1843.
Factual Background
In or around October 2017, the Plaintiff Mr. Wakil was looking for an investment rental property. He is a medical surgeon. Due to his busy professional practice, he was looking to acquire a property that would not require a significant time commitment on maintenance and renovation after purchase. When he was introduced of the property of the Defendant, Ms. Yin, he learnt from Defendant’s real estate agent that the Property was completely renovated on the three floors. The asking price on the listing was $1,168,000.00. The Property was presented as a quadruplex with four residential units that were leased to tenants.
The Seller’s Declaration did not disclose any defect of the Property.
Photo by Mr. Ou
On November 6, 2017, Plaintiff NW Holdings, a corporation of which Mr. Wakil is the sold shareholder, promised to purchase the Property at $1,105,000.00 from Defendant on the condition of a satisfactory pre-purchase inspection after several rounds of negotiations.
On November 18, 2017, Mr. Guenette inspected the Property. In general, Mr. Guenette’s assessment of the Property was that it was in “good condition”. Meanwhile, Mr. Guenette identified certain issues that he considered needed to be addressed or repaired. Upon receipt of the Inspection Report, Plaintiff requested Defendant, through her broker, to carry out the necessary repairs.
On November 23, 2017, the parties signed a modification to the Promise to Purchase detailing the repairs to be carried out by Defendant.
Over the following weeks, Defendant hired various contractors and tradespersons to carry out the agreed work.
After Defendant declared that the repairs were done, Plaintiff carried out two inspections. Plaintiff first asked Mr. Guenette to return and inspect the work. He then visited the Property himself with Defendant for final verification. From what was visible, and based upon Defendant’s declarations, Plaintiff accepted that the repairs were done in accordance with the rules of the trade.
On December 21, 2017, the parties signed a deed of sale. The sale of the Property was made with the legal warranty of quality.
On January 5, 2018, Plaintiff was called by the tenant in one of the apartments of the Property that there was no running water.
On January 7, 2018, Plaintiff was called by another tenant who told him that she was hearing the sound of water running and splashing in the adjacent apartment in the basement. When Plaintiff arrived at the apartment, he was shocked to see water gushing down from the ceiling in the kitchen. When Plaintiff tried to close the water entry, he found that it was defective and would not close. When he turned the valve, the water would not turn off. Unfortunately, the plumber of Defendant did not know how to shut off the water neither. In this situation, Plaintiff had no choice but to ask the City of Montreal to close the City’s main water entry on the street.
Plaintiff called his home insurer immediately, who sent down an emergency crew to prevent further damage and undertook preliminary salvage and restoration.
Then, Plaintiff requested professional plumer to replace the shuts-off valve, and worked with the insurer and a contractor to determine the cause of the flood. It was determined that the cause of the flood was the freezing of the water entry pipes that were partially located outside the building and were not insulated. When the pipes froze, water stopped circulating and prevented the circulation of running water to all the apartment units. As the pipes were made of copper, they expanded and burst. When the bursted pipes were heated up by the heater, the frozen water began to to flow through the busted pipes, causing the flood.
In assessing the damage, Plaintiff and his contractor discovered many defective works and poor workmanship with respect to the repairs done in the basement. The defective works include violations of basic rules of the trade regarding electricity, plumbing and structure. Some defects were causing long-standing problems of ice-damming and water infiltration, which had been affecting a neighbouring property on the same street of the Property.
After an in-depth investigation on the Property, Plaintiff realized that Defendant purchased the Property in 2016 without legal warranty and at her risk and peril. Before Defendant acquired the Property, the neighbouring property’s owner, Mr. Sanchez sued the previous owner of the Property to the Court for damages caused by the water infiltration. After Defendant acquired the Property, Mr. Sanchez informed her about the problems of the water infiltration and required her to effect necessary works to resolve the problem, Defendant chose to ignore this request and never disclosed this problem to Plaintiff.
On January 23, 2018, Plaintiffs sent a formal demand letter to Defendant.
Plaintiff discovered other major defects with the Property in the following weeks. Plaintiff therefore hired an independent engineer to review and comment on the various discoveries. In the expert’s report, the engineer stated that, in the absence of any waterproofing, slab or protective barrier, humidity from the ground and water, especially in the Spring, repeatedly rose and then rotted out the wood elements of the nonconforming subfloor.
On May 24, 2018, Plaintiffs sent a second formal demand letter to disclose the various discoveries of the latent defects.
Defendant did not respond to the demand letters.
As Plaintiff was more and more concerned with the structural integrity of the Property, notably in light of the fact that the supporting walls in the basement were rotting out at their base, he hired a structural engineer, Mr. André Houle to evaluate if there is any major problems which would affect the structural integrity of the Property. The structural engineer, Mr. Houle confirmed that the wood walls were based directly on the humid soil, and that such method of construction was never acceptable. Mr. Houle also wrote that this structural defect was known to Defendant since the floor on the main level had been artificially “lifted” with shims and then revelled. Mr. Houle also commented that this work could never resolve the problem of the sinking of the supporting structure; it only covered up the signs of sinking.
On July 10, 2018, Plaintiff sent Defendant a third formal demand letter.
During the execution of the corrective works, Plaintiff discovered that some repairs that should have been done by Defendant was not properly done as agreed between the parties before their transaction.
On May 29, 2019, Plaintiffs sent a fourth letter of demand to Defendant.
Due to the corrective works which took a period of eighteen months, Plaintiff was prevented from generating any rental income from the Property.
On August 16, 2018, Plaintiffs filed a lawsuit against Defendant and her realtor.
On February 11, 2011, Defendant filed an assignment in 你 under the Bankruptcy and Insolvency Act. On the same day, the trustee in bankruptcy sent to the Plaintiffs a notice of suspension of the legal proceedings under Section 69.3 of BIA.
On June 30, 2021, Plaintiffs presented to the Superior Court (Commercial Division) an application to obtain authorization to continue the legal proceedings against Defendant and her realtor.
On September 8, 2021, the Superior Court (Commercial Division) granted the application and authorized Plaintiffs to continue the legal proceedings.
Defendant did not file any exhibits in support of her defence during the legal proceedings.
On January 13, 2022, the trial date was set for a hearing of seven days from May 1 to May 9, 2023.
On April 27, 2023, Plaintiffs concluded an out of court agreement with the realtor. Upon receipt of their payment of the amount of $15,000.00, Plaintiffs agreed to withdraw their proceedings against them.
Plaintiffs are suing Defendant for the amount of $202,823.84 for latent defects and civil fraud regarding the sale of a quadruplex located in the city of Montreal.
Defendant’s Bankruptcy Proceeding and Plaintiffs’ Allegations on Acts of Civil Fraud
While Ms. Yin has not been discharged from bankruptcy, Plaintiffs request that the Court restricts its analysis and decision on the known and undisclosed defects or acts of civil fraud by Ms. Yin (Articles 1401, 1407, 1726 and 1728 Civil Code of Québec). Plaintiffs makes this request on the basis that only such known and undisclosed defects or acts of civil fraud may be eligible to be qualified at a later stage by the Court (commercial division) as a debt not subject to discharge under section 178 (1) (e) of the BIA.
Article 178 (1) (e) BIA reads in part as follows: “An order of discharge does not release the bankrupt from […] (e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, […]”;
In Salesse (Syndic de), 2016 QCCS 3091, the Superior Court of Quebec held:
« [33] La jurisprudence recèle plusieurs cas où la non-divulgation de vices cachés a entrainé l’application de l’exception prévue à l’article 178 (1)3) LFI. À titre d’exemple, dans Abran c. Tourville 2015 QCCS 916, l’honorable Michèle Lacroix qui statue sur un recours en vices cachés s’exprime ainsi :
52 Les relations entre un vendeur et un acquéreur ne s’assimilent pas à un jeu de cache-cache. Les vendeurs demeurent soumis à des obligations de loyauté. Connaissant un problème sérieux, ils se doivent, à tout le moins, de ne pas induire en erreur l’autre partie en l’envoyant délibérément sur une fausse piste ou en induisant chez elle un sentiment de fausse sécurité.
(…)
54 L’obigation de renseignement a un champ d’application beaucoup plus vaste que la simple dénonciation d’un vice caché. Elle englobe toute information déterminante pour une partie à un contrat.
(…)
57 En aucun temps, le vendeur n’a fait mention des problèmes qu’il connaissait et qui affectaient la propriété. Ces déclarations trompeuses et ces propos rassurants ont placé l’acheteur dans un climat de fausse sécurité.
(…)
67 Au risque de me répéter, il est assuré que Diane Abran n’aurait pas acheté si, comme elle le dit, elle avait été mise en courant de cette “histoire d’horreur”.
68 Diane Abran a démontré que Gilbert Tourville ne doit pas être libéré de cette dette comme le prévoit l’article 178 (1)3) de la Loi sur la faillite. »
Main Issues to Analyse in this Post
- Have Plaintiffs proven that Ms. Yin intentionally chose not to disclose to Plaintiffs certain known latent defects and problems affecting the Property?
- What is the consequential amount of prejudice suffered by Plaintiffs with respect to the sale price?
Court’s Analysis
- Yes. According to the Plaintiffs, the Defendant was fully aware of the existence of all the latent defects. According to the Defendant, she did not know about any of the defects or problems of the Property and that is why she did not disclose them to the Plaintiffs. In front of the two different theories of the facts, the Court is required to determine the veracity, probative value and credibility of Defendant’s version of facts and whether she was aware of the defects and problems in issue at the time of the sale.
The Court concludes that the Defendant, Ms. Yin’s version that she was not aware of any of the defects or problems in issue is unfounded in fact and not credible, for the following reasons: 1) The facts show that Ms. Yin is a highly intelligent and educated woman with significant experience in property management and supervision of renovations, construction and repair work. The facts also show that her husband is a very successful businessman in China. 2) The facts show that Ms. Yin supervised all workers for the renovations of the Property. The Facts also show that the net sale profit of the sale of the Property was split equally between Ms. Yin and his husband; 3) The facts show that Ms. Yin and her husband owned another multi-unit rental property located in downtown Montreal on Fort Street for the price of $888,000. Ms. Yin acknowledges that as the property manager, she hired and worked with all the contractors and tradesmen for the renovations for the Fort Street property; 4) Ms. Yin states that she had no personal knowledge of the work that was performed. The Court finds this statement not credible. She acknowledged that she hired unlicensed workers for the conversion work in the basement of the Property. She also testified that, as part of the arrangement, she rented without charge the basement to the principal workers for a period of four months, paid to the renovation and repair workers in cash under the table, and paid for occasional grocery bills and cigarettes for him. Ms. Yin also testified that the majority of the renovation and repair materials were purchased by herself directly in construction material outlets. 5) The Court found that Ms. Yin was not truthful with regard to her statements to the Court regarding whether she continues to be married to Mr. Guan, her husband; 6) Ms. Yin chose to retain and act principally through an interpreter. However, the Court noted that her level of intelligence, knowledge and sophistication were apparent in her testimony, conduct, examination and cross-examination of witnesses, even expert witnesses, and argument.
It is worth to note that the knowledge of the existence of the quality defect by the seller is not a condition of liability in a standard action for latent defects.
2. Having found that the Defendant’s testimony not credible, the Court proceeds on a fact specific case-by-case basis and determine the level and degree of Defendant’s liability for each defect or problem.
The Plaintiffs claim and file supporting documents for the following damages on the basis that the Defendant aware and not disclose defects and problems in the Property:
1) Damages caused by the incident of January 6, 2018 and not covered by insurance – $2,482.90
2)Defects relating to violations of the Electricity Code – $5,262.50
3)Defects relating to violations of the Plumbing Code – $6,316.00
4)Defects relating to improper ventilation and aeration of attic – $10,258.70
5)Costs to rebuild basement and front and back entrance in accordance with the rules of the trade – $94,457.46
6)Landscaping after waterproofing work – $5,065.80
7)Loss of rental revenue resulting from the absence of tenants during the corrective work – $29,580.00
8)Defect regarding condition of the back wall – $28,640.27
9)Damages for trouble, loss of time and inconvenience – $15,000.00
10)Cost of expertises – $5,760.21
Total: $202,823.84
The Court uses 17 pages in the judgment to present its reasoning for the determination of the Defendant’s liability. This post would like to summarize the Court’s reasoning on the liability for the damages caused by the flood incident not covered by insurance as well as the liability for the costs to repair defects with regard to rebuilding basement and partial front and back entrances.
2.1 Determination of Defendant’s Liability for Damages Caused by the Flood Incident Not Covered by Insurance
Plaintiffs claim $2,482.90 for damages caused the flood but not paid for by the insurer of the Property. Two amounts are claimed: the cost of repairing the defective water shut-off valve ($482,90) and the deductible paid. However, as there is no proof that Ms. Yin was aware of its defective state, that amount is not granted by the Court. Regarding the deductible of $2,000, the expert witness testified that the installation of the plumbing system violates the elementary rules of the rade of plumbing and that this defect could not be detected by a pre-purchase inspection. Ms. Yin also acknowledged that she had plumbing work done by unlicensed workers. The Court finds that there was a problem of partial freezing of the pipes even before the sale and that Ms. Yin was aware of it and that the abnormal cold air in the apartment was brought to the attention of Ms. Yin many times but the tenants.
The Court therefore concludes that the cause of the flood was a latent defect known to Ms. Yin and not disclosed by her and she is liable for $2,000 according to Art. 1728 C.c.Q.
2.2. Determination of Defendant’s Liability for Costs to Repair Defects with regard to Rebuilding Basement and Partial Front and Back Entrances
As a result of the damage of the flood, the entire basement had to be demolished and rebuilt. But the basement was presented at the time of the sale as being “completely renovated”. According to the normal rules of construction practice and according to the reasonable expectations of the buyer, the recent renovations in the basement (those of Ms. Yin in the last year and those of the previous owner before the sale to Ms. Yin) should have respected the rules of the art at the time that they were carried out.
Unfortunately, almost all the renovation work carried out completely violated the rules of the art. The Plaintiffs claim and file supporting invoices for:
1)Demolition costs of Apartments 3 and 4 – $16,452.85
2)Removal of debris and soil required to install supporting structure – $11,207.45
3)Slab and new subfloor – $54,021.42
4)New Floor – $3,497.27
5)Stabilization of damaged joists – $876.01
6)Solidification of ceiling and below the first floor – $3,456.15
7)Stabilization of beams and installation of ceiling – $11,782.07
8)Ventilation and support for wall – $6,115.39
9)Demolition of back and front entrances – $11,016.89
10)Floors – $3,583.93
11)Installation of ventilation of new entrance – $4,769.00
12)Demolition of roof of front entrance – $2,063.23
13)Materials for new flooring – $3,214.59
Sub-Total – $132,056.25
Less extras included – ($15,368.07)
Less refund of insurance – ($22,237.28)
Total – $94,450.90
The Court finds that the amount claimed should be reduced for the following reasons: for 70% of the basement, Plaintiffs have not established that the defective works were done by Ms. Yin. It could be done by the previous owner 10 years ago. As such a depreciation factor of 25% applies to items 1) to 8) and 10) and 13).
The Court first deducts from these amounts the percentage reduction made by Plaintiffs (28%)
- $114,207.17 – ($114,207.17 * 28%) = $82,229.16
Then the Court applies the depreciation factor of 25%
- $82,229.16 – ($82,229.16 * 25%) = $61,671.87
Therefore, for items 1) to 8) and 10) and 13), the claimable amount by Plaintiffs is $61,671.87.
The Court then determines what proportion of the latent defects causing this damage was known to Ms. Yin. The testimony and the evidence show that it is unlikely that all the latent defects were known to Ms. Yin. The Court arbitrates that Ms. Yin was aware of 1/3 of the defects. That equates to $20,557.29 ($61,671.87÷ 3) of the repair costs.
Regarding the works carried out in 9), 11) and 12), they were not in a new or nearly new state on the time of sale. According to the evidence, they were at least 30 years old.
The Court reduces the amount by 28% (extras and insurance payment) calculated but the Plaintiffs:
- $17,849.12 – ($17,849.12 * 28%) = $12,851.37
The Court then applies a factor of depreciation of 50%:
- $12,851.37 – ($12,851.37 x 50%) = $6,425.69
Regarding knowledge of these defects by Ms. Yin, the evidence indicates that Ms. Yin had knowledge of them only with respect to the front entrance. As she had knowledge for the front entrance but not for the back entrance, liability is restricted to ½ of the amount, namely $3,212.84.
In the final conclusion, among other, the Court condemns Ms. Yin to pay the Plaintiffs $49,025.49 with legal interest at the rate of five percent (5%) per annum plus the additional indemnity prescribed by Article 1619 of the Civil Code of Quebec starting from the date of the demand letter dated May 18, 2018.
Reflection
- Il importe de ne pas confondre le manquement à l’obligation de renseignement du vendeur qualifié comme un dol (Art. 6, 7, 1375 C.c.Q.) et l’obligation de garantie légale contre les vices cachés de ce dernier (Art. 1725, 1726 et 1728 C.c.Q.) ; La Cour d’appel, dans l’affaire Monarque du Richelieu, nous enseigne que le manquement à l’obligation de renseignement qualifié de dol est une protection plus large qui englobe tous les faits susceptibles d’influencer le consentement du contractant, tandis que la garantie légale n’englobe que ce qui concerne le vice caché (Monarque du Richelieu inc. c. Boisé Richelieu inc., 2018 QCCA 2168) ;
- L’article 178 de la Loi sur la faillite et l’insolvabilité prévoit qu’une ordonnance de libération ne libère pas le failli de toute dette ou obligation résultant de l’obtention de biens ou de services par des faux-semblants ou la présentation erronée et frauduleuse des faits, autre qu’une dette ou obligation qui découle d’une réclamation relative à des capitaux propres ;
(Attention : Le but de cet article est de fournir des informations juridiques générales. Il ne reflète pas l’état du droit de façon exhaustive et ne constitue pas un avis juridique sur les points de droit discutés. Afin de minimiser les risques juridiques pour vos affaires, vous devez demander l’avis juridique d’un avocat sur toute question particulière qui vous concerne. Merci pour votre attention.)