CAVEAT EMPTOR DOES NOT ALWAYS PROTECT THE SELLER April 2015
In a recent case, the plaintiff offered to purchase a property "subject to inspection."1 A Property Disclosure Statement (PDS) accompanied the Contract of Purchase and Sale wherein the sellers had answered negatively to whether they were aware of any structural problems, moisture and/or water problems in the walls, basement or crawl space or damage from wind, fire or water.
The subsequent inspection did not reveal any significant problems and the subjects were removed. Prior to completion, however, the buyer was advised by a third party that the house had been previously inspected pursuant to an insurance claim and that some of the wall framing was found to contain mould and rot. The contractors had draped the affected area in clear plastic with a sign indicating that mould was present. The contractors were never called back to complete the repairs. The sellers indicated at trial that they had repaired the problem themselves.
Prior to closing, the buyer, through his agent, sought to undertake a more extensive examination of the affected area which was denied. The sellers also refused to consider holding back some of the purchase price pending a resolution of the matter. Instead, the sellers' lawyer advised the buyer that he would, at a minimum, forfeit his deposit unless he completed. Faced with this prospect, the buyer completed the purchase and gave notice that the sellers would be held responsible for any undisclosed damages.
Upon purchasing the property, the buyer discovered significant rot and mould in two places, including the area discovered by the previous inspection. Repairs totalled $140,000 for which the sellers were found to be liable.
The court acknowledged the doctrine of caveat emptor (or buyer beware) as it applies to the purchase of real property.2 In general, the onus is on the buyer to inspect and discover patent defects; defects which could be discovered upon a reasonable inspection by a qualified person.3 A seller is not liable for damages arising from patent defects.
However, caveat emptor is not a defence in all cases. A seller is required to disclose latent defects; defects which could not be discovered upon a reasonable inspection by a qualified person, of which they were or should have been aware or where they were reckless as to whether such a problem existed.
In this case, the court concluded that the problems were not patent defects, as they were not discovered upon a reasonable inspection by a qualified person. As latent defects, the sellers were required to disclose them if the sellers knew, ought to have known or were reckless as to their existence. The court concluded that the repairs done by the sellers were insufficient and that they knew or were reckless as to the existence of the ongoing problem.
With respect to the representations made in the PDS, the court recognized the danger in a buyer placing too much reliance on the PDS. The broad nature of the questions may not reveal a seller's past history with the property in a case where the seller believes a problem has been rectified or was a one of a kind incident. Disclosure statements are designed to be the start – not the end – of the buyer's investigation.
The court found that the representations in the PDS can provide some recourse to the buyer where it can be shown that the statement was made falsely or recklessly.
Given the sellers' knowledge of the problem, the court found that their negative answers on the PDS amounted to fraudulent misrepresentations which assisted the buyer in recovering from the sellers.
While the doctrine of caveat emptor still imposes a high onus on the buyer to discover problems in a property they are acquiring, there may still be recourse against a seller who fraudulently conceals or recklessly disregards latent defects.