The matter of patent and latent defects falls under the law of real property and the issue of disclosure.
A Patent defect is clear, apparent, observable and not hidden from view.
A Latent defect is not readily apparent to the eye and can only be determined with some degree of investigation.
A 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…..” an interest in property.
Registrants 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 big difference arises when it comes to the seller. The seller is under no obligation whatsoever to disclose material facts, or any facts, at all. That is contrary to the registrant’s obligations and may bring them into conflict.
The seller basically has the right to remain silent. However, once he breaks his silence, then he must volunteer the truth. An omission at this point could lead to liability.
The seller does not have to mention patent defects, because they should be obvious to all. The only obligation might arise in respect to latent defects which make the premises unsafe or unfit for human habitation.
Any concealment of a patent defect could require comment and disclosure by the seller. Some courts have interpreted such an action to constitute a fraudulent activity and would be actionable.
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.
Brian Madigan LL.B., Broker