Hide and Seek: The Law of Patent vs. Latent Defects

The Latin maxim “caveat emptor” or buyer beware is a warning that strikes fear into the heart of many a homebuyer.  It is also the principle behind much of the law relating to potential construction defects in a property.  Generally we accept that it is the buyer’s responsibility to satisfy themselves about the quality of the property they are buying.  The exception to this is that it is the seller’s responsibility to disclose any dangerous latent or hidden defects.  This critical difference between what is a patent (obvious) or latent (hidden) defect was the subject of the recent British Columbia Court of Appeal case.

FACTS

This case involves a home that was purchased in 2000 for $1.35 million.  When the seller had purchased the home in 1986, it had been a modest 2000 square foot bungalow.  The seller did extensive renovations to the home including building a series of retaining walls; moving the kitchen; adding beams, a bathroom and a bar; and converting the bungalow to a Santa Fe style residence that included an ornamental bell tower and columns. 

The purchasers viewed the house twice with their real estate agent before putting in an all cash offer.  The accepted offer was not subject to any condition for a satisfactory inspection and the purchasers never did have an inspection completed before buying the home.

Shortly after purchasing the home, the purchasers went to replace some flooring and discovered moisture under the floor that had led to widespread mold and rot.  The purchasers hired an engineering firm to prepare a report regarding the deficiencies.  The engineering report identified numerous problems in addition to the mold, including problems with the floors, walls, roof, outbuildings and retaining walls.  The report described the work as “crude”, “unprofessional” and recommended that the purchasers demolish and rebuild.  The cost estimate to repair the deficiencies identified in the engineer’s report was $1,000,000.

The purchasers elected to sell the home to a builder for a $710,000 loss.  They then sued the original seller for failing to disclose the deficiencies present in the home.

DECISION & COMMENTARY

The issue came down to the critical question of whether the defects in the home were patent or latent: the seller only had a responsibility to disclose latent defects.  The trial judge commented on the difference between these defects by saying:

Patent defects are those that can be discovered by conducting a reasonable inspection and making reasonable inquiries about the property… there is a fairly high onus on the purchaser to inspect and discover patent defects.  This means that a defect which might not be observable on a casual inspection may nonetheless be patent if it would have been discoverable upon a reasonable inspection by a qualified person.  

The courts agreed that the purchasers could only recover against the sellers for those defects that had been lurking under the floor.  All of the other defects were found to be patent even though some may have required an inspection to find them.  What does this mean?  It means that any purchaser who elects to purchase a home without first obtaining an inspection report is taking a significant risk.  What it does not mean is that sellers are off the hook entirely.  The sellers in this case were responsible for failing to disclose information relating to the moisture problems under the floor. 
The Court decision also tells us that there are generally four exceptions to the application of the rule of caveat emptor: 

  1. where the vendor fraudulently misrepresents or conceals;
  2. where the vendor knows of a latent defect rendering the house unfit for habitation;
  3. where the vendor is reckless as to the truth or falsity of statements relating to the fitness of the house for habitation;
  4. where the vendor has breached his or her duty to disclose a latent defect that renders the premises dangerous. 

This places an onus on the seller to disclose defects that they know that are dangerous or relate to the fitness of the house, but the case referred to above brings focus back to the uncomfortable reality of caveat emptor.  

LESSONS LEARNED:

  1. Despite the requirement to disclose latent defects, a purchaser should always hire an inspector to examine a property before purchasing.
  2. A seller should be careful to ensure that they are disclosing any latent defects.
  3. Contractors and trade contractors need to be aware that they will inevitably be dragged into these kind of disputes if it is their work that is the subject of complaint, or they have failed to warn the appropriate party about the defects.  

This article was written by Meghan A. Maddigan, a lawyer who practices in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.