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Don’t Take Their Word For It: Latent Defects And Why Disclosure Obligations Are Of Limited Value

December 12, 2017

Author: Kevin Stenner

Case-law is replete with examples of the application of the Latin doctrine caveat emptor (buyer beware) which in plain language means the purchaser is solely liable for determining defects upon purchasing property. This remains the law in respect to the sale of land.1 There is one important exception to this rule, namely, where a seller is aware of a defect and conceals it or willfully or recklessly fails to disclose it.

However, there are also exceptions to the exception. For instance, even if the seller is aware of a defect, they are not obligated to disclose the defect to the purchaser if it is a “patent” defect. “Patent defects are discoverable by inspection and ordinary vigilance on the part of a purchaser and latent defects are such as would not be revealed by any inquiry which a purchaser is in a position to make before entering into the contract for purchase.”2  As stated above, the seller is under no obligation to call patent defects to the purchaser’s attention and absent concealment of the defects, the purchaser cannot complain later as caveat emptor applies.3

In most cases, proving that the seller had knowledge of the hidden (or latent) defect will be difficult. For instance, how do you prove that the seller was aware that a septic tank was defective? The seller may simply say that it worked fine up to the time of sale and that they had no knowledge of any defect.

There are also other issues with relying on the say-so of the seller. Assume that the seller is aware of a defect and nonetheless makes a positive representation that such a defect does not exist. Many would be surprised to discover that even then, a claim may not lie against the seller. For instance, “a representation which is contradicted by the property’s obvious physical condition may not give the purchaser a remedy.”4

For a purchaser to potentially have a valid claim against the seller, the purchaser must demonstrate that they “truly relied on the representation and, if so, [that] such reliance was reasonable in the circumstances.”5 Accordingly, even where there is a deliberate misrepresentation, it is entirely possible that no claim lies against the seller. This was the case in Novel Energy (North America) Ltd. v. Glowicki (“Novel Energy”)6 where the purchaser glossed over the seller’s disclosure documentation.  In Novel Energy, the court stated: “As I have said, [the purchaser] claims that he never read the Plan he received. Having taken this position, I do not see how he can argue that he relied upon any representations contained therein ….”7

As the principle of “buyer beware” is alive and well in Alberta, purchasers should never rely solely on the disclosure and word of the seller. It is essential for the purchaser to conduct proper due diligence before closing a transaction. This would typically involve hiring a reputable home inspector to thoroughly inspect the property.  A home inspector may be able to identify latent defects and will also be able to provide insight into the accuracy of the representations made by the seller.  As such, a thorough home inspection will put the purchaser in a position to make an informed decision whether to proceed with the sale as is, request a reduction, or, where the sale is conditional on the purchaser receiving a satisfactory report from the home inspector, walk away entirely.

In addition to condition precedents, a purchaser can further protect themselves by requesting that the seller provide “warranties”, rather than “representations”. In other words, rather than the conventional wording which states that “to the best of the seller’s knowledge, there are no latent or patent defects with the property”, a warranty would state that “the seller warrants that the septic tank is in good working order and is free from any defect whatsoever”. This would create a form of strict liability, so that regardless of the knowledge of the seller, they would be held to their warranty.

The precise wording of the warranty is important. For instance, if the seller simply warrants that at the time of signing the septic tank is working, a purchaser would not have a right to rely on the warranty six months later.

Further, courts have found that where a specific period is not specified in a warranty, the warranty will only be valid for a reasonable time after the sale. For instance, in MacDonald v. Clark8 the court found that a warranty which related to the condition of the septic tank on the date of closing did not provide an ongoing warranty which could be invoked 6 months after closing.  This result would have been different if the warranty had stated that it was valid for one year from the date of closing.

A purchaser may further protect themselves by requesting that a liquidated damages clause being inserted into the sale agreement. This type of clause contains a genuine pre-estimate of damage and allows the purchaser, without having to prove actual damage, to demand a specified sum for any breach of warranty. Again, this type of clause would need to be carefully worded to ensure that it is enforceable.

Purchasing property is often an exciting time where a purchaser feels pressure to close a deal.  However, a purchaser can potentially save significant money in the long-run if they are diligent in inspecting the property and include protections in the sales agreement.

1 Lewis v. Plourde, 2017 ABQB 235.

2 Nash v. McMillan, (1997) 222 AR 4 at 11 (QB).

3 Leishman v. Virostek, 2011 ABQB 488 at para 34.

4 Calder v. Martin, 2007 ABPC 224 at para 45 (“Calder”).

5 Ibid at para 45.

6 1994 CarswellAlta 14.

7 Ibid at para 94.

8 2001 ABQB 89.