Latent Defects - Is There a Duty to Disclose Them? When Does the Duty Arise?

In this still hot real estate market, in order to provide a 'firm offer' as quickly as possible, many deals are entered into without a professional inspection of the property. However, hastily entering into a deal carries great risk to the buyer, especially where older properties are involved.

In the November 2014 decision of Thomas v Raynard,[1] the Ontario Superior Court considered the issue of whether the home seller was liable to buyers for damages for the seller failing to disclose a "latent defect" (not discoverable upon a reasonable inspection-- i.e. a leaky foundation that was found after-closing).

The Facts:

The buyers purchased the 60 year old property by an OREA[2] form of agreement on June 17, 2013. It contained the "entire agreement" clause that is part of the OREA form:  

"26. ... This Agreement including any Schedule attached hereto, shall constitute the entire Agreement between Buyer and Seller. There is no representation, warranty, collateral agreement or condition, which affects this Agreement other than as expressed herein..."

The deal was not conditional on inspection nor was there a warranty dealing with the basement or leaks; however, the contract provided the buyers could inspect the property twice prior to closing, i.e. a right to the equivalent of two further "walk-through" viewings prior to closing.

Before closing, the buyers attended the property with Mr. Mills, a family member with expertise in construction related matters. While the basement had been finished by the seller so its bare floor and walls could not be observed, there were no indications of musty smells or water intrusions. Some questions were asked of the seller but the answers were evasive.

Mr. Mills told the buyers the house generally looked good but caution was needed in relation to the basement because they could not really know what they would be getting.

Subsequent to the closing on July 16, 2013, the buyers found a leak in the furnace room after a contractor's faulty installation of an air conditioner. When the basement walls were ripped apart, water was seen entering from a small hole in the foundation wall that was not visible until the drywall was removed. An insurance representative inspected the basement and confirmed the apparent cause of the water intrusion was a foundation leak, which would not be covered by the buyer's policy. The insurance representative testified that the water could have gone unnoticed for quite some time and that one could not accurately determine when a foundation leak started.

The Decision:

The buyer's claim for damages was dismissed.

The Reasons:

1. On a balance of probabilities, the Court could not find that "the seller was or ought reasonably to have been aware of the foundation hole discovered by the buyers – although she was probably aware of some leaks at some point after she bought until she finished the basement." Essentially, it was not proved that the seller knew of the latent defect.
2. Even if a seller does know about a latent defect, there is no legal duty of disclosure because the defect did not "render the premises uninhabitable or inherently dangerous". The Court relied on Ontario case law for the proposition that "a vendor may be liable to a purchaser of a property which is not new if he knows of a latent defect which renders the premises unfit for habitation or dangerous in itself and does not disclose it to the purchaser". Additionally, subject to the agreement or the OREA form entered into, the doctrine of caveat emptor (buyer beware) would apply and shift the burden to the buyer to conduct appropriate due diligence.
3. There was no misrepresentation by the seller and there was no applicable warranty in the contract. The buyers got "exactly what they bargained for: a residential property, with no relevant warranties or conditions and no terms or representations other than those expressed in the [Agreement]".
4. "… they had already purchased the property on June 17, 2013, on an as-is basis, so neither the inspection conducted thereafter nor any information which they might in hindsight prefer to have learned from the defendant during that inspection had any effect on that decision".

The Lessons:

1. Caveat emptor applies unless you provide otherwise in your agreement.
2. Ask for a warranty on matters you cannot find without an intrusive inspection (e.g. asbestos/ UFFI/ leaks), especially if your deal is not conditional on an inspection. The seller's refusal to give a warranty should give rise to concern about the risks you will assume.
3. A true latent defect is one that was not known to either the seller or the buyer at the time of sale. Liability will only arise where a latent defect renders the premises uninhabitable or inherently dangerous and the seller can be proved to have had knowledge of the defect and deliberately failed to disclose it.
4. A patent defect is an issue discoverable upon a reasonable inspection of the property and so the buyer assumes the risk.
5. If there is anything in the MLS listing that induced you to purchase the property, make sure it is added into the purchase agreement due to s.26 of the OREA form.
6. Insurance typically does not cover foundation leaks.

Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.

[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at dgold@robapp.com with your suggestion. Not all requests can be accommodated.]