Caveat Emptor and Seller’s Lack of Knowledge of a Latent Defect #383

By Gerry Neely
B.A. LL.B.

A Supreme Court judge concluded the following advertisement by a representative for the sale of a lot implied a warranty that the buyer could commence construction of a house without unusual expense or building methods:"0.59 (acre) building site in an area of executive homes. South West view property. Fully serviced lot. Building scheme in effect, area suits two storey plus basement or rancher and basement. Room for RV & workshop."

There was a large cavity in the middle of the lot when it was purchased by the owner. Her representative recommended she accept the developer's offer of free fill to eliminate the cavity and improve the marketability of the lot, if she decided to sell rather than build. She agreed, and approximately 100 tandem truckloads of fill were dumped to a depth of eight to ten feet until the compacted surface was level with the adjoining lots. It wasn't obvious that fill had been added. She decided to sell.

The buyer's inspection led him to assume the lot was ready to build on without problem but, when foundation excavations commenced, he discovered the fill had to be removed at a cost of $33,000. He sued the seller. The judge decided the fill was a hidden defect, and the seller's failure to disclose this lulled the buyer into foregoing due diligence steps that might have revealed its presence. The judge ordered the seller pay damages to the buyer.¹

The seller appealed successfully to the BC Court of Appeal. It decided the ad only represented a building lot for sale, and nothing more could have led the buyer to believe there would be no unusual expense. The buyer had also argued the increased cost of construction was a latent defect that should have been disclosed.

The test for a latent defect is a defect that wouldn't be apparent by any inquiry a buyer is able to make before entering into a contract. However, the liability of a seller for non-disclosure depends upon the seller knowing it's a defect. The seller genuinely believed the fill was a benefit and that its presence wouldn't increase construction costs. Because of this, the judge rejected the claim that it was a latent defect.²

A seller who fails to disclose a known latent defect or who conceals a defect or conducts himself so as to mislead a buyer with respect to a defect that would otherwise be patent, may be liable for fraudulent misrepresentation. However, the seller doesn't need to disclose a patent defect, because the rule of caveat emptor applies. The onus is on a buyer to satisfy himself by reasonable inspection and inquiry as to the condition and quality of the property in question.

Failing that, and in the absence of warranty or fraud, the buyer has no remedy against the seller. The buyer of the lot didn't ask the one question that might have warned him off, caused him to negotiate a warranty or given him a remedy if the seller had said "No"; that is, "Has any fill been added to the land?"

Knowing the distinctions between latent and patent defects may be more important now that licensees have a duty to advise owners to disclose latent defects known to the licensee, and to walk away if the owner refuses to do so (Part 5, Division 2, s. 5-13 of the Real Estate Council Rules under the Real Estate Services Act).

Legally Speaking 384 will contain the facts and decisions in several cases to illustrate how these tests or rules are applied.

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