“Buyer beware” has its limits.
The age-old principle, also known by its Latin translation caveat emptor, is easy to grasp when it comes to a property’s “patent defects” — the legal term for problems or issues that a buyer could have discovered themselves through an inspection or ordinary vigilance.
Things get a little messier when it comes to “latent defects,” hidden flaws that can escape detection during a reasonable inspection and only emerge later. Because these defects can have a significant impact on a property’s value, disputes involving latent defects are among the most common claims to arise after a real estate deal has closed.
The key to these cases, including the recent Ontario Superior Court ruling in Austin v. MacFarlane, tends to be whether the seller knew (or should have known) about the hidden problems and the extent to which they covered them up before selling the property.
The facts
The dispute revolved around the plaintiff’s 2019 purchase of a residential property in North Bay, Ont., which went through after he had obtained a home inspection.
The buyer also completed a walkthrough before the deal closed, but within days of taking possession, he got his first indication of a serious problem while moving his belongings into the house, when his piano was placed on the basement floor, and water began seeping up through the flooring.
Following further investigation, with the help of a contractor and a structural engineer, the plaintiff discovered that the north side of the property had significant cracks in its foundation, as well as extensive mould growth behind the basement walls and other structural issues caused by a faulty deck construction.
The resulting repair work, which involved a large-scale excavation and jacking of the property, cost around $119,000, and the plaintiff sued the seller for compensation.
The results
After considering representations in the MLS listing, Agreement of Purchase and Sale, and Warranties and Bill of Sale suggesting that the property was “well maintained” and “move-in ready,” Justice Robin Bellows sided with the buyer, concluding that the principle of caveat emptor did not apply to the transaction.
The judge found that the plaintiff had satisfied each element of the five-part test for negligent representation by the defendant, which required:
- A duty of care between the parties based on a special relationship
- The representation was untrue, inaccurate or misleading
- The representor acted negligently in making the representation
- The representee reasonably relied on the negligent misrepresentation
- The reliance was detrimental to the representee
Although the defendant acknowledged repainting baseboards and having her father perform minor drywall repairs, she denied having knowledge of any of the issues identified by the plaintiff.
However, the judge concluded that she “knew or displayed wilful disregard” for water infiltration in the basement that was present before the sale, adding that manufacturer’s dates stamped on the drywall found by the plaintiff’s contractor suggested that the repairs were “more extensive than she acknowledges.”
“On a walkthrough with freshly painted baseboards, I can see how this damage may have been missed, but I find it impossible to believe that the defendant, while painting the baseboards in the basement, would not have noticed evidence of water infiltration,” he wrote. “At best, the defendant was wilfully blind or reckless as to the reality of the water infiltration issues in the basement.”
The judge ordered compensatory damages of $119,000 to cover the cost of the plaintiff’s repairs, plus a further $10,000 for mental stress and inconvenience, well short of the $100,000 requested, due to the limited evidence provided on this issue.
The lessons
The principle of buyer beware offers some protection to real estate vendors, but it is not an absolute defence to a latent defect claim. If a seller deceives or misleads a buyer about the state of the property, they run the risk of being held liable.
An increasing number of latent-defect plaintiffs are adding claims for mental stress and inconvenience. These claims are highly fact-specific, and judges have taken differing positions on their availability in breach-of-contract actions.
Assuming you find a judge who is prepared to award damages, plaintiffs seeking more than a nominal amount will typically need