Disclosure Obligations in Residential Real Estate Transactions

By Peter Roberts on May 25th, 2016

Posted in Civil Litigation, Real Estate

The residential real estate market in the Lower Mainland is incredibly active. Prices continue to rise by significant amounts in a matter of weeks, sometimes days. Stories abound of bidding wars and sales without subject clauses. Out of anxiety or excitement, purchasers sometimes forgo viewing the property or having an inspection done.

What happens when the home you bought turns out to be not quite what you expected? Perhaps the roof leaks or there is a rodent infestation. Maybe the plumbing is faulty or the construction defective. What recourse does a purchaser have against the vendor?

The critical question is what disclosure obligations the vendor has when selling their property. As is often the case in legal matters, there are competing principles at play in determining who bears the loss for such defects.  The first is caveat emptor, colloquially know as “buyer beware”.  It has been described as meaning:

Absent fraud, mistake or misrepresentation, a purchaser takes existing property as he finds it, whether it be dilapidated, bug-infested or otherwise uninhabitable or deficient in expected amenities, unless he protects himself by contract terms.

 This means there is a fairly high onus on purchasers to conduct a reasonable inspection and make reasonable inquiries in order to discover patent defects. A “patent defect” is one which might not be observable on a casual inspection but may nonetheless have been discoverable upon a reasonable inspection by a qualified person.  In many cases, this means a purchaser should retain an inspector to inspect the property and the failure to do so cannot shift blame to the vendor.

A competing principle is consumer protection. This means the court will intervene to prevent fraud and non-innocent misrepresentation where a purchaser has been lied to about a property’s condition. However, the court may also intervene where a vendor has failed to disclose material (meaning dangerous) latent defects about the property that they knew about or ought to have known about. A latent defect is one that is not discoverable by a purchaser through reasonable inspection and inquiry. But not every latent defect will result in a remedy against a vendor.  It must be a defect of “substance” that makes the property uninhabitable or dangerous.

In reconciling these competing interests, the courts delineate exceptions to the caveat emptor principle.  For example, it will not apply in situations where the vendor:

1.      fraudulently misrepresents or conceals;

2.    knows of a latent defect rendering the house unfit for human habitation;

3.    is reckless as to the truth or falsity of statements relating to the fitness of the house for habitation; or

4.    breached the duty to disclose a latent defect which renders the premises dangerous.

Given these competing principles, determining the outcome of any given case is entirely dependent on the underlying facts. Some cases have held that the subsequent discovery of slope instability, or leaks, mould, and faulty retaining walls will entitle recovery from a vendor.  In other cases, the discovery of a hidden ravine, or faulty plumbing have not been the types of defect that allow a purchaser to shift liability to a vendor.

Most residential sales involve the vendor providing a Property Disclosure Statement (PDS). A PDS is meant to identify any problems or concerns with the property, not to give detailed comments in answer to the questions posed.  A vendor need only say that they are or are not aware of problems.  When completing a PDS, a vendor must correctly and honestly disclose their current actual knowledge about the property, but that knowledge does not have to be correct.  The contents of a PDS are representations upon which a purchaser can rely.

If you are caught up in the residential real estate frenzy, remember that generally it is “buyer beware”. Before you close a purchase, properly inspect the property and, if necessary, retain professionals to help you.  As a purchaser, if you want a promise of fitness for the home you are going to buy, your safest bet is to negotiate express warranties by the vendor to that effect by the vendor.

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