Residential Property Purchases and Disclosure Duties – Who will be footing the bill for property defects?

Published by Sean Donaldson

When it comes to residential real estate transactions, a Property Disclosure Statement (“PDS”) is one standard tool being used by the parties in an effort to protect themselves from future liability. Purchasers and vendors often incorporate a PDS into their residential real estate transactions. But what happens when representations made in those PDS do not match up to the status of the property purchased?

The old adage “Buyer Beware” is a doctrine known as caveat emptor which is still alive and well in British Columbia. Where a defect in the property is one that could have reasonably been discovered by the purchaser (a “patent defect”), the maxim of caveat emptor can be used to protect a vendor from liability. Purchasers will generally be responsible for any defects that can be reasonably discovered through a regular comprehensive home inspection. However, in the case of fraud or where the defect is one that is not reasonably discoverable by a purchaser (a “latent defect”), the vendor may well be liable for losses suffered by the purchaser as a result of that defect. Latent defects may include issues related to flooding, poor construction, infestations and mould.

Vendors owe a duty to purchasers to disclose latent defects and those latent defects that render the property dangerous or unfit for habitation. Therefore, when a serious issue reveals itself in a newly acquired home, the vendor can be held accountable for the losses experienced by the purchaser due to latent defects under the principles of negligent and/or fraudulent misrepresentations.

Fraudulent misrepresentations are made when a vendor purposefully or recklessly conceals a defect with the property from the purchaser. To prove fraudulent misrepresentation the purchaser must establish each of the following:

  1. the vendor made a representation of fact to them;
  2. the representation was false;
  3. the vendor knew that the representation was false when they made it, or that they made it recklessly, not knowing if it was true or false;
  4. the vendor intended the purchaser to act on the representation; and
  5. the purchaser was induced to enter into the purchase contract in reliance on the false representation and suffered a detriment.

There must be clear and convincing proof in order for the purchaser to be successful in a claim of fraudulent misrepresentation against a vendor due to the serious nature and stigma associated with fraud.

Where the vendor’s misrepresentation cannot reach the high standard necessary to be found fraudulent, a purchaser may still be able to hold the vendor accountable for negligent misrepresentations. Negligent misrepresentation requires a purchaser to prove that there were negligent representations made by the vendor, typically in the PDS, that were untrue, inaccurate or misleading. For negligent misrepresentation the purchaser must prove:

  1. there must be a duty of care based on a “special relationship” between the vendor and the purchaser;
  2. the representation in question must be untrue, inaccurate, or misleading;
  3. the vendor must have acted negligently in making said misrepresentation;
  4. the purchaser must have relied, in a reasonable manner, on said negligent misrepresentation; and
  5. the reliance must have been detrimental to the purchaser in the sense that damages resulted.

The use of a PDS creates the special relationship necessary to give rise to the duty of care required for negligent misrepresentation. Therefore, a vendor must act reasonably to ensure the accuracy of their disclosures in the PDS or face the potential to be held liable for the purchaser’s losses related to a latent defect in the property.

If the parties incorporate the PDS into the purchase contract, the purchaser may also have a claim in breach of contract which can provide an opportunity for the purchase to obtain a remedy even if they are unable to prove claims for fraudulent or negligent misrepresentation.

Substantial costs for repairing a defect in a newly acquired home may be a purchaser’s worst nightmare, however, taking the appropriate steps during the formation of the purchase contract may provide the purchaser with ability to claim their losses from to vendor. Before signing off on the purchase of that new home, buyers should take the follow steps to protect their purchase: have the vendor complete a PDS; make sure the PDS is incorporated into the purchase contract; and have qualified professional complete a comprehensive home inspection.

If you are faced with the unfortunate circumstance of having sold or purchased a property in which a serious defect has been discovered, it is important to seek legal advice, and we can help. Please contact us directly to arrange for a consultation with one of our civil litigation lawyers.

Sean Donaldson