British Columbia courts have consistently held real estate licensees to a high standard of disclosure when they’re acting for a client in an agency relationship. An agent’s duty to disclose is broad and encompasses “everything known to the agent respecting the subject matter of the contract which would be likely to influence the [client’s] behaviour or which would be likely to operate on the [client’s] judgment.”
The only limitation on an agent’s disclosure obligation, other than the agent’s own state of knowledge, is the concept of “materiality.” Only facts or information material to the transaction must be disclosed.
What is “material”?
Unfortunately, the dividing line between “material” facts that need to be disclosed and “immaterial” facts that don’t, is often difficult to discern and depends on the specific circumstances of each case.
Even the legal test for materiality is unsettled. In Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.[i], the Supreme Court of Canada framed the test for materiality from the perspective of a “reasonable investor.” The Supreme Court held that “an omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision…”
Just last year, however, the British Columbia Court of Appeal adopted a slightly different materiality test in Wang v. Laura W. Zhao Personal Real Estate Corporation[ii], a case involving a real estate licensee. Unlike the Sharbern decision, the focus in Wang was on the perspective of a reasonable person in the position of the agent, with the relevant question being “what a reasonable person in the position of the agent would consider in all the circumstances would be likely to influence the conduct of the [client].”
The Court of Appeal in Hutchinson v. Moore[iii] acknowledged that there was a difference in the two tests, but concluded that both tests would lead to the same result regardless of whose perspective was considered; accordingly, the Court of Appeal did not feel it was necessary to resolve the issue. In our view, the Hutchinson approach will likely apply in most factual circumstances, but we expect that a future case will attempt to reconcile the law in this area.
Err on the side of disclosure
Regardless of how the test for materiality is framed, the core consideration for licensees acting in a fiduciary role is that the law will treat most information as “material.” If you’re hesitating between disclosing or not disclosing information to your client, you’re probably wise to err on the side of disclosure.
In the recent decision of Shave v. Century 21 Assurance Realty Ltd.[iv], the B.C. Supreme Court found a buyers’ agent 75% at fault for failing to inform his clients about the existence of the foreign buyer’s tax. The decision is another example of the heightened duty of disclosure in an agency relationship and provides a useful starting point to discuss effective means of avoiding or reducing your risk of liability.
The plaintiffs in Shave had immigrated to Canada from the United Kingdom in January 2018 and planned to purchase a residence in Kelowna. In February 2018, around the time when the plaintiffs first met with the licensee, the provincial government amended the Property Transfer Tax Act to include the Regional District of Central Okanagan as subject to the foreign buyer’s tax.
Failing to disclose
Although the licensee knew that the plaintiffs had recently moved to Canada, he did not advise them about the existence of the foreign buyer’s tax during the three to four months when he was working with them. The plaintiffs made an offer on a property in May 2018, but the offer didn’t complete because they couldn’t obtain financing. There was evidence that their difficulties in obtaining financing were because they weren’t Canadian citizens and didn’t have permanent resident status. The plaintiffs reported this problem to the licensee.
Following the collapse of the May 2018 contract, the plaintiffs made an offer on another property a month later, in June 2018. The evidence was that the plaintiffs had travelled to the United States prior to writing the second offer to finalize their work permits. Based on discussions he had with the plaintiffs, the licensee believed the plaintiffs had finalized their citizenship status during this trip. He later conceded that he must have misunderstood the plaintiffs’ statement. The court found there was no possibility that the plaintiffs would have informed the licensee that they were permanent residents at the time.
The licensee prepared the offer documents and sent them to the plaintiffs for electronic signature, advising them to make sure to review the offer documents carefully. In drafting the offer, the licensee incorrectly entered information at clause 24 to indicate that the plaintiffs were Canadian citizens or permanent residents. The offer contained the standard page titled “Information About This Contract,” which advised the plaintiffs that they should review the tax implications of their residency or citizenship status with a lawyer or accountant. It also contained a subject condition making the offer conditional on the plaintiffs’ lawyer reviewing the contract.
The plaintiffs engaged a lawyer to assist them with the purchase and provided him with the contract documents. The lawyer was aware that the plaintiffs were non-residents when they made the earlier offer the previous month, but he didn’t make any inquiries regarding their residency status on the later offer, simply accepting the statement at clause 24 at face value.
The plaintiffs completed their purchase on July 25, 2018, and on January 7, 2020, they received a Notice of Assessment from the province for unpaid foreign buyer’s tax in the amount of $172,000.
Defending the claim
In defending the claims against him, the licensee argued that his duty of care didn’t extend to providing advice on residency and taxation issues. He relied on the terms of the contract, which cautioned that “the buyer and seller should confirm their residence and citizenship status and the tax implications thereof with their lawyer/accountant,” and submitted that the primary responsibility for the error should rest with the plaintiffs’ lawyer. Finally, the licensee argued that the plaintiffs had failed to tender any expert evidence to establish the appropriate standard of care in the circumstances.
However, the court concluded that the licensee had breached his duty to the plaintiffs. The court determined that the licensee “had a clear duty to disclose the existence of the foreign buyer’s tax,” given that this information would be “extremely important” for prospective purchasers in the plaintiffs’ position. Liability was apportioned 75% to the licensee and brokerage, 20% to the solicitor and 5% to the plaintiffs.
While the licensee’s mistake in completing clause 24, based on the incorrect assumption regarding the plaintiffs’ residence status, likely had some bearing on the result and the apportionment of fault, it’s likely that the licensee would have been found liable in any event.
The existence of the foreign buyer’s tax was found to be “material” information to these buyers. In such circumstances, the court held that the licensee had a duty to disclose the tax’s existence regardless of whether the Sharbern or Zhang tests were applied. The licensee’s duty didn’t extend to providing tax advice or confirming whether or not the plaintiffs would be subject to the tax, but it did extend to at least informing the plaintiffs of the existence of the tax, as a piece of information relevant to their deliberations.
Risk management tips
We can learn from cases such as the Shave decision because they allow us to consider strategies for mitigating liability risk in specific circumstances. Licensees could employ several strategies to potentially avoid liability, or at the very least, to minimize the degree of fault imposed on them.
First strategy: Know your client and don’t make assumptions.
As mentioned earlier, the law holds licensees to a high standard of disclosure when they’re working for a client. The legal test for “materiality” is dependent on whether the omitted information would have influenced the client’s deliberations, regardless of whether the test is framed from the perspective of the prudent investor or the prudent agent. Consequently, in order to exercise reasonable judgment in deciding which facts or information could be important, you need to get to know your client. This involves asking them specific questions to understand their personal circumstances and their objectives in acquiring or disposing of real estate. Rather than making assumptions, confirm information.
Second strategy: Know the regulatory landscape.
Although licensees aren’t lawyers or tax advisors, courts expect them to know about regulations that apply to real estate, particularly where those regulations could be important to the client. For example, in Luminary Holding Corp. v. Fyfe[v] the licensee was held to the standard of knowing that a pending change to the ALR boundaries could be material to the buyer where the buyer had expressed a desire to develop the property for a commercial venture.
While you need to be aware of land use restrictions and regulations that affect real estate, this doesn’t mean that you should advise a client about how these restrictions or regulations could impact their legal rights – in fact, this is something that you should avoid. Rather, the objective is to be able to alert your client to restrictions that could affect their interests in a material way, so that they have a timely and real opportunity to consult with appropriate professionals before committing to the real estate purchase.
Third strategy: Make sure to go through the contract with the client.
Although the licensee in the Shave case spent considerable time going through the first contract with the plaintiffs, he made assumptions about their residency status on the second contract and then didn’t draw their attention to the changes he’d made. He did advise the plaintiffs to “review the contract carefully” but this did not relieve him of liability for failing to explain the contract.
Electronic signature software should be used with caution. It’s still important to review the contract or changes in the contract with the client and recommend that clients carefully review it themselves before they sign or initial anything. (For more information on this topic, see “E-docs and E-rrors – The dangers of e-signatures” by S. Cordell in the December 2020 Risk Report).
Fourth strategy: Recommend appropriate buyer’s subject conditions.
While risk shifting is a useful liability mitigation tactic, it needs to be done correctly in order to be effective.
In Shave, the plaintiffs’ offer contained a generic subject clause making the offer conditional on the buyers’ lawyer reviewing the contract. Based on the reasons for judgment, it does not appear that the subject condition was worded to specifically refer to tax advice relating to the plaintiffs’ residency status. A subject condition that was specifically worded to deal with the plaintiffs’ risk of being exposed to the foreign buyer’s tax may not have relieved the licensee from liability for failing to disclose material facts, but it may have shifted a greater share of the liability onto the solicitors and to the buyers themselves. It also would have enabled the licensee to argue that his negligence was not the proximate cause of the plaintiffs’ loss, because the plaintiffs had a real opportunity to discuss the tax implications of their residency status with their solicitor before committing to the purchase.
It’s important to keep in mind that buyer’s subject conditions are effective because they suspend the operation of the contract until the buyer has an opportunity to investigate a potential risk and to consult with the appropriate professionals. Accordingly, a recommendation to buyers to consult with a lawyer is of little practical benefit to the client unless it is in the form of a subject condition, since the buyers may already be bound by the terms of the contract before they have the opportunity to obtain the legal advice.
Ask yourself, “What could go wrong?” Each deal is different, and sometimes problems can arise that are completely unforeseen, but you can do your clients, your profession, and yourself a great service if you’re able to identify potential risks and respond with the information and contractual protections that can offer your clients the opportunity to make an informed decision.
[i] Sharbern Holding Inc. v Vancouver Airport Centre Ltd., 2011 SCC 23 (CanLII), [2011] SCR 175
[ii] Wang v. Laura W. Zhao Personal Real Estate Corporation, 2021 BCCA 97 (CanLII)
[iii] Hutchison v. Moore, 2021 BCCA 301 (CanLII)
[iv] Shave v Century 21 Assurance Realty Ltd., 2022 BCSC 183 (CanLII)
[v] Luminary Holding Corp. v Fyfe, 2021 BCSC 167 (CanLII); 2022 BCCA 185 (CanLII)
