Latent Defects in Real Property Transactions

Sabrina Saltmarsh, B.A. (Hons), J.D.Agents and Brokers, Broker and Agent Claims, Civil Litigation, Commercial, Condo Litigation, Contract Disputes, Cottage Litigation, Cottage Purchase and Sale, Misrepresentation, Professional Liability, Real Estate Agent and Broker, Real Estate Litigation, Recreational Property, Recreational Property Litigation0 Comments

Latent defects are defects to a property that are not generally discoverable by a prospective purchaser on a reasonable inspection and ordinary vigilance. This can include issues such as, faulty electrical wiring hiding behind the walls or a well-hidden termite or mould problem. The problem latent defects can pose for a prospective real estate purchaser is that no amount of vigilance on a visual inspection can uncover such a defect, even one conducted with a home inspector (who’s inspections are typically also simply visual in nature). Thus a latent defect will often only be uncovered by a purchaser after the closing of the sale, and possession of the property has already been taken. If the latent defect was also unknown to the seller, no liability can attach to the seller upon the sale of the property. If rectifying a latent defect results in significant expense to the purchaser, a purchaser may have a claim against the seller if the latent defect was, or ought to have been, known to the seller.

A heated real estate market might tempt owners of problem or dilapidated homes to offload properties that have defects. The principle “buyer beware” places a fairly high onus on a purchaser to satisfy themselves as to the condition of the property.[1] This principle generally means that a seller has no obligation to disclose any defects to a property that can be discovered by a reasonable inspection and ordinary vigilance on the part of a buyer – referred to in law as patent defects. Assessing whether a defect is patent or latent in law is not always clear and an assessment of all of the facts is important.

Based on consumer protection interests the courts tend to carve out exceptions to this general principle of buyer beware. By example, although a seller has no obligation to disclose a patent defect, the seller also cannot attempt to hide or conceal such a defect, this is referred to in law as fraudulent concealment.

Most of the exceptions to the general principle of buyer beware relate to latent defects and include:

  1. Fraudulent misrepresentation;
  2. Knowledge of a latent defect which renders the home uninhabitable;
  3. Recklessness as to the truth or falsity of statements relating to fitness of the property for habitation; or
  4. Breach of a duty to disclose knowledge of a defect.

It falls on the purchaser to prove the existence of a latent defect.Usually damages to the purchaser will follow if the latent defect is an objectively verifiable physical defect affecting habitability of the property, and not a mere stigmatization. Further a purchaser will not be able to recover money spent to improve the property in the process. In the case where a purchaser has been induced to enter  into a purchase and sale agreement by deception, the purchaser  may be able to rescind (set aside) the putative contract, however important steps usually need to be taken promptly to preserve this right and this right can be foreclosed if certain steps have already been taken with respect to the property.

In order to be successful in a claim against a seller for a latent defect a purchaser must establish:

  1. That the seller (or in some cases a sellers real estate agent/broker) made a representation of a fact to the purchaser (or the purchasers agent/broker);
  2. That the representation was in fact false;
  3. That the seller (agent) made the false representation knowingly or recklessly not knowing whether it was true or false;
  4. The seller (agent) intended the purchaser to act on the representation; and
  5. The purchaser acted on the false representation, entering into the contract in reliance on it, and suffered losses as a result.

A seller who fails to disclose their knowledge regarding a latent defect on the inquiry of a purchaser risks exposure to a claim by the purchaser if the defect is uncovered after the sale.

Identifying whether a defect is patent or latent, and whether either party involved in the transaction is liable to deal with the defect is heavily dependent on the particular facts.  Whether you are a purchaser, seller, a property inspector, or a real estate agent/broker involved in a latent defect dispute, it is important to obtain legal advice from a qualified lawyer. There may be duties owed to either the seller, the purchaser, or both by any real estate agents/brokers involved in the transaction which also need to be considered when dealing with a potential misrepresentation issue in a real estate transaction.

[1] This principle is often judicially cited as referred to by the late honourable Justice Bora Laskin (as he then was) at the 1960 Law Society Special Lectures: “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.” (Laskin, Bora, Defects of Title and Quality: Caveat Emptor and the Vendor s Duty of Disclosure in Law Society of Upper Canada Special Lectures: Contracts for the Sale of Land 389 at 403.)

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About the Author
Sabrina Saltmarsh, B.A. (Hons), J.D.

Sabrina Saltmarsh, B.A. (Hons), J.D.

Practitioner in a broad range of business and civil litigation matters including commercial, real estate and condo disputes. Experienced at all levels of Ontario Courts. Bio | Contact

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