Barristers and Solicitors	German Spanish

   [Ed. note:  Addendum released November 14, 1986 appended to this judgment.]
 

Melvyn L. Solmon, and Mark L. Goodman, for the Plaintiff.  P.J. Jewell, Q.C. and G. Hodder, for the Defendants.

   R.E. HOLLAND J.:— This is an action by a purchaser, Della Caleb, of a private residence against the vendors, John Potts and Madeleine Potts, and also against the mortgagee of the property for rescission of the agreement of purchase and sale. Madeleine Potts at the time was a real estate agent for A.E. Lepage Real Estate Services Ltd., the listing agent, and the action is also against her for damages.

   It is alleged on behalf of Mrs. Caleb that a representation was made to her husband by Mr. Potts in her presence and in the presence of Mrs. Potts that was negligently or fraudulently made, such representation being that what appeared to be an extra fuel oil tank in the basement of the house was in fact a water storage tank required because of the large number of bathrooms in the house. In fact, the tank was required to vent methane gas from the well water.

   In the alternative it is alleged that Mrs. Potts had a fiduciary duty to Mrs. Caleb which required her to advise Mrs. Caleb that the well water contained methane gas or was negligent in failing to so advise Mrs. Caleb.

FACTS.

   The property is known as 128 Brule Trial and is in a subdivision known as The Carrying Place in the Township of King some distance north of Toronto. The lots in the subdivision are large and the lot at 128 Brule Trail is about five acres. Water for the property is drawn from a well.

   The water in the area has been described as "problem" water. It is hard water containing a number of minerals. In addition, the water from the well for this property contains methane gas. Methane gas results from the decomposition of organic material and is soluble in water. It has no odour or taste and it is lighter than air. The gas will tend to go out of the solution particularly if the temperature of the water rises or the water is agitated. A five to fifteen per cent solution of methane gas in air is explosive. Tests taken in 1984 indicated that the methane gas was 1,400 to 1,500 times below the minimum explosive level.

   This case depends to a great extent on findings of credibility and it is therefore necessary to review the evidence in some detail.

   Mrs. Caleb is married to Paul Caleb and they have one child, Christine, who is now 15 years old. In July 1982, she saw an advertisement for the house on Brule Trail. She telephoned the listing sales person - Mrs. Potts. Mrs. Caleb then visited the property with her daughter. She looked around the house, including the basement. She said that she observed two tanks that looked like oil tanks and was told by Mrs. Potts that one of them was a water tank. She said she was given a copy of the listing and an information sheet.

   Mrs. Caleb arranged a second visit during which she and her husband and daughter all attended. It was on a Sunday and there was a party of relatives at the house. Mrs. Caleb showed her husband around the house. Mrs. Caleb said that there also was a third visit when she was accompanied by her husband and daughter. During the tour of the house the three Calebs, according to Mrs. Caleb, went to the basement accompanied by Mr. and Mrs. Potts. She testified that her husband asked Mr. Potts why there were two tanks in the basement that looked like oil tanks and that he was told that with three bathrooms and with watering outside the house an extra water tank was required. Mrs. Potts did not contradict or correct her husband.

   Mrs. Caleb said that there was then a fourth visit when agreement was reached to buy the house. There were further discussions concerning finances and the agreement of purchase and sale was then prepared by a solicitor who acted for both parties. The agreement contained a warranty that the water was potable. Although it was claimed initially in the action that the water was not potable this is no longer an issue.

   The Calebs moved into the house on June 1st, 1983. Mrs. Caleb said she noticed that the water was yellow to brown and had both an odour and a metallic taste. At her request a serviceman from Culligan, a water conditioning company, made a service call to check the equipment on June 30th, 1983. She said that it was during this visit that she first learned from the serviceman, Tom Jones, that the water contained methane gas. She advised her husband and he in turn asked Mr. Jones to confirm the problems with the water and describe the treatment system. Mr. Jones wrote a letter dated July 19th, 1983 to Mr. Caleb reading, in part, as follows:
 

	Owing to the nature of the well water in the area above and, in particular, reference to the water at 128 Brule Trial, it is necessary to process the water through specialized equipment in order to attain the degree of excellence required in the home.
	The well water comes under the heading of "problem water" in its raw state and contains such things as:

Methane Gas  Excessive Iron  Excessive Hardness  Off-tastes, etc.

     In processing such water to bring it up to acceptable standards, the equipment in your home consists of:-
 

a)		degassing tank vented to the atmosphere.
b)		chlorination system.
c)		automatic carbon filter to remove chlorine.
d)		automatic water softener.

Such equipment requires the use of liquid concentrated chlorine and rock salt on a regular basis.

   The Calebs consulted a solicitor, Mr. Dorsey, on August 2nd. This action was commenced in October.

   The water was tested further and Mrs. Caleb received a letter dated December 16th, 1983, from Mr. Hodgins, a ground water technologist with the Ministry of the Environment reading, in part, as follows:
 

Attached please find copies of the lab results on the water samples collected from your property on November 4, 1983. As discussed earlier with you by telephone, the well does contain methane gas, but according to lab the concentrations appear to be low enough so as not to really poise any serious danger.

   Further water samples were taken in March, 1984, and Mr. Hodgins wrote another letter to Mrs. Caleb dated April 5th, reading, in part, as follows:
 

	With regard to the methane gas, explosive concentrations are achieved between 3% and 10% by volume in air. Methane gas can be ignited by a spark but as long as there is some ventilation as with the vent pipe from the converted oil tank treatment unit to the atmosphere, the risk of an explosion is reduced. To achieve the minimum explosive concentration of 3%, the methane concentration must be 30,000 parts per million or roughly 1,000 times the concentrations reported at the two sample locations. The concentrations in the converted oil tank itself may be somewhat greater but provided the vent pipe on the oil tank is properly vented to the atmosphere, it is unlikely the concentration would reach the hazardous limit.
	The concentration of methane gas in water varies inversely with the temperature of the water. To improve the effectiveness of the methane treatment unit on the system agitation of the tank water, aeration, or possibly even slightly elevating the temperature of the water itself should drive off additional gas at the tank stage. Agitation of the tank contents could be achieved by allowing the water to enter the tank from the top. The agitation on impact should release some gas but employment of other methods of improving the efficiency of the unit would best be discussed with the installer of the treatment unit.

   Paul Caleb confirmed that the first time he saw the house was after his wife had gone to see it and that this was on the day that a party was in progress. He testified that his daughter did not accompany them on this visit and in this his evidence is in conflict with that of his wife. He said that he and his wife walked through the house and then left.

   Mr. Caleb said that he, his wife and daughter came to look at the house again and on this occasion the three Calebs and the two Potts went into the basement. Mr. Caleb said that this time he asked Mr. Potts why there were two red oil tanks in the basement. He said that Mr. Potts told him that the second tank was a water tank because there were three bathrooms. Mrs. Potts was there but said nothing. Mr. Caleb said that he was shocked when he later learned that the tank was used to vent methane gas, particularly since he had lit two matches to try to look into the tank and could have blown himself up.

   Christine Caleb said that she remembered her parents going downstairs with Mr. Potts. She accompanied them but does not remember what, if anything, was said about the water system.

   The evidence of the Calebs is buttressed to some extent by the evidence of Harvey Dorsey, the solicitor they consulted in August of 1983. Mr. Dorsey testified, with the assistance of notes made at the time, that he was told by Mr. Caleb that there was methane gas in the ground which required venting of the water but that Mr. Caleb said he had been told in the presence of Mrs. Potts, by Mr. Potts, that the larger tank was needed because of the three bathrooms.

   Mr. Potts was formerly president and chairman of the board of a marine insurer. He is now an insurance agent and semi-retired. Mr. Potts and his wife purchased the lot from the developer and the developer built the house for them on the lot. The water was drawn from a well and the purpose of the tanks in the basement was explained to him by Mr. Jones of Culligan. He knew that one of the two tanks was constructed for the purpose of venting gas. He also knew at the time the Calebs were viewing the house that the gas to be vented was methane.

   Mr. Potts and his wife had no problem with the water while they were living there. He said that he first met the Calebs the day of the family party. He thought that their daughter was with them. He did not show them around. He said that the next time they met was a negotiating night when they talked prices and financing. He said they did not go to the basement. He testified that as the Calebs left he told them that if they wanted to look at the systems in the house he would be glad to show the systems to to them. Other than a meeting in Mr. Caleb's house concerning assumption of a mortgage, he said that he did not meet Paul Caleb again, although he did meet Mrs. Caleb when the Potts gave up possession of the property. At that time he showed her the basement and explained the roughed-in plumbing. He said that he started to explain the banks but Mrs. Caleb became emotionally upset and explained that she would have to put the house on the market for financial reasons involving her husband and Mr. Potts broke off the tour. He denied making any false representation to the Calebs concerning the venting tank. He agreed that it would have been appropriate to mention the venting of methane gas if he had been given a chance to do so.

   Madeleine Potts had been a real estate agent for about eight years out of the last eighteen. She started working in the King area after Christmas 1981. Most of her sales were in King City. She said that she had never encountered methane gas prior to the sale to Mrs. Caleb and was not aware that there was methane in the water in her house. She is not mechanically minded and left such things to her husband. She said that she knew that there was a water filtration system in the basement and that she got good water, but did not make any inquiries about how the system worked or what it was for.

   Mrs. Potts said that on Mrs. Caleb's first visit, she showed her the basement and told her there was a water filtration system - which was quite obvious - and said that her husband could explain the system to Mrs. Caleb's husband if they were interested in knowing more about it. Mr. and Mrs. Caleb visited again the following weekend but did not go downstairs with the Potts. She said that her husband did not at any time go to the basement with the Calebs in her presence. She agrees that it is the duty of a sales person in real estate to make full and accurate disclosure of all pertinent facts. Knowing now of the methane gas she said that she did not think it was important because it was in such low concentration. She thought that the water treatment system was a positive feature.

   John Scolthorne was called as a defence witness. He is the manager for Ontario of engineering and technical services for Royal Insurance Company. He was a most impressive witness and was able, in my opinion, to accurately recall events in 1982, assisted by notes made on a calendar at that time. He and his wife were interested in purchasing the property from Mr. and Mrs. Potts at the time that the Calebs were negotiating the purchase. He distinctly remembered when viewing the basement with Mr. Potts asking Mr. Potts the purpose of the extra tank. He said that he was told by Mr. Potts that there was methane gas in the water and that the tank was used to vent the gas.

   It is difficult to make a finding of credibility between Mr. and Mrs. Caleb on the one hand and Mr. and Mrs. Potts on the other. On the surface at least they all appeared to be credible witnesses. I accept the evidence of Mr. Scolthorne without reservation and based on his evidence I have come to the conclusion that had Mr. Potts been asked by Mr. Caleb the purpose of the second tank he would have answered the question as he answered the question to Mr. Scolthorne. I conclude that I should accept the evidence of Mr. Potts that he did not go to the basement with Mr. Caleb and that he was not asked the purpose of the second tank by Mr. Caleb. I also accept the evidence of Mrs. Potts that she did not know that the second tank, which she knew contained water, was used to vent methane gas from the water. So far as she knew it was all part of a filtration system which in the end produced good potable water.

   I also accept that Mr. and Mrs. Caleb did not know at the time they purchased the property that the water contained methane gas and that the second tank that looked like an oil tank was used for the purpose of venting the gas from the water. I believe the evidence of Mr. Caleb that he lit matches to attempt to look into the tank and that he and his wife were shocked and surprised when they found out the purpose of the second tank. I find as a fact, however, that they were mistaken when they said that they had been incorrectly advised of the purpose of the tank by Mr. Potts prior to entering into the agreement of purchase and sale. I also find that Christine Caleb was mistaken when she said that she remembered her father being in the basement with Mr. Potts.

   In summary, Mr. Potts knew, at the time the agreement was entered into, that the tank in question was used to vent methane gas. Mrs. Potts did not know. Mr. and Mrs. Caleb were not advised prior to entering into the agreement of purchase and sale that the water contained methane gas and that the tank was used to vent the gas. No representation was made to Mr. and Mrs. Caleb prior to closing concerning the water system other than that the tanks in the basement represented a water filtration system.

WAS THE PRESENCE OF METHANE GAS IN THE WATER MATERIAL?

   Mrs. Caleb testified that had she known that there was methane gas in the well water she would not have purchased the property on the grounds that it would not have been a good investment. In spite of the methane in the water system Mr. and Mrs. Caleb and their daughter have remained in possession of the property and have done nothing to improve the venting system, such as moving the system to the well outside of the house.

   Mr. Hodgins from the Ministry of the Environment advised Mrs. Caleb not to use the wood burning stove in the basement because of the potential hazard should gas escape. He also advised against the partitioning of the basement to prevent the concentration of gas should gas escape.

   David Maher offered to purchase the property from the Calebs on June 12th, 1986, at a price of $239,000.00. He had been advised by the real estate agent that the well contained methane gas and he said that he took this fact into consideration in making his offer.

   I find that the fact that there was methane gas in the water was a material factor that would tend to influence a purchaser to offer a lower price for the property; however, it was not so material that it rendered the property or residence unsafe.

THE CLAIM AGAINST MR. AND MRS. POTTS AS VENDORS.

   Defects of quality may be either patent or latent. Patent defects are ones which are discoverable by inspection and ordinary vigilance on the part of the purchaser. Latent defects, on the other hand, are ones that could not have been discovered by reasonable examination. The existence of methane gas in the well water was a latent defect.

   Mr. and Mrs. Potts failed to disclose this defect. He knew about it but she did not; however, there was no active concealment on their part. Mr. Potts was prepared to and indeed offered to explain the systems in the house to Mr. Caleb. The question remains, were they, as vendors, under an active duty to bring this defect to the attention of Mr. and Mrs. Caleb? Generally speaking, there is no such obligation. See Halsbury's Laws of England, 4th. ed., Vol. 42, paragraph 54:
 

Prima facie the rule "caveat emptor" applies also to latent defects of quality or other matters (not being defects of title) which affect the value of the property sold, and the vendor, even if he is aware of any such matters, is under no general obligation to disclose them.

   This is subject to certain exceptions as shown in McGrath v. MacLean (1979), 22 O.R. (2d) 784, where Mr. Justice Dubin, for the majority, said this at page 792:
 

	337 I am prepared to assume that, in an appropriate case, a vendor may be liable to a purchaser with respect to premises which are not new if he knows of a latent defect which renders the premises unfit for habitation. But, ... in such a case it is incumbent upon the purchaser to establish that the latent defect was known to the vendor, or that the circumstances were such that it could be said that the vendor was guilty of concealment or a reckless disregard of the truth or falsity of any representations made by him ...
	Similarly, I am prepared to assume that there is a duty on the vendor to disclose a latent defect which renders the premises dangerous in themselves, or that the circumstances are such as to disclose the likelihood of such danger, e.g., the premises being sold being subject to radioactivity.

   It does not appear to me that the presence of methane gas in the well water, in the concentrations disclosed by the evidence, rendered the house dangerous or uninhabitable. This case is unlike the situation discussed in Tuttahs and Tuttahs v. Maciak and Maciak (1980), 6 Man. R. (2d) 52 where the vendors sold a restaurant without disclosing that the water usually smelled of gasoline. Gasoline leaked into the well water from an underground storage tank, rendering the water unfit for human consumption. Mr. Justice Deniset held that the vendors in that case were under a duty to disclose the defect.

   In the present case the presence of methane gas in the well water was not nearly as serious as the presence of gasoline in the water to be used in the restaurant. In Tuttahs the water was not good for cooking or drinking and what was being sold was a restaurant business.

   I conclude that there was no duty in this case on the vendors, as vendors, to volunteer the information and the action as against Mr. Potts therefore must be dismissed.

THE CLAIM AGAINST MRS. POTTS AS REAL ESTATE AGENT FOR THE VENDORS.

   It was suggested by counsel for Mrs. Caleb that Mrs. Potts was wearing three hats; that is, she was the vendor, the real estate agent for the vendor and the real estate agent for the purchaser. In fact Mrs. Potts was wearing two hats, that of a vendor and that of the real estate agent for the vendors. Mrs. Caleb was not represented by her own real estate agent but it can hardly be said that Mrs. Potts was also the agent for the purchaser. She did, however, have a general duty to exercise care and skill when dealing with prospective purchasers under the doctrine in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465, [1963] 2 All E.R. 575.

   Did Mrs. Potts have a duty as an agent to propsective purchasers to investigate the systems in the house, thereby ascertaining the presence of methane gas in the water, and then disclose this information to a prospective purchaser, in this case, Mrs. Caleb?

   In Sedgemore et al. v. Block Bros. Realty Ltd. et al. (1985), 39 R.P.R. 38, Mr. Justice Lysyk of the British Columbia Supreme Court quoted extracts from Foster, Real Estate Agency Law (1984), with approval. One such extract reads as follows:
 

A broker must at least check the completeness and accuracy, both of all information which it is usual or customary for brokers to verify, and of all other information as to the completeness and accuracy of which he is in doubt. However, authority exists to support the contention that the obligation of, at least, a listing broker is somewhat broader in that he must ascertain and verify all pertinent facts concerning the property placed in his hands for disposal.

   All selling agents are interested in selling property because of the commission involved. However, Mrs. Potts had more than the usual conflict of duty and interest. Her professional duties in exercising reasonable care and skill when showing the property to potential purchasers were in conflict with her personal interest, as a vendor, in selling the property in question. It was her duty as the selling agent to thoroughly investigate her own property and if there was anything that she did not understand to make inquiries of her husband. If she had questioned her husband she would have found out about the methane gas in the well water - a material or pertinent fact concerning the property - which she should have disclosed to a potential purchaser. She was negligent in failing to make the inquiries and in failing to disclose the information such inquiries would have revealed. In short, Mrs. Potts failed to alert the Calebs to information she should have been aware of, which would have enabled the Calebs to make their own further inquiries.

   This negligence is not in the same category as a breach of fiduciary duty giving rise to a right of rescission. It will, however, support a claim for damages.

THE EFFECT, IF ANY, OF THE EXCLUSIONARY CLAUSE IN THE AGREEMENT OF PURCHASE AND SALE.

   The agreement of purchase and sale contained the following clause:
 

This Agreement shall constitute the entire agreement between Purchaser and Vendor and there is no representation, warranty, collateral agreement or condition affecting this Agreement or the property or supported hereby other than as expressed herein in writing.

   An amendment was permitted at trial, on consent, to plead this clause as a defence. Mrs. Potts is described in the agreement of purchase and sale as a vendor. However, the clause can give her no protection as an agent. In any event, the liability in this case is not against the vendors for a false representation, but rather against Mrs. Potts for negligence in failing to investigate and advise a potential purchaser of a material fact.

THE POSITION OF THE ASSIGNEES OF THE FIRST MORTGAGE.

   Under the terms of the agreement of purchase and sale the Potts took back a first mortgage. This mortgage was assigned to the defendant, the Toronto-Dominion Bank, and was further assigned to the defendant Miles Obradovich.

   The assignees of the mortgage were made parties to bind them and on the basis that the assignees took subject to the equities between the Potts and Mrs. Caleb. The solicitor for the Potts also acted as solicitor for the assignees. Since the claim for rescission fails the matter is not of great importance. In so far as the covenant to pay is concerned the asignees took the mortgage subject to the equities existing between Mrs. Potts and Mrs. Caleb: see Patterson v. McLean (1891), 21 O.R. 221.

CONCLUSION.

   In the result, the claim for damages against Mrs. Potts, qua real estate agent, must be allowed.

   There was no evidence at trial to indicate the difference in value of this residence as it was and without methane in the well water. The matter is therefore referred to the Master at Toronto to assess the damages and deal with the costs of the reference. The plaintiff is entitled to the costs of the action after assessment against Madeleine Potts and the action will be dismissed without costs as against the defendants John A. Potts, Miles Obradovich and the Toronto-Dominion Bank.

R.E. HOLLAND J.

   R.E. HOLLAND J.:— Since delivery of the reasons for judgment I have been advised of offers to settle made on behalf of the plaintiff and on behalf of the defendants John A. Potts and Madeline Potts.  In the circumstances, the matter will be referred to the Master who will be required to report to me concerning his findings.  The costs of the action and of the reference will be reserved until this report has been received by me, at which time submissions may be made concerning a possible variation in my present order concerning costs.

R.E. HOLLAND J.