Material Latent Defect Versus Latent Defect. Is There a Difference? #486
CATEGORY: Legally Speaking
Two major disclosure duties govern every listing REALTOR®. Common law requires the Realtor to disclose any known latent defect. At the same time, the Real Estate Council of British Columbia (Council) demands compliance with the Material Latent Defect Rule.1 Are these two requirements the same?
Common Law Latent Defect
Under common law, the onus is on a buyer to satisfy him or herself about the quality of the real property being sold.2 It is the buyer's job to find any patent defect, being one discoverable by a reasonable inspection or reasonable inquiry. A latent defect is the opposite. The courts effectively define a latent defect as one that is not discoverable by a reasonable inspection or inquiry, and which makes the property dangerous or uninhabitable.3 A seller or listing Realtor must disclose any known latent defect. They may disclose verbally, but written disclosure is the best practice.
A recent Alberta case, McKenzie v. Smith, is a good illustration.4 The sellers' underground sewer line suffered infiltration by tree roots. The sellers knew there was a history of sewer problems, including a backup, but did not disclose it. These problems could not be discovered by a reasonable inspection. They were underground without telltale signs of previous sewer difficulties. Shortly after completion the sewer backed up again, making the basement uninhabitable for the buyers, who sued the sellers. The court found the sellers liable under common law for failure to disclose this latent defect.
Material Latent Defect Rule
Council's Material Latent Defect Rule is broad, covering circumstances corresponding to a common law latent defect, plus more. The Rule defines a material latent defect as:
|" …[a] material defect that cannot be discerned through a reasonable inspection of the property, including any of the following:||5|
|(a)||a defect that renders the real estate|
|(i)||dangerous or potentially dangerous to the occupants,|
|(ii)||unfit for habitation, or|
|(iii)||unfit for the purpose for which a party is acquiring it, if|
|(A)||the party has made this purpose known to the licensee, or|
|(B)||the licensee has otherwise become aware of this purpose;|
|(b)||a defect that would involve great expense to remedy;|
|(c)||a circumstance that affects the real estate in respect of which a local government or other local authority has given a notice to the client or the licensee, indicating that the circumstance must or should be remedied;|
|(d)||a lack of appropriate municipal building and other permits respecting the real estate."|
Unlike the common law, the Rule also demands written disclosure before entering an agreement.
The Council Rule Demands More
Generally, a common law latent defect is a very significant problem, usually involving risk to health or habitability as in the McKenzie case.
Yet, the broad wording of the Material Latent Defect Rule covers a wide range of problems, from the very serious to those without any physical danger at all. For example, in a recent discipline decision a residential property contained two rental suites.6 Neither suite had the necessary municipal permit. The Data Input Form ambiguously said, "Suite: None, Unauthorized Suite". There was no completed Property Disclosure Statement (PDS). The Council found that both listing Realtors breached the Material Latent Defect Rule by failing to tell the buyer in writing, before entering an agreement, that the suites were unauthorized.
It is easy to confuse the two standards. The terms latent defect and material latent defect are similar. The standard PDS may also confuse some. The PDS defines material latent defect for the seller, but only cites that part of the Council's definition equivalent to a common law latent defect. The PDS asks if the seller is aware of any material latent defect (the Council's term), being one that renders the real estate dangerous or potentially dangerous to the occupants, or unfit for habitation (effectively the common law definition).
The two requirements are not the same, but if you always abide by the Material Latent Defect Rule, you will likely meet the demands of both the Council and common law.
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