When a Dream Home Turns into a Nightmare: Who Pays?
Purchasing a property can be an exciting – albeit overwhelming – experience for any homebuyer. Thoughts about what to renovate and how to decorate are often at the forefront, but what happens after a buyer moves in and discovers an issue with the property? Perhaps there is mold in the walls or there are large cracks in the foundation. Who is responsible for the cost of repairing these issues? The answer to that question lies in the law of latent defect.
Caveat Emptor: Buyer Beware
Most people have at some point heard the phrase ‘caveat emptor’ or ‘buyer beware’. In the context of real estate transactions, this means that a buyer takes a property as they find it. It also means that a seller cannot be held responsible for issues that are discovered after the fact. This is the guiding principal when it comes to physical defects in property.
There are, however, exceptions to that general rule. For instance, under the law of latent defect, a seller can be held responsible for a latent physical defect that is discovered after closing. For greater clarity, a latent defect is a physical defect that cannot be easily discovered through normal observation. It is the opposite of a patent defect, which is one that is obvious or visible on an ordinary inspection.
The Legal Basis for a Claim in Latent Defect
In order for a seller to be responsible for the costs associated with a latent defect, the buyer must demonstrate that each of following criteria are present:
- The defect is a latent defect that renders the property “unfit for habitation”;
- The seller had knowledge of the defect; and,
- The seller did not disclose the defect, concealed the defect, or otherwise misrepresented the nature of the defect.
Depending on the nature of a seller’s conduct, their failure to disclose a latent physical defect can be addressed through either negligent or fraudulent misrepresentation. The rationale is that the buyer relied on the seller’s representations or silence, in making the decision to purchase the property. Had the buyer been made aware of the defect at the time that they agreed to purchase the property, the buyer may not have followed through with the transaction or may have asked for a reduction in the purchase price.
Returning to the three criteria, the first requires that the defect be latent and render the property unfit for habitation. As noted above, buyers may only recover against a seller where the defect in question is latent. In circumstances where the defect is a patent defect that is capable of being discovered through ordinary diligence, the principal of caveat emptor will apply and the buyer will not be able to recover the cost of repair from the seller. It is, therefore, important for buyers to carefully inspect a property for any obvious signs of a defect, prior to executing an agreement of purchase and sale.
In addition to being “latent”, the defect must also be one that renders the premises unfit for habitation. This requirement is fairly broad and is met where the defect interferes with the buyer’s enjoyment of any part of the property, or the property as a whole. Whether this is the case will depend on the type and severity of the defect.
A further requirement is that the seller must be proven to have knowledge of the defect. This can be difficult to establish. Sometimes the buyer can provide evidence that the seller concealed the defect; otherwise, it may be necessary to present circumstantial evidence showing, for instance, that the seller previously completed renovations in the area of the defect. If a seller cannot be shown to have knowledge of the problem, they cannot be held responsible for failing to disclose it. It is the buyer’s onus to prove that the seller was aware.
The final requirement speaks to the seller not having disclosed the defect, or having misrepresented the presence or nature of the defect. This requirement is fairly straightforward. In most cases, the seller will simply have failed to disclose the defect in question. In other cases, the seller may have completed a “Seller Property Information Sheet” where the seller stated that there was no such defect, or will have made false statements to the buyer (sometimes through their realtor) in response to questions related to the defect.
Where a buyer can prove each of these three requirements, they will generally be entitled to recover the cost of repairing the defect from the seller.
One important consideration in these types of matters is the role and effect of a home inspection. In the current market, agreements for the purchase and sale of a home often include a condition that the buyer be allowed to hire a third party to inspect the property. Where buyers do retain a home inspector and a latent defect is later discovered, sellers will often point to the inspection as a way to avoid liability. Typically, the seller will argue that they cannot be liable for their representations, because the buyer relied on the information in the inspection report instead of the seller’s statements or silence.
Whether the seller is successful with such an argument will depend on the circumstances. If the inspection report draws attention to the defect or identifies issues related to the defect, the buyer will generally be considered to have been aware of the issue and the seller will not be held responsible. Similarly, the seller can avoid liability if the defect should have been discovered by the inspector, but was not. In that case, the buyer may be able to make a claim against the inspector. On the other hand, if the defect could not have been discovered by the inspector and/or was beyond the scope of the inspection, the buyer will generally still be able to recover against the seller.
Best Practices When Buying or Selling a Home
Given that proving a claim in latent defect can be an uphill battle, buyers should be observant and vigilant when purchasing a property. In that respect, it is advisable to (among other things) do the following:
- Check the utilities by operating light switches, taps, toilets, etc.;
- Check whether any appliances (included in the purchase) are operational;
- Look behind furniture and other objects that may be covering wall/floor space;
- Take a close look around all areas of the property; and,
- Ask the seller and/or the seller’s realtor specific questions about the state of the property, particularly if you observe something that may be an issue.
Sellers should always be truthful about the state of their property and should do their best to draw the buyer’s attention to any latent defects that they are aware of. Although that may put some buyers off, it will save the seller the hassle and expense of a lawsuit down the road.
Please note that this is meant to be a general overview of the law of latent defect and is not intended to constitute legal advice about any specific defect. If you have questions or concerns about a defect at your property, you should contact a lawyer or paralegal in order to further discuss your options.