Do I Have to Disclose This? The Duty to Disclose and Caveat Emptor in Real Estate Transactions
Read time: 3-4 minutes
In real estate transactions, when must the vendor disclose defects with the property? Or can a vendor rely on the doctrine of caveat emptor or “buyer beware?” And what happens if the vendor doesn’t know the defect even exists?
The law in Canada on property defects sets out two categories: patent defects and latent defects. The type of defect will determine what disclosure, if any, a vendor must make to a potential property buyer.
A patent defect is one that can be detected by a potential home buyer or their home inspector by reasonable observation and by making reasonable inquiries. For example, a stained carpet or unlevel kitchen counters would be considered patent defects.
A vendor has no duty to disclose a patent defect to a potential buyer – it is a case of caveat emptor or “buyer beware” – the buyer must do their own inspections and due diligence prior to closing the transaction. Even if the vendor is aware of an issue such as unlevel kitchen counters, it is reasonable that this would be noted by either the potential buyer or home inspector. If a buyer does not discover a patent defect until after they purchase the home, they still have no cause of action against the vendor for non-disclosure of the defect because they ought to have known it existed.
However, if it is discovered that the vendor actively concealed a patent defect, the general rule of caveat emptor may not apply.
Defects that are not reasonably detectable by either a potential buyer or building inspector and that would render the property dangerous or uninhabitable are considered latent defects.
“Uninhabitable” does not necessarily mean that the whole house must be vacated. The courts will consider if the latent defect has caused any loss of use, occupation and enjoyment of any meaningful or material portion of the property. Examples of latent defects include faulty renovations to the electrical or plumbing system, or a bug infestation.
If a vendor has no knowledge of the defect, then there is no liability for concealment or non-disclosure. If a vendor is aware of a latent defect, such as a crack in the foundation, they have a duty to disclose that to the potential buyer. Failure to do so could render the vendor liable for any damage caused by the latent defect. If the vendor tries to cover-up a defect to hide it, such as putting up drywall in the basement to cover a foundation wall crack, this can create a serious legal problem.
When to Disclose
If a vendor is aware of the foundation crack but hired a company to fix it, is it still considered a latent defect if the vendor believes it has been resolved? What if the vendor tried to fix it and succeeded, or tried and unbeknownst to them failed and the defect remains? Does the vendor still have to disclose?
In Fors v Overacker & Mallon, a property was built on a very high-water table which meant that the sump pump in the property’s basement ran continuously. If it failed the area would quickly flood. The vendor had spent considerable time and money trying to address the situation and believed the situation, if not remedied, was under control providing the sump pump was cleaned on a very regular basis.
The vendor did not disclose this issue and the required maintenance of the sump pump was never discussed with the buyer. Within a few months of the buyer taking possession, the sump pump failed and the basement flooded. Should the vendor have disclosed this? The court said yes. It found the omission inaccurate and misleading. The judge observed that while buyers are expected to make their own inquiries this does not absolve a vendor of liability for misstatements. A buyer is not expected to investigate the honesty of the vendor.
What if a serious crime took place right outside the building or the home was formerly used as a marijuana grow-op? What should a vendor disclose? What questions should a potential buyer be asking? This is where the law becomes more nuanced and your best option to protect your interests, whether you are buying or selling a home, is to consult with a lawyer who is familiar with this type of law.
Next Steps for Vendors
If you are considering selling your home and are unsure if a known issue in your home would be considered a patent or latent defect, err on the side of caution and consult a lawyer experienced in this type of law. If a prospective purchaser is asking specific questions, such as whether the property was ever used as a marijuana grow-up, or whether any murders had ever occurred there, it is likely best to disclose.
Next Steps for Buyers
If you are buying a home and are looking for reassurances with regards to potential problems with the house, consider requesting a Seller Property Information Statement, if one has not been made available. In the absence of a vendor’s fraud, mistake or misrepresentation, caveat emptor is in effect and a buyer takes the property as they find it, unless they have protected themselves by contractual terms. Purchase title insurance and ask your lawyer to tailor the agreement of purchase and sale to best suit your needs instead of using standard OREA real estate form provisions.
If you require advice on your duty to disclose or whether material defects were failed to be disclosed to you, please contact Michael Paiva at 519.729.5038 or 416.800.1733. Rodrigues Paiva LLP represents property owners and property sellers in real estate and related litigation.