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Tuesday, June 29, 2010

Is the Construction Industry Corrupt?

With all the scandals with houses that are built with defects (not up to code and end up costing new homeowners way more than expected to have the house fixed) there is a growing movement of angry homeowners who are upset with what they see as corruption in the construction business.

Shoddy workmanship.

Phony promises.

Construction costs that go way over budget.

And then there is Mike Holmes, the messiah of the construction and renovation industry in Canada. He actually stands up for homeowners and pushes for "construction done right - the first time!" But for all his efforts in trying to get the housing industry in Canada to change their ways the Canadian government ignores the issue, ignores the pleas of homeowners and is probably accepting bribes from executives in the construction industry.

And this isn't just an issue for the construction industry, there's also the rather unregulated renovation industry and people who do their own renovations. Lets take the following case as an example:

Cotton Vs. Monahan

In April 2006 Walter and Shelley Cotton bought their dream home in Brantford, Ontario. Afterwards they found out their new home wasn't up to the building code and it was going to cost them an extra $85,000 to fix it.

The old owners, Gary, Laurie and Carey Monahan, had shown the Cottons the Sellers Property Information Statement (SPIS). The form lists the extensive renovations done to the house without any building permit. The Cottons and their real estate agent went over the document and each of their questions was answered properly.

The Cottons told their real estate agent to submit an unconditional offer without a home inspection clause, despite the agent’s advice against doing so.

After the deal was closed they had an inspection which revealed numerous problems which violated the building code. It took 6 months to fix everything and was an absolute chaos.

The Cottons then sued the Monahans for the cost of the repairs, arguing the hidden defects were actively concealed. The Monahans responded they answered all the questions in the SPIS and that the new buyers failed to exercise due diligence by conducting a home inspection.

Legal fees for the 10-day trial were approx. $100,000.

The judge quoted the following line from Bora Laskin in a 1960 Law Society lecture: “Absent fraud, mistake or misrepresentation, a purchaser takes existing property as he finds it . . . unless he protects himself by contract terms.”

The judge also quoted a 1979 decision wherein a seller aware of defects must disclose them to the purchaser only if they are dangerous or unfit for living in. Otherwise there is no obligation to reveal hidden defects.

Thus trying to sue for hidden defects in the house people have to prove those defects are actually dangerous and were knowingly concealed by the seller.

The judge ruled in favour of the Monahans, deciding they had accurately and truthfully filled out the SPIS form.

The SPIS form is published by the Ontario Real Estate Association and is apparently the single most frequent cause of Ontario real estate litigation

Lessons Learned

#1. Never sign a SPIS form. They're unnecessary and can only cause future lawsuits.

#2. Get a freaking home inspection before buying the house! Talk about stupid.

If you're going to buy a house you can't take people on their word. It doesn't matter if its a new house or an old one with lots of renovations. Have it inspected for faults first.

An inspection can also dramatically lower the price of a house. Once people know it has so many thousands of $$$ in repairs needed it becomes evident that the house really isn't worth as much as they claim it is. It would make sense to make an offer (after the house has been inspected and a contractor has made an estimate as to the repair costs) that deducts the cost of repairs.

"And every one that heareth these sayings of mine, and doeth them not, shall be likened unto a foolish man, which built his house upon the sand:

And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it."

- Matthew 7:26-27.

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