Discovery of Defect Just Before Closing

What happens if a defect of some kind is discovered right before closing?

This could easily take place on the Buyer’s final walkthrough. At this point, the Seller has moved out, and the Tenant has moved out, so things that were not quite so visible suddenly become quite apparent.

The Discovery

Let’s assume that it was a little bit of mould on the back of a board; that has been removed, and there is nothing left, then, the Buyer would be in breach for not closing. This is not a serious matter.

However, let’s assume the Buyer discovers mould and this leads to evidence of a chemical lab, marihuana grow house, toxic contamination, serious insect infestation, or underground stream that affects the underpinning of the building.

These matters would all be serious. They are important and they are material.

Buyer’s Options

Depending upon the circumstances, the Buyer may:

  1. Ignore the defect, and close the transaction,
  2. Close the transaction with an abatement of price, or
  3. Rescind the Agreement.

In some situations, the defects would be sufficiently serious so as to enable a Buyer to refuse to close and walk away from the deal. If there had been a home inspection that would not matter. No notice is necessary, and no alternative proposal needs to be made.

Nature of the Defect

The first and primary issue would be “how serious was the defect”. Then, we have two other issues. Was this patent or latent? Patent means out in the open or highly visible, not covered up or concealed. If it was covered up or concealed in some way, then it would be a latent defect. Generally, a latent defect is one which is not apparent or visible.

Seller’s Knowledge

The next issue to be determined is whether the Seller had knowledge. Often, that’s a difficult matter to prove, but with some digging and investigation (contractor’s estimates, insurance reports, police reports), something might pop up. In many cases, Courts will be somewhat generous and conclude that the Seller must have known. Evidence of concealment and non-disclosure are important factors here.

At this point, we really don’t know what the Buyer may have found, so we don’t know who has a good case, and who doesn’t.

The Law

A Seller has an obligation to disclose latent defects. Without such disclosure the Buyer has remedies. Active concealment could easily amount to fraud. If there is fraud, then the doctrine of caveat emptor does not apply.

Many times, discovery of very serious defects takes place just before closing. This can thwart the potential closing.

Brian Madigan LL.B., Broker

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