Latent Defects

RECA is pleased to introduce a new feature in the Regulator. Legal Corner will feature recent court cases relevant to industry members in Alberta. Where appropriate, RECA will provide commentary or explanatory notes.

In this first edition of Legal Corner, RECA wants to draw industry members’ attention to a recent Alberta court case that touches on the issue of latent defects.

In Gibb v. Sprague, 2008 ABQB 298:

• the Buyers purchased a house from the Sellers
• the Buyers’ inspection of the property did not reveal any significant and/or material defects in the house
• the Sellers provided them with a home inspection report from two months earlier
• the Buyers took possession of the house on July 15, 2005
• in Fall 2005, the Buyers discovered mould behind the baseboards in the basement bedroom and mould to a height of three feet on the drywall of exterior walls. Additionally, after removing the inside walls of the basement, the Buyers also noticed that the telepost supports were rusted 2 to 3 inches from the floor
• the Buyers’ alleged that the basement damage was a latent defect, that the Seller knew about the basement damage and fraudulently misrepresented its existence prior to execution of the Purchase Agreement.

Patent defects are those that can be discovered by conducting a reasonable inspection of the property and making reasonable inquiries into its qualities. In the case of patent defects, the purchaser must rely upon their own personal inspection. However, a latent defect is one that could not have been identified by a purchaser upon a reasonable inspection of the property. Additionally, a latent defect may render a property unfit for habitation. In this case, the presence of mould in the basement made the basement unfit for habitation. Latent defects known to a seller must be disclosed to a buyer.

Through a reasonable visual inspection of the basement, the Buyers could not have discovered the presence of mould in the basement, as such, the mould was a latent defect. The Sellers, during their testimony, admitted that the basement had been flooded by 2 to 3 inches of water in 1998. However, they had the basement professionally cleaned and dried, and thus denied having any clues that would indicate the presence of mould in the basement in present day.

The court found it is reasonable to expect that someone whose basement has flooded in the past would inspect the basement for signs of mould in the future and that it is reasonable to expect such individuals to advise potential buyers of the property’s history.

The first time the Buyers visited the property, husband Buyer thought the basement smelled “musty.” On a later visit to the property, wife Buyer noticed deodorizers in virtually every outlet in the basement. Wife Seller said they were there to mask the smell of cigarette smoke.

The court found that the Sellers’ use of deodorizers was to dispel the Buyers’ suspicions of the presence of mould, and was sufficient evidence for the court to find fraudulent misrepresentation. 

The second part of the fraud allegation relates to a conversation concerning whether the basement of the house had been flooded. Wife Seller said she advised her realtor and a previously interested buyer the basement flooded in the past, because they asked her. But, she says wife Buyer never asked about water in the basement. However, wife Buyer testified that she did ask wife Seller about previous basement flooding and that wife Seller shook her head to indicate a “no” answer.

Because the Sellers’ brokerage representative and a previously interested buyer questioned wife Seller about past basement flooding, she knew that a yes answer may adversely affect the sale of the House. It is therefore logical to assume that she would either choose not to disclose to a potential buyer such as the Buyers as to previous water in the basement or deny the fact altogether.

The Sellers included in the Purchase Agreement an exclusionary clause about there being no warranties relating to the property. However, since the Buyers proved that the Sellers were guilty of making a fraudulent misrepresentation relative to the basement damage, the exclusionary clause cannot prevent the Buyers’ claim for the costs associated with remedying the basement damage. 

The court awarded damages to the Buyers in the sum of $12,186.45.

 

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