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Unfortunately, as a recent British Columbia Supreme Court decision has shown, real estate transactions are not always trouble-free. Lavigne v. Ellis demonstrated that, if serious defects are discovered in a property subsequent to the completion of its purchase, the purchaser may not be entitled to a remedy from the seller. The doctrine of caveat emptor or “let the buyer beware”—is based on the notion that purchasers must fend for themselves, seeking protection by express warranties from the vendor or by independent examination of the premises. If they fail to do so, they are often without recourse.
When purchasers consider legal actions against vendors, they must first consider the nature of the defect. In broad terms, courts have traditionally distinguished between “patent” and “latent” defects: the former are those which are visible or discoverable through reasonable inspection and inquiry while the latter are those that are less evident.
The onus is on the purchaser to inspect and discover patent defects. A defect which might not be observable on a casual inspection by a purchaser may be considered patent if a qualified person’s reasonable inspection could have discovered it. In addition, defects that a reasonably careful inspection and inquiry have not revealed might be regarded as latent but, in order to avoid the doctrine of caveat emptor, they may also need to be such as to render the property uninhabitable or dangerous.
Exceptions to the doctrine exist in the case of latent defects if the vendor has behaved fraudulently or if there is a fundamental difference between the property that was bargained for and the one eventually obtained.
In a 1998 B.C. Supreme Court case, McCluskie v. Reynolds, the judge summarized the conditions that a purchaser must usually prove to recover for alleged defects from a vendor as follows:
To succeed in court, a purchaser must therefore prove that a vendor knowingly made misrepresentations and/or acted recklessly (in other words, acted carelessly to the point of being heedless of the consequences) with respect to his or her disclosure obligations. This can be a dauntingly high standard for an aggrieved purchaser to meet. In Lavigne v. Ellis, (which was a summary trial dealing only with liability issues), the plaintiffs took the position that they should be compensated for undisclosed defects in the basement of the Kelowna house they purchased in 2009. They were unsuccessful despite the fact that, in the words of the trial judge, these apparent defects turned “the plaintiffs’ dream home into a nightmare.”
Amanda and Kevin Lavigne, the plaintiffs in this case, sued Shawn Ellis and his real estate agent, Steve Wright, as well as Mr. Wright’s company. The essence of the Lavignes’ claim was that the defendants concealed or misrepresented latent defects in the house’s basement, which, according to an affidavit, one of Mr. Ellis’ tenants had converted into a suite and, in the process, had installed a sub-floor. Mr. Ellis gave permission for the conversion but never saw it.
Mr. Ellis had purchased the property for investment purposes in 2004. He never lived in it. In 2009 he listed the property for sale with Mr. Wright. The listing on the Multiple Listing Service described the Kelowna property as a “good, solid Glenmore home”; the purchasers viewed the house with their own real estate agent and, to quote the judgment, “formed a favourable impression of the Property.”
In their affidavit, the Lavignes stated that they asked both the real estate agents involved about the sub-floor. Their evidence was that their agent stated that “sub-floors were common” and that Mr. Wright, the defendant’s agent, stated “the sub-floor was put in to reduce electricity bills.”
The Lavignes entered into a standard agreement with the vendor to purchase the property for $325,000. They also obtained a home inspection report which was generally “positive” and, in particular, noted that “the foundation wall was in good condition with non-structural cracks noted.”
Almost two years after moving into the house, the Lavignes noticed that cracks had developed in the drywall, doors were failing to close properly, and the outside deck was separating from the house. They hired a foundation professional and, after the sub-floor was removed, “significant cracking in the foundation was evident” to the extent that Mr. Lavigne claimed that the cracks were “wide enough in places that he [could] insert his hand into them.” In spring 2012, an area of about 40 square feet in the basement was covered in water up to 4 inches deep.
The purchasers, in essence, argued that the sub-floor had been installed to hide the cracks in the foundation and that extensive cracking throughout the house was purposefully concealed. The trial judge found, however, that the purchasers had failed to establish that the defects came under one of the exceptions to the doctrine of caveat emptor. The judge accepted the evidence of the vendor that he was unaware of any such defects. In particular, the judge found that the vendor:
This case demonstrates the challenges involved in proving fraudulent or reckless conduct in the context of disclosure obligations of vendors in real estate transactions. While purchasers may be aggrieved to discover that what they thought was their “dream home” has substantial defects they were unaware of at the time of the purchase, the doctrine of caveat emptor can create a high bar: civil courts are unlikely to attribute fraudulent or reckless conduct without strong evidence.
In such circumstances, prospective purchasers should always engage competent and experienced experts to inspect and evaluate a property that they are considering to buy. If necessary, they should also retain legal counsel to fully review the contract documents and the circumstances surrounding the purchase transaction. This case illustrates that not only is “buyers beware!” prudent advice, it is also the law.
For more information on the caveat emptor doctrine in real estate transactions and real estate law in general, please contact Mark.
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Our Commercial Real Estate Group has experience in all aspects of the law and practice related to commercial property acquisitions, management, structuring, development and sales.
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