The Latent Defects issue
It happens all the time. Doug and Sally buys a house from Bob and Suzy in downtown Toronto. The house is fifty years old but appears to be functioning properly. That is, until Bob and Suzy move in and discover, to their horror, that the basement is flooding.
After thousands of dollars spent researching the issue through various tradespeople, Bob and Suzy are finally able to determine that the flooding is due to a faulty pipe installed 2 years ago.
The latent defects issue has reared its ugly head.
Bob and Suzy are then upset to learn that it will cost them $20,000 to repair the pipe and stop the flooding, plus to add insult to injury, they have to move into a hotel while they wait for the repairs to be performed.
Beside themselves, they call their real estate agent to find out what to do. Surely someone must be responsible they ask?
The real estate agent calls the real estate lawyer. The real estate lawyer writes a few letters of demand to the seller’s real estate lawyer, but to no avail.
“What’s the law?” Doug and Sally ask Bob and Suzy. “Can we sue the sellers in Ontario Small Claims Court?” they want to know.
Assessing the Latent Defects
Fortunately, Bob and Suzy’s real estate agent has come across the issue before and knows the right questions to ask.
Step 1 – Is it indeed a latent defect?
The first question that must be determined is whether or not the defect in question is latent or patent. In simple terms, latent defects are those which was not clearly visible to the naked eye upon routine inspection whereas a patent defect could have been discovered by the purchaser. For example, say the defect is a crooked pipe sticking out of the floor in the basement in an awkward manner. In such case, the defect is arguably easily visible and therefore patent. In such instance, Bob and Suzy have no recourse, and the principal of caveat emptor “let the buyer beware” applies.
However, let’s assume, for this example, that the defective pipe was actually below the ground and therefore not visible upon routine inspection. In such case the defect is clearly a latent defect, and Bob and Suzy progress to the next stage of analysis.
Step 2 – Did the latent defect render the property unfit for habitation?
While many sellers’ lawyers have tried to argue that unfit for habitation means that the property must be inherently “dangerous” the fact is that the current state of the law does not measure unfit for habitation to such a high standard. Generally, if there are damages which need to be repaired, short of cosmetic repairs, this will be considered latent defects that render the property unfit for habitation.
Step 3 – Did the purchasers’ suffer damages?
While it may seem obvious in the case of latent defects that the purchasers’ have suffered damages by way of money spent to rectify the defect, one must be careful to distinguish between genuine damages relating to the defect and monies paid to improve the state of the house. This is often referred to as “betterment”. If a Small Claims Court judge finds that certain repairs put the purchasers in a better position than what they contracted for, then even if successful on the claim for damages arising out of the latent defect, they may have their damages award offset by such a betterment.
Step 4 – Was the seller aware of the latent defect?
This is typically the hardest part to prove because the purchasers will usually have no such evidence that the sellers knew of the latent defects or they have evidence, but it is so circumstantial, that it does not arise above the balance of probabilities threshold required to convince the judge that the seller was aware. In other words, in a civil lawsuit, the onus of proof is on the purchasers to prove to the court that it is more probable than not that the sellers knew of the latent defect and failed to disclose it. if a judge is not convinced, his/her fallback will be to find in favour of the sellers.
Sometimes, though, sellers are able to get enough evidence, and in the most creative of ways. In a recent decision that we won in in Small Claims Court and then again on appeal to the Divisional Court, the purchasers wisely did a Freedom of Information Act request to see the documents pertaining to the house before they bought it. To their amazement, there were very detailed records showing that the sellers were aware of the defect and filed to disclose it.
The above is a simplification of a complex set of laws and should not be construed as specific legal advice. The law of latent defects in Ontario is always evolving, and lawyers representing sellers will have a different interpretation of the above law. Real estate lawyers and agents would do well to learn the intricacies surrounding the law of latent defects in Ontario so that they could know how to advise their clients accordingly.