Defects in Real Property and Related Disclosure Issues

The question relating to the obligation to disclose is one which arises constantly, and applies to every real estate sale.

What are the disclosure obligations?

The matter of patent and latent defects falls under the law of real property and the matter of disclosure.

Patent defect is clear, apparent, observable and not hidden from view.

Latent defect is not readily apparent to the eye and can only be determined with some degree of investigation.

The seller basically has the right to remain silent. However, once he breaks his silence, then he must volunteer the truth.

The seller does not have to mention patent defects, because they should be obvious to all. From time to time, there may be patent defects which are covered up, concealed from view, or otherwise inaccessible. Some Courts have simply classified them as latent defects, while others have noted the element of concealment and chastised the vendors accordingly.

Any concealment of a patent defect could require comment and disclosure by the vendor. Some courts have interpreted such an action to constitute a fraudulent activity and would be actionable.

So, to some, there is a positive obligation to disclose the existence of a patent defect which has been concealed in some way.

Latent defects are treated somewhat differently in law.

Latent defects which make the premises unsafe in themselves or unfit for human habitation must be disclosed by the vendor. That proposition in respect to the law in Ontario is accepted, but it is not well set out as part of a binding legal decision, so technically there is no precedent for it.

When it comes to a seller’s obligation to disclose, that seems to be:

1)    patent defects, which are concealed, and

2)    latent defects, which render the premises unsafe or unfit for human habitation.

Naturally, there are sellers like new home builders whose obligations are regulated by statute in addition to the common law.

The big difference in disclosure obligations arises when it comes to the real estate agent. They are governed under the Real Estate and Business Brokers Act, 2002 and are subject to certain requirements imposed under the Code of Ethics. They must disclose material facts. Actually, they must investigate, determine and verify material facts.

material fact is a defined term under the Code of Ethics. Basically, it means something “important”, but it is defined to be “…..a fact that would affect a reasonable person’s decision to acquire or dispose of….

Real estate professionals must investigate and determine material facts, and disclose them to clients. In respect to customers, the disclosure obligation is lessened somewhat to “known material facts” and those material facts which “ought to have been known”. In practice, there may not really be a distinction between these two standards.

The seller is under no obligation whatsoever to disclose material facts, or any facts, at all.  The trigger for the seller’s obligation is “defects” and their subsequent classification. That is contrary to the real estate agent’s obligations and may bring them into conflict.

That law prevailed until a Judge considered the case of a convicted sex offender who lived across the street in March 2011. This was information that was well-known in the neighbourhood. The sellers did not disclose this fact. The buyers had young children and refused to close, claiming that the presence of the sex offender constituted a latent defect in the property which required disclosure.

The Judge heard the case, and set the matter down for trial. Until this case, any latent defect would have to have been something physical in respect to the property, not just a “bad neighbour”. Ultimately, this case will be decided by the trial Judge.

It should also be noted that the law is always changing, so it makes good sense to keep up to date.

For further reference, see the decision of Judge Hoy in Dennis v. Gray (Superior Court of Justice, Ontario, 11 March 2011).

It should be noted that simply setting the matter down for trial thwarted the seller’s interest in pursuing the case and the buyers were permitted to walk away. While that case is now a decade old Madame Justice Hoy has been elevated to the Ontario Court of Appeal. If there ever was a similar case, we now understand her thinking and approach.

Brian Madigan LL.B., Broker
www.OntarioRealEstateSource.com

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