Buyer Beware!

Date Posted: 19/09/16

You’ve just purchased your dream home. Upon moving into the home, you discover that there is a large watermark on one of the basement walls. You couldn’t view the watermark during your previous visits to the property as the Sellers’ contents were blocking the area. You further discover that the watermark is being caused by a leak, and that mould may have developed behind the basement walls. The excitement of living in your dream home quickly turns into a nightmare. Unfortunately, situations like this are all too common.

Who is responsible for remedying such defects? In real estate transactions, the doctrine of caveat emptor, or “buyer beware,” applies. In the absence of fraud, mistake, misrepresentation, or a contractual term which protects the Purchaser from such defect, or a duty of the Seller to disclose (such as a dangerous condition that renders the home unfit for habitation), the Purchaser will be responsible for any previously undisclosed defects.

Undisclosed defects can be broken down into two categories: patent defects and latent defects. A patent defect is an obvious flaw that would be ordinarily discoverable or easy to observe on an inspection. If the Purchaser is able to observe the defect, they are also able to raise concerns or include contractual terms to account for the defect. A Seller is not liable to a Purchaser for a patent defect.

A latent defect is one that is not known to either the Seller or the Purchaser at the time of sale. A Seller cannot be liable for a defect that they had no knowledge of. However, if the Seller did have knowledge of the defect, and deliberately failed to disclose, misrepresented, or tried to conceal it, then the Seller may be liable for such defect. The key consideration in determining liability is the knowledge of both the Seller and the Purchaser.

For example, in our leaky basement scenario, if the Purchaser could easily observe the watermark, the Seller cannot be held liable for it. Furthermore, there is no liability if both Seller and Purchaser had no knowledge of the defect. If, however, the Seller had knowledge of the watermark and actively tried to conceal it, the Seller may be liable.

A Purchaser can best be protected from latent and patent defects prior to closing by: 

1) Having the Seller complete a Property Information Statement

2) Asking the Seller relevant questions about the history and quality of the property

3) Ensuring that the Agreement of Purchase and Sale is conditional upon an inspection of the property

4) Completing a professional inspection of the property, including moving furniture which may otherwise cover-up potential problems

5) Include terms in the Agreement of Purchase and Sale to protect against certain concerns such as water seepage

In hot housing markets such as Toronto, it can be tempting for a purchaser to submit an offer without an inspection condition. Before submitting such an offer, speak to your realtor and lawyer to better understand the risks in doing so, as the doctrine of caveat emptor will apply.

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