Imagine that you have recently purchased a property and after moving in, you discover an unexpected problem with the house that could be costly to repair. This could be something relatively minor like a faulty dishwasher or something major like a leak in the foundation, roof or electrical issue. Regardless of the problem, this situation will invariably lead to an analysis the Agreement of Purchase and Sale (“Agreement”) and an interpretation of patent vs. latent defects. This column will explain the difference between the terms and will provide some tips on how to best protect Buyers and Sellers in a real estate transaction.
Firstly, if there is any dispute, reference will first be made to the Agreement. What representations and warranties, if any, were included in the Agreement? What was the nature and scope of the representations and warranties? Words matter and every single word in an Agreement is important, especially cases of disputes between the parties which may lead to potential litigation. Now, an explanation of patent and latent defects will follow.
A patent defect is a visible defect which is easy to see or identify upon a normal inspection of the property. A broken window or crack in the flooring is a patent defect. Sellers are under no obligation to disclose patent defects. The rationale is that if it can be seen by an ordinary inspection of the property, then it need not be disclosed.
Latent defects are more complex. A latent defect are defects that cannot be seen by an ordinary inspection of the property. Examples of these are water damage, electrical issues, mould behind walls or foundations problems. A Seller is responsible for informing a Buyer about known latent defects which make the property uninhabitable, unsafe or dangerous. In cases where a Seller knows about a latent or material defect and fails to disclose it, this could result in the Buyer suing the Seller after closing for damages. Accordingly, it is extremely important to hire a professional home inspector, where possible, so that you as a Buyer are fully aware of potential defects with the property.
There are a number of different clauses that can be used in an Agreement to address possible defects. If a Seller is aware of a defect, it may be advisable to disclose the defect by using a number of clauses which the Seller’s realtor can prepare. By doing so, the Buyer is fully informed and cannot later sue the Seller for failing to disclose the defect. My advice is to disclose where possible so that you as a Seller can avoid a lawsuit in the future.
The principle of “caveat emptor” or buyer beware often comes into play when there is a defect. When the market was hot, many Buyers were purchasing homes without the benefit of a home inspection. This is a risky practice because a Seller will invariably defend any claim by a Buyer for damages relating to a defect by arguing that the Buyer failed to protect itself with a home inspection and therefore is deemed to take the property as is. If a home inspection is not possible, there are other means by which a Buyer can protect itself from surprises following closing. Examples of these are prior MLS listings, google searches on the property and speaking to neighbours. By doing some research, Buyers may be able to avoid nasty surprises. Similarly, there are numerous clauses, in the form of representations and warranties that a Buyer’s realtor can insert into the Agreement which can protect a Buyer.
Understanding the difference between patent and latent defects can be complicated. Hiring an experienced realtor and real estate lawyer is recommended to become informed and protected.