Nelligan O’Brien Payne gratefully acknowledges the contribution of Adrienne Fanjoy, Student-at-Law in writing this blog post.
“Buyer beware” is a term more formally known as caveat emptor. The principle isn’t unique to real estate law, but when it comes to investing in something as significant as a home, it is particularly important for buyers to take notice of.
Patent and latent defects
In relation to caveat emptor, there are two types of defects that buyers need to be wary of: patent defects and latent defects.
Picture the following situation to gain a better understanding of each:
You’re a Property Brothers fan and have watched every episode of Holmes on Homes. You’re not afraid of a house that needs a little love. In fact, you prefer them, but you want to go into your home purchase with all the facts.
At a showing, you notice the house has an unfinished wall, a broken banister, and a few light fixtures that need repairing.
These characteristics are not just charming flaws of your future home – they are known as patent defects. Patent defects are issues with the property that a reasonable buyer should notice. If a buyer fails to notice such imperfections upon examination of the home, and then is later unsatisfied, the principle of caveat emptor will apply. The buyer will be unable to pursue a successful claim against the seller because they should have noticed the issues before (unless the Agreement of Purchase and Sale states otherwise). Sellers are not under an obligation to specifically point out patent defects. As a buyer, whether you view these defects as endearing or troublesome, you are responsible for identifying them.
Upon moving into the home, problems with mold begin to manifest. You eventually realize this has been a problem in the house for years. If the sellers knew about the mold and failed to tell you, they cannot rely on the principle of caveat emptor to shield them from liability. Mold is an example of a latent defect; that is, a problem with a property that is not reasonably discoverable upon a thorough inspection by a potential buyer. Another good example of a latent defect could be concealing a known foundational issue.
If a seller fails to disclose a latent or hidden defect they are aware of, they could be liable to the buyer after closing.
What have the courts said?
Earlier this year in Beatty v Wei, the Ontario Court of Appeal clarified that sellers will only be liable for major latent defects that were concealed from the purchaser. In Beatty, the parties entered into an Agreement of Purchase and Sale for a residential property that contained an Illegal Substances Clause. The clause stated that “to the best of the Seller’s knowledge and belief, the use of the property … had never been used for the growth or manufacture of illegal substances”. A month after the execution of the Agreement, the buyer discovered that the house had in fact been used for a marijuana grow-op.
The Court of Appeal ruled in favour of the sellers, reversing a lower court’s judgement that had favoured the buyers. The Court of Appeal found that since the sellers had not concealed material information about the condition from the purchaser, they shouldn’t be held liable. The seller’s representation that the house had been free of criminal activity was limited to their knowledge and belief at the time they executed the Agreement, and therefore the fact that the buyer later found out about the history did not give them the authority to withdraw from the Agreement.
The takeaway from this case for buyers is to make sure you’ve thoroughly researched and inspected the house for defects before entering an Agreement.
Importance of disclosure
While this judgement can provide some peace of mind to sellers, it should not be understood as diminishing their responsibilities of disclosure.
Openness about a home’s good qualities and bad qualities is the most effective way for a seller to protect themselves from litigation. Specifically disclosing defects to prospective buyers may avoid the potential for both pre- and post-closing issues.
What can buyers do?
As a buyer, there are many effective measures to ensure that you know everything about your home prior to entering into an agreement, including investing in a home inspection.
If you notice patent defects, you may also negotiate the terms of your Agreement to reflect an appropriate resolution; for example, a price reduction or a provision in the Agreement whereby the Sellers are obligated to repair/rectify the issues on or prior to Closing.
Whichever side you’re on, think of caveat emptor (or buyer beware) as less of a warning and more of guide that will help you make informed decisions in your home-buying.
For more information about purchasing or selling property, contact our Real Estate and Development Group.