Caveat Emptor and Latent Defects: Ignorance is not always bliss.

By Darren Richards

A purchaser moved in to a beautiful home on closing day, unpacked and turned on the coffee maker. The power went out in the whole house. Another moved in and within days and found that a large section of the main floor wall was infested with termites. Of course, you can prevent termites pretty easily but they had already infested the home so the only step was to terminate them. Yet another moved in and found that the drywall in the basement was wet after a ‘typical’ rain fall the night before. After investigating a bit more (removing drywall, vapor barrier and insulation) it was discovered that the wall was recently repaired and painted and covered a gaping crack in the basement wall. Water was literally pouring in.

All these are nightmares for any home buyer. And many believe that these situations will never happen to them. What are the chances? I got a home inspection Lynchburg report after all! And, really, how much could it cost to rectify something like that anyway?

Well, it does happen; quite often, in fact.

And look closely at that home inspection report. ‘A typical inspection agreement and report make it clear that it is a ‘visual inspection of accessible areas’ and that ‘certain defects and problems which may be concealed behind walls or otherwise, are not expected to be discovered by the inspection’. A professional inspection helps with respect to the conditions of the siding or the shingles, but not termites and hidden cracks. This means that you will know the condition of the siding, for example, before buying the house so that you can start looking for things like stone veneer panels for exterior to replace them. However, you may not know about things like hidden cracks until it’s too late.

And with respect to damages: the water damage in the basement cost the new homeowner over $50,000 to correct. The electrical issue turned into a $123,000 problem (although, in that case, the circuit breaker wasn’t the only issue – lack of water for weeks at a time, faulty heating and other issues existed too).

Is there any recourse against the Seller when these ‘hidden’ issues are discovered after the closing? The answer isn’t necessarily simple. The general rule is that of Caveat Emptor or ‘buyer beware’.

Caveat emptor is a Latin term that essentially means “let the buyer beware.” This term, likened to “sold as seen”, means that the buyer assumes the risk that a product may fail to meet expectations or have defects. It is not to be confused with a caveat, which is a statutory injunction or procedure that stops dealings on a property. Click here to learn about caveat withdrawal and extending a caveat if this is the information you need instead.

There are two types of defects one can encounter or discover after buying a home: latent and patent defects.

Patent defects are the responsibility of the buyer to discover – they are defects that a ‘reasonable person’ using ‘reasonable diligence’ should discover. And under the common law principle of caveat emptor, the buyer is actually the one responsible for finding these. That is, the seller is generally not obligated to point them out or disclose them.

If, for example, your son broke a hole in the wall behind his bedroom door practicing some cool skateboard move, he said nothing to you about it, and you said nothing to the buyer about it, you’d likely be fine (although I’m not sure how the son would fare). The buyer would be expected to actually open that door and look at the wall. If it’s discoverable after reasonable diligence it would be a patent defect. The seller would not likely be held liable.

On the other hand, latent defects are not discoverable upon reasonable inspection – they are defects that are essentially hidden from a reasonable due diligence inspection. The courts generally require sellers to disclose any latent defect that they have actual knowledge of – if they don’t, they may be liable for damages.

A few cases have given some guidance on these matters. In the case of Biegler v Stacey (1995) (Alta Prov. Ct) the judge held that it was incumbent upon the [buyer] to prove that (1) the matter complained of was a latent defect (2) the [seller] actively concealed the defect and (3) the latent defect went to the fitness of the premises for habitation. She went on to define a latent defect as one that could not have been identified by a reasonable observation. As to fit for habitation, Alberta has followed Ontario’s lead and extended the historically limited application to ‘any loss of use, occupation or enjoyment of any meaningful portion of the premises or residence that results in the loss of the enjoyment of the residence as a whole’. As you can well imagine, that could cover a lot of defects.

Does the Seller need to ‘actively’ conceal or hide the issue to be caught by this obligation to disclose? Not necessarily. In an Alberta Queens Bench case (Palmer v Van Keulen (2005)) the court stated: ‘In a situation where a vendor actively conceals a latent defect, the rule of caveat emptor no longer applies and the purchaser is entitled to rescind the contract or seek damages . . . . .However, a claim for fraudulent misrepresentation does not require that an overt misrepresentation be made. The law is clear that silence and half-truths can amount to a fraudulent misrepresentation. . . In a residential conveyancing context, fraud can arise where there is an active concealment or silence about a known major latent defect.’

The B.C. Supreme Court weighed in and noted that while the law of vendor and purchaser has long relied on the principle of caveat emptor to distribute losses in real estate cases, the rule is not without exception. ‘Two major exceptions are in the case of fraud, and in cases where the vendor is aware of latent defects which he does not disclose. The law also supports the imposition of a duty to disclose latent defects on the vendor where he is not subjectively aware of those defects, but where he is reckless as to whether or not they exist‘ (emphasis added).

So be careful out there. If you’re a seller and know of a material defect, err on the side of disclosure. If you’re a buyer, complete your proper due diligence. And as always, if you have any questions about the contract, or your specific situation or facts, consult your lawyer.

Darren Richards is a partner with Richards Hunter Toogood. He focuses on both residential and commercial Real Estate and Corporate/Commercial Law serving both small and medium sized owner-managed business in the Edmonton and surrounding region. Mr. Richards also acts for major banking institutions and other lenders in relation to their commercial loan facilities. Reach him at: d.richards@rht-law.ca or www.rht-law.ca.

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