Latent Defect Disclosure


If you're interested in buying a home, what does the seller have to disclose about the property prior to making an offer?

It's really easy to forget about latent defect disclosure during the process of buying a home. You're focused on architectural style, room sizes, kitchen cabinetry and floor materials, in other words, the aesthetics of the structure. You're excited. And that's perfectly natural.

Especially if you're a novice in the home buying process, the foundations, electrical wiring, plumbing, heating and cooling systems are often not even on your radar. Nevertheless, these house ownership nuts and bolts are just as important, if not more so, particularly when you're buying an old house.

Sometimes, to entice a buyer prospect into offering on their property, sellers fraudulently attempt to hide problems. Or they're oblivious to their responsibility for latent defect disclosure. Or they may be innocently unaware of the serious defect and presume that the buyer's home inspector will discover the issue and report to their client. Or maybe the listing agent has no clue about the responsibility for the seller to disclose such defects.

However, a seller is legally obligated, under latent defect disclosure requirements, to inform a buyer prospect during the course of a transaction, through their real estate agent, any and all material latent defects of the subject property. I emphasize the word, material; you'll learn why near the end of this article.

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Briefly, patent defects are those that are clearly visible to any reasonable person while inspecting the property without any technical special equipment. Latent defects, on the other hand, are not apparent and may not be discoverable, even by a home inspector or other expert.

Examples of patent defects include clearly visible cracks in a foundation wall, safety railings that fail to comply with the local building code, visible ceiling or wall stains suggesting water leakage from a leaky roof or damaged plumbing. Or it could be something that may only be discovered by a thorough home inspection, such as faulty electrical wiring or rotten roof trusses.

Neither the seller or their listing agent have any obligation to disclose patent defects to a buyer prospect since these issues could be found during a home inspection, or are quite visible to the potential buyer during the viewing. It’s up to the buyer to do their own research and due diligence, and ask questions.

Latent defects are an entirely different kettle of fish. For example, consider a house that has a history of flooding, or has superficially repaired fire damage. In both of these examples, the impact may not visible without an invasive inspection. Or maybe the house has an infestation of carpenter ants not easily seen since the damage is so far limited to the crawl-space beneath the house. In such cases, the seller is obligated to comply with latent defect disclosure of the problem, provided - importantly - that they know about it. Nevertheless, the defect must be a ...

Serious Risk to the Health and Safety of the Occupants

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It could be a structural defect that poses a risk of a wall or ceiling collapsing, or of periodic flooding that could foster the growth of toxic mould. Or it could be an old buried oil tank on the property. Such situations would definitely require the seller to comply with latent defect disclosure rules.

However, if the home has a crack in the basement foundation where water could leak through, the house may be liveable, and disclosure would not necessarily be required. Having said this, if the foundation crack is serious enough and hidden behind drywall or paneling, if the seller is aware of the crack, then such a defect might be considered worthy of disclosure.

The buyer must not only assume some personal responsibility for due diligence, but the buyer's realty agent, home inspector, lawyer and possibly other professional inspectors and contractors must also, if hired, step up to the plate. They must take all reasonable steps to determine and disclose all facts about the property that might affect the buyer's decision to proceed with the purchase.

This would include opining by the contractor or home inspector about the cost to rectify the problem. The buyer's agent should offer, not only their considered opinion regarding the current market value of the property, possibly creating a Comparative Market Analysis (CMA), but also a suggestion of where to begin the bidding. Also, recommendations regarding what conditions should be included in the offer contract.All of this is assuming, of course, that the buyer is not competing with other buyers; that would change everything.

If there are possible defect issues that have come to the attention of the buyer or their agent, the agent could ask the seller’s agent direct specific questions about such concerns, and insert appropriate clauses in the Agreement of Purchase and Sale. The buyer's agent could also seek available documentation pertaining to the subject property, possibly from the local municipal office.

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A Seller Property Information Statement (SPIS) might be available. Such a statement, completed and signed by the homeowner, provides various details, including any defects and other relevant information, about the property. Such reports, however, usually state that the information is 'to the best of the homeowner's knowledge and belief'. And the seller is under no obligation to complete an SPIS. Thus, a buyer mustn't assume that one will be available.

Even if a SPIS is available and fully completed, the best advice I can offer a buyer is to get their own home inspection. Consulting a skilled home inspector (they're not all highly skilled) or licensed contractor (they're not all trustworthy) is the best way to determine if any defects exist with the house’s major systems. And make sure you, as the buyer, attend the home inspection.

Remember that a fully informed buyer is a more confident buyer, and ultimately, a happier home owner. If your agent refuses or is incapable of addressing any potential issue, you might want to consult with your real estate lawyer. Or even hire a different, more qualified agent.

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Other issues that could demand latent defect disclosure by a seller or agent

Psychological Stigmas

A stigmatized property is one that a buyer might shun for reasons that are unrelated to its features or physical condition. Maybe an occupant died, from natural causes or murder or suicide. Maybe a notorious criminal once called the place home. Or the house is a former meth lab or marijuana grow-op, though remediated and made safe for occupancy. Or it could be simply the belief that a house is haunted. Hey - call the ghost-busters! It's certainly a controversial topic.

Opinions vary as to what sort of stigmas (or stigmata) must be disclosed at sale. Some argue that the seller has a duty to disclose any such infamous history of the property. In practice, such a requirement falls into two categories: demonstrable (physical) and emotional. Local jurisdictions vary widely in their interpretation of these issues and occasionally contradict federal law.

Though a psychological stigma, a non-physical attribute of a property, could trigger a negative emotional response in a buyer prospect, in many jurisdictions (including Ontario), there is no legal requirement to disclose the existence of stigmas to buyers. Thus (according to my research at the time of writing), such issues do not fall under the requirement for latent defect disclosure.

While events that could be considered stigmatizing occurred in or near the property for sale, they do not necessarily have any bearing on the function or appearance of it. Nevertheless, you might perish the thought of your future home having a criminal past or a reputation of being haunted.

Though sellers aren’t legally required to disclose any potential stigmas to buyers, you can try to avoid buying a home that you consider stigmatized. Have a frank conversation with your real estate agent. No doubt you advised them of what you want in a new home, but you should also advise them of what you don't want, including a home with such issues as deaths or paranormal entities. Your agent may think you're a nutcase, but what they think of you is really none of your business. It's going to be your home - not theirs.

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Your agent can then carefully scrutinize property listings to ensure compliance with your explicit wish list. In my experience, stigmas are not typically noted in the listing details. So, they must make a specific inquiry of the listing agent on your behalf. It's really no different that your agent pre-viewing a listed property to ensure that it has many if not all of the physical features on your shopping wish list.

Sellers certainly have the right to sell their home for the highest price possible. And to accomplish this, a seller may avoid disclosing a possible stigma issue. Or latent defect disclosure may not even enter their mind. After all, the disclosure of such issues to prospective buyers could adversely affect the ultimate sale price. Or it could conceivably limit the number of prospective buyers.

The seller could specifically instruct their agent to not disclose a stigma. The seller’s agent, frankly, should explain to their seller client that they cannot deceive anyone, that they are ethically and legally compelled to be honest with other parties. If the agent is asked a direct question about the matter, they must tell the truth. I suppose they could decline to answer the direct question from the buyer's agent, and instead, advise that the buyer’s agent investigate the matter themselves. Such a response, however, would obviously raise a red flag.

If this is the situation, try an Internet search of the home's address. Maybe there are old news reports about the property. Or you could survey the neighbours about the house, the street and the neighbourhood. I suggest that if something happened there that you might consider covered under the seller latent defect disclosure requirement, the locals will probably know about it.

Remember Caveat emptor? It's Latin for "let the buyer beware". Generally, it is the contract law principle that controls the sale of real property after the date of closing. It's based on the premise that a buyer typically has less information about the property they 're buying than the seller. If a particular latent defect is not covered under the requirement for latent defect disclosure, then such an ill-defined property defect may be hidden from the buyer. If there's no specific seller warranty in your Agreement of Purchase and Sale, the ancient rule applies. And you as the buyer should beware.

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