Defects, Disclosure and Caveat Emptor

from Legally Speaking -  May 2009

 It’s trite law that a seller and a listing REALTOR® have a duty to disclose known material latent defects, but not patent defects. Sometimes the distinction as to what constitutes a patent defect or a latent defect isn’t clear.

Take a sump pump in the crawl space, for instance. Is it a latent defect warranting disclosure by a listing REALTOR®? The BC Supreme Court has held that it isn’t, overturning, on appeal, the Provincial Court’s decision finding a seller and her agent liable for failing to disclose to the buyers the existence of a sump pump in the crawl space of the property they purchased. After briefly viewing the property, and without going into the crawl space, the buyers chose to make a subject-free offer. The buyers had reviewed the Property Disclosure Statement (PDS), which indicated the seller wasn’t aware of any water problems in the crawl space. Shortly before completion, the buyers learned the property may have had water ingress issues in the past. The buyers sought to inspect the property before completion, but the seller refused access.

After seeking legal advice, the buyers completed the purchase and, upon gaining access several days later, found water standing in the crawl space. The buyers sued their agent, the seller and the seller’s agent. The Provincial Court found the seller and her agent liable for negligent misrepresentation and negligence, after concluding that the presence of the sump pump signified a structural defect that should have been disclosed on the PDS. The seller’s agent denied any knowledge of a sump pump. However, the Provincial Court accepted the seller’s evidence that she had disclosed the existence of the sump pump to her agent, and that he had advised it need not be disclosed if the seller hadn’t had any water problems. The seller admitted at trial that the previous owners had disclosed the sump pump and past water issues to her when she purchased the property, but she didn’t convey her knowledge of the previous owners’ water issues to her agent.

The Provincial Court held that the manner in which the seller completed the PDS constituted a negligent misrepresentation, which misled the buyers and justified their decision not to carry out a further inspection of the property. The Provincial Court found the seller’s agent a party to the misrepresentation, and negligent for failing to make reasonable enquiries.

The Provincial Court’s finding against the seller’s agent was successfully appealed to the BC Supreme Court, which held that the existence of a sump pump wasn’t a material defect. Even if it was, it was a patent defect, discoverable upon reasonable inspection, and therefore didn’t require disclosure. The Supreme Court reiterated the principles set out in Cardwell v. Perthen: that the onus rests upon a buyer to carry out a reasonable inspection of the property and that, for those defects or conditions discoverable upon a reasonable inspection, the doctrine of caveat emptor strictly applies. The court held that the manner in which the PDS was completed didn’t eliminate the buyers’ obligation to carry out a reasonable inspection of the property, and the lack of an inspection didn’t obviate the doctrine of caveat emptor or make the distinction between patent or latent defects irrelevant.

Where there’s confusion about whether a particular condition may be categorized as patent or latent, full disclosure is recommended to avoid a lawsuit. Also, as discussed in Legally Speaking 415,buyers should be warned to carefully inspect the property they propose to purchase and, if they aren’t qualified to do so, to engage qualified professionals to do so on their behalf.

- Jennifer Clee, Real Estate Errors & Omissions Insurance Corporation, Vancouver, BC