Legal Blog

Patent-Latent

In most completed real estate transactions, the purchasers are relatively satisfied with the condition of the property that they purchased (i.e., for the most part, the property is in the condition that the purchasers expected it to be). Sometimes, however, the property is most certainly not in that condition, the purchaser sues, and the outcome depends upon whether the defects were patent or latent or concealed. These were the issues in Purdy v. Russell 2022 ONSC 4692.

Problem

The vendors were an elderly couple who had owned the family home since 1977. The daughter sold the house pursuant to a power of attorney. After completion, the purchaser found that the pressure-treated wood foundation was rotting – resulting in mould that rendered the home unfit for habitation.

One year before the sale, the vendors obtained a home inspection report. That report recommended several repairs, all of which the vendors completed before listing the house for sale. The report opined that there were no major defects on the visible portions of the foundation and that, given its age, the foundation appeared to be in satisfactory condition. The purchaser never saw this report.

The agreement of purchase and sale was conditional upon the purchaser obtaining a satisfactory home inspection report. She obtained a report that was far more pessimistic than the vendors’ report; it stated that the “condition of the basement, foundation, moisture and possible mold posed a major concern” and that there was a “risk of hidden damage, mould, wood rot. This could be a major expense to repair.”

Regardless of this report, the purchaser waived the condition and completed the transaction.

Law

The law as to defects has been settled for quite some time. As in most actions, the question was how the facts fit within the law. The judge set out the law as follows:

“1. A patent defect is one which can be discovered by a reasonable examination and reasonable diligence on the part of the purchaser. The principle of caveat emptor applies to defects of this kind.

2. Tony’s Broadloom and Flooring Covering Limited v NMC Canada Inc., (1996) CarswellOnt 4926 (ONCA) at para 19 confirms that a patent defect is one that “would have been readily discoverable by [the purchaser] had they exercised reasonable diligence in the circumstances”.

3. A vendor is under no obligation to disclose a patent defect since a purchaser should have discovered that defect upon reasonable inspection.

4. Even in circumstances where the vendors are entitled to remain silent, they cannot actively conceal or cover up a patent defect. In those circumstances the rule of caveat emptor no longer applies. The purchaser is entitled, at their option, to rescind the contract or to compensation for damages.

5. A latent defect is a fault not readily discoverable during a routine inspection.

6. In the case of a latent defect, it is incumbent on the purchaser to establish that (a) the defect was known to the vendors and the vendors were guilty of active concealment or (b) the vendors made a false representation about the defect in reckless disregard for the truth or falsity of that representation.”

Patent

The purchaser’s home inspector not only identified the possible problem regarding the foundations, he recommended removal of the drywall and vapour barrier to allow for a full inspection by a wood foundation expert. It was not sufficient for the purchaser merely to say, “I could not see the defect.” Once the purchaser knew of the possible problem, the onus was on her to obtain an appropriate expert to inspect the property. In this case, the purchaser did not heed the advice of her own home inspector; the judge held that, in effect, it was a patent defect and the principle of caveat emptor (buyer beware) was engaged.

Active Concealment

Regardless whether there was a patent defect (because there was enough to put the purchaser on notice of the defect) or whether it was a latent defect, the vendors could still have been held responsible for concealing defects or making false or reckless representations.

The judge noted that “active concealment means the vendor knew of the defect and acted to prevent that knowledge from coming to the notice of the purchaser. Such conduct is treated as if it were a false assertion of the absence of such defect, a form of fraud.”

The fact that the vendors had obtained their own report, which, unlike the purchaser’s report, did not raise the spectre of rotting foundations, militated against a conclusion that the vendors actively concealed a defect or made any false or reckless representation about the foundation. The vendors simply did not know about the problem. When they were informed of problems regarding other aspects of the house, they remedied them before listing the house for sale.

Findings

The judge found the following:

“1. The plaintiff’s home inspector was able to see mold and wood rot. Based upon that observation, he alerted the plaintiff to the need to investigate further. The foundation defect was discoverable but was not discovered because the plaintiff did not exercise reasonable diligence. She chose to ignore the risk that the foundation was defective.

2. The repair work done by (the contractor who repaired some defects) had the incidental effect of concealing some of the foundation, but there was no intention by him, or by the defendants, to conceal any defect.

3. The defendants did not know the foundation was defective.

4. The defendants did not make any representation respecting the fitness of the foundation, expressly or otherwise.”

The judge dismissed the plaintiff’s action by way of a summary judgment motion.

 

Image courtesy of ulleo.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.