LATENT DEFECTS OR HIDDEN DAMAGE IN REAL PROPERTY TRANSACTIONS

According to our civil litigation lawyer Toronto, when buying or selling a property, parties should be mindful of the defects that are and are not disclosed before entering into an agreement of purchase and sale. In certain instances, failing to disclose particular defects may lead to liability for breach of contract, fraud and/or negligent misrepresentation depending on the facts and circumstances of the case.

Patent vs. Latent Defects

Defects in a property may either be categorized as “patent” or “latent.”

On the one hand, patent defects are defects that can be discovered by conducting a reasonable inspection and making reasonable inquiries about the property. In general, the buyer bears the onus to inspect and discover patent defects on a property. A defect which might not be observable on a casual inspection may nonetheless be patent if it would have been discoverable upon a reasonable inspection by a qualified person. On the other hand, latent defects are those that are not discoverable by a buyer through a reasonable inspection.

Caveat Emptor: Buyer Beware

Depending on the terms of the agreement of purchase and sale, the doctrine of caveat emptor may be relied on by vendors as a defence against claims alleging defects in the property. The doctrine of caveat emptor, which translates to “buyer beware” from Latin, has been interpreted in the context of the sale of land as follows:

Absent fraud, mistake or misrepresentation, a purchaser takes existing property as he finds it, whether it be dilapidated, bug-infested or otherwise uninhabitable or deficient in expected amenities, unless he protects himself by contract terms.

[Source: Professor Laskin “Defects of Title and Quality: Cavear Emptor and the Vendor’s Duty of Disclosure” in Law Society of Upper Canada, Contracts for the sale of land (Toronto: De Boo, 1960)]

In other words, under the doctrine of caveat emptor, the buyer generally assumes the burden of any defects that come with the property.

As such, the onus is on the buyer to conduct a reasonable inspection of the property and make reasonable inquiries prior to entering an agreement of purchase and sale. When a buyer does not see readily apparent defects or does not understand the implications of what they see, the buyer still bears the obligation to make reasonable inquiries of someone who is capable and/or qualified to provide the necessary information and answers.

Vendor’s Duty to Disclose

The doctrine of caveat emptor is not without limits. Vendors have an obligation to disclose latent defects that render the property unfit for habitation or dangerous. Further, vendors cannot conceal or mislead the buyers about the defects they are aware of or be reckless as to whether or not they exist. More specifically, instances, where the doctrine of caveat emptor does not apply, include, but are not limited to, the following:

• where the vendor actively conceals a latent defect or an otherwise patent defect;
• where the vendor fraudulently misrepresents information;
• where the vendor knows of a latent defect rendering the house unfit for human habitation;
• where the vendor is reckless as to the truth or falsity of statements relating to the fitness of the house for habitation;
• where the vendor has breached his duty to disclose a latent defect which renders the premises dangerous;
• where the vendor breaches the agreement of purchase and sale; or,
• where the vendor breaches an implied warranty of habitability in the case of newly-constructed homes.

Disclosure Statements

Some agreements of purchase and sale may include a disclosure statement. Disclosure statements are not meant to warrant the state of the property, but rather to disclose to a prospective purchaser the vendor’s current and actual knowledge of the state of affairs of the property and any known concerns or defects. Information contained in the disclosure statement included into the agreement of purchase and sale may be considered a representation upon which a buyer can rely on.

What Happens When the Purchaser Fails to Mitigate their Damages

In the recent decision of Bolduc v. Legault, the Ontario Superior Court ruled the vendor was not liable for the damages suffered by the buyer as a result of latent defects. The Court provided additional commentary on the purchaser’s duty to mitigate their damages.

Around July 2014, the parties entered into an agreement of purchase and sale of property. A few months thereafter, a water leak occurred in the bathroom and the leak gradually caused failure of the mortar in some locations, weakened the cement blocks, and compromised the structural integrity of the foundation of the property. The buyer/plaintiff in this case sought over $400,000.00 in damages for breach of contract and negligent misrepresentation.

The Court determined the water infiltration and basement problems were indeed latent defects. The Court came to this conclusion by relying on photographs from the listing and the expertise of the buyer and real estate agent. The photographs accompanying the Kijiji listing of the property, showed a clean and well-maintained finished basement. Further, the buyer was an experienced mason and noted nothing untoward after his inspection of the property and the exterior of the foundation. Additionally, the real estate agent didn’t notice any settling of the foundation or any cracks in the interior finishes or window casings that might suggest a problem.

With regards to liability under breach of contract and/or negligent misrepresentation, the Court found that the vendor was not liable. The buyer failed to establish that the vendor was aware of the latent defects. The agreement of purchase and sale included an entire agreement clause confirming in writing that the agreement constitutes the entire agreement between the parties, thereby excluding any representations not contained in the agreement. Accordingly, the agreement of purchase and sale did not include any representation or warranty dealing with the state of the foundation, water leakage or past flooding of the property.

Although the Court determined that the vendor is not liable, the Court addressed the buyer’s estimated damages and the impact of the buyer’s failure to address the defects in a timely manner on hypothetical liability.

The buyer’s repair costs did not reflect the state of the property as it existed when the deficiency was first discovered around six years earlier. The Court accepted that repair costs may exceed $400,000.00 today. However, when the issues were first discovered, the buyer did not take reasonable steps to remedy them resulting in significant deterioration and more expensive remedial options. The Court determined that the repair costs, had they been undertaken when the issues were discovered, would be less than $100,000.00. As such, had the vendor been liable for the losses suffered by the buyer, the Court would have awarded to the buyer only about a quarter of the actual present-day costs of repairing the defects, that is around $104,000.00 in damages plus prejudgment interest.

The Bolduc v. Legault decision highlights the importance of home inspections, entire agreement clauses and remediating defects within a reasonable amount of time. Should you wish to receive a consultation on reviewing your agreement of purchase and sale or assistance with a litigation matter, please contact our office at 416-583-2377 or you may email us at admin@chandlitigation.com.

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