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Caveat emptor: buyer beware!



In the business of buying and selling land, it is essential that at the completion of the sale the vendor is entitled to the purchase money, and the purchaser acquires the title to the land. Because of this, the courts have developed the legal doctrine known as caveat emptor or, translated, let the buyer beware. According to this doctrine, in the absence of

* an express provision in the sale agreement,

* fraud, or

* a determination that the purchaser has purchased something totally different from that bargained for, the purchaser is deemed to have acquired the land together with all accompanying defects upon conveyance of title. Where none of these exceptions are present, caveat emptor will prevent a purchaser from re-opening the contract, if subsequent to conveyance, the purchaser concludes that the land does not have the quality that the purchaser assumed it had.

Defects Affecting Land

Defects affecting land fall into two classifications: those that one can see (a patent defect) and those that one cannot (a latent defect). A determination of the application of caveat emptor will depend upon the classification. Without an express provision in the sale agreement, a vendor is not required to communicate to the purchaser any patent defects that might affect a purchaser's judgment relative to the acquisition of the land. Accordingly, caveat emptor will apply to patent defects, unless it can be shown that the vendor has intentionally concealed their presence. In contrast, a vendor must communicate to the purchaser all known latent defects. As latent defects cannot be discovered by observation, caveat emptor will only apply when their existence was unknown to the vendor at the time of sale.

Patent Defects

An example of a case involving a patent defect is 638733 Ontario Inc. et al. v. Ward heard by the Ontario District Court in 1990. After the closing of the transaction, the purchasers discovered that the floor tiles in the house they had purchased were cracked and broken. They claimed that they were unaware of the dilapidated state of the floor tiles when they had inspected the house prior to entering into the sale agreement. They brought an action to recover damages from the defendants for the cost of the floor's replacement. The purchasers alleged that the damage was known to the vendors when the sale agreement was entered into and that the defect had been hidden by them. After reviewing the evidence, the Court pointed out that the vendors had made no attempt to hide the state of the floor tiles and that the defects existed on the date the sale agreement was entered into. Furthermore, the Court maintained that the purchasers could easily have found the damage by a visible inspection of the floor. Accordingly, given the circumstances of the case the doctrine of caveat emptor applied.

A further example of the classification of a defect as a patent one is the Ontario Court of Justice 1997 decision in Alderman Holdings Inc. v. McCutcheon Business Forms Limited. In this case the plaintiff corporation purchased property from the defendant vendor, and although the plaintiff had inspected the state of the roof before closing, it claimed that it was not aware of its defective state. Subsequent to the completion of the purchase, the roof required minor repairs which eventually necessitated replacement of most of the roof. The defendant vendor argued that the defect in the roof was a patent defect. The Court held that the doctrine of caveat emptor applied to defeat the plaintiff's claim since the defective roof was a patent one. In this respect, the Court made specific reference to the fact that the plaintiff purchaser had gone on the roof and he therefore had adequate opportunity to inspect. Furthermore, the Court determined that the defendant vendor was under no obligation to draw to the plaintiff's attention what was essentially a patent defect.

Latent Defects

An excellent example concerning a latent defect is the British Columbia Supreme Court's 1979 decision in Allen et al. v. McCutcheon et al. Here, the plaintiffs purchased a house that had been renovated by one of the defendants and also had additions built on to it. The building had been improperly constructed in that it had no foundation and faults became apparent. The property was subject to a British Columbia Hydro right-of-way easement, which was not registered in the Land Registry Office. This easement was found to be 25 feet in width and not five feet as the defendants had told the plaintiffs. Upon ascertaining the condition of the building and the true width of the right-of-way, the plaintiffs sued the defendants for rescission of the contract and damages. The Court concluded that the doctrine of caveat emptor did not apply where latent defects are actively concealed by the vendor. The information given to the plaintiffs concerning the width of the right-of-way was made recklessly by the defendants to induce the purchase without knowing or caring if it was true. This constituted fraudulent misrepresentation. The plaintiffs were under no legal duty to investigate the truthfulness of what they were told. Furthermore, the Court held that the workmanship on the house was of such poor quality that the house was structurally unsound and the defendants had committed fraud by failing to disclose the absence of foundations.

An unusual example concerning the doctrine of caveat emptor in the context of latent defects is the 1987 Ontario Supreme Court decision in Sevidal et al. v. Chopra et al. In this case the plaintiffs entered into a sale agreement to purchase a house from the defendant vendors. Subsequently, the plaintiffs became aware of radioactive contamination in the area through newspaper reports. The plaintiffs then spoke to an employee of the defendant Atomic Energy Control Board (AECB) and were assured that there was no contaminated soil on the property, that the radioactive material in the area was of low level, and that it would in any event be removed by the government. Although not disclosed to the plaintiffs, testing in the area had not been completed, and a few days before the closing, the AECB found radioactive soil at the property. In accordance with internal AECB policy, disclosure of the finding was made only to the registered owners, the defendant vendors. The vendors had not disclosed the presence of radioactive contamination in the area to the purchasers, nor did they advise the purchasers of the finding of contamination on their property. The plaintiff purchasers became aware of the contamination after the closing. When it became apparent that the AECB was not able to find a suitable disposal site to which the contaminated soil could be removed, the plaintiffs sold their house and claimed for damages. In finding the defendant vendors liable, the Court ruled that because the vendors knew of the potentially dangerous latent defect, they had a duty to disclose the contamination in the area prior to entering into the sale agreement. Furthermore, the vendors also had a duty to the plaintiffs to disclose, prior to closing, the subsequently discovered radioactivity on their property.

Changing Defects

Although the ability to detect a defect through normal observation is a relevant consideration in determining classification, the courts have in certain cases regarded the defect as patent rather than latent. To complicate matters further, under certain circumstances, the classification of a defect may change due to a particular event. Hence, what may once have been a latent defect may become visible and therefore be considered patent.

This change in a defect's classification occurred in the 1995 case, Davies et al v. Clarke et al. , where the Manitoba Court of Queen's Bench dealt with a situation involving water seepage in a basement wall that at one time was considered as a latent defect but later, due to its obviousness, became a patent defect. In this case, the defendant vendors knew that their basement walls were poorly constructed and they had in fact replaced one wall that had crumbled. They subsequently framed, insulated and dry-walled the basement. There was evidence of cracks which did not appear to be serious. When the plaintiff purchasers purchased the house, the defendants advised them that there had been recent leaking but did not disclose the history of the basement wall repairs. Subsequent to the completion of the purchase, water poured into the basement and the walls crumbled, making the house structurally unsafe. The Court held that the defendants had failed to address whether what they knew, or ought to have known, should have been disclosed. Their knowledge of a latent defect that became a patent defect, therefore entitled the plaintiffs to damages.

Duty of Care/Duty to Disclose

While each case is decided on its particular circumstances, caveat emptor does not not apply where a vendor knows of the presence of a latent defect connected with the land and fails to tell the purchaser of this prior to completion of the sale. Without actual knowledge of the presence of latent defects related to the land, a purchaser must rely upon the vendor to provide this knowledge. In order to lessen the harsh effects that may result from latent defects associated with land, the courts have imposed a duty of care on the vendor with respect to the purchaser and the condition of the land. As a result of this duty of care, a vendor is required to tell the purchaser of the existence of all known latent defects affecting the land. This disclosure requirement continues until the date of conveyance of the title to the land. In these instances, should a vendor remain silent or conceal a latent defect associated with the land, the conduct of the vendor will be considered a fraud on the purchaser in the form of deceit. Where fraud is established, rescission of the contract will be allowed.

Failure to disclose a latent defect was found in the 1974 case of Gronau v. Schlamp Investments Ltd. In this case, the plaintiff purchased an apartment building from the defendant. Prior to the purchase, the plaintiff had viewed the outside of the building and examined two of the suites which appeared to be in excellent condition. However, prior to the purchase a serious crack had appeared in the east wall of the building. The defendant had received advice from a structural engineer that the crack was quite serious and that its repair would require substantial expenditures. Instead of repairing the defect, the defendant chose to conceal it by way of a temporary patching with matching bricks. Shortly after the repair the defendant sold the property to the plaintiff. Upon discovering the concealed damaged wall, the plaintiff brought an action against the defendant claiming compensation and rescission of the contract. The Manitoba Court of Queen's Bench held that the doctrine of caveat emptor did not apply to latent defects and where, as in this case, these defects were actively concealed by the vendor, the purchaser was entitled to seek rescission with compensation for damages resulting from the concealment.

Caveat emptor was created by the courts, and what the courts create, they can change. Accordingly, over time the courts have in certain instances stepped in and limited the circumstances under which caveat emptor will apply. Most recently, this judicial intervention has occurred where, after completion of the sale, the state of the land is found to be uninhabitable or dangerous to persons or property. In these situations, the courts have refused to apply caveat emptor on the justification that a vendor owes a duty to the purchaser to disclose those defects in the land that are known to the vendor and that could not have been identified through normal inspection by the purchaser.

The rationale for this duty of care lies in the close relationship or connection between a vendor of land and the purchaser. Due to this relationship or connection, it is assumed that the vendor knows that if he or she acts in a manner that is considered careless towards the purchaser that the purchaser may incur damages. Should a vendor breach this duty of care, caveat emptor will not prevent recovery by the purchaser from the vendor for damages incurred. In these situations, liability will be imposed not simply because the vendor had actual knowledge as to the presence of the latent defect but also when a vendor ought to have known of the existence of the latent defect, provided the purchaser had advised the vendor of the purchaser's proposed use of the land.

Donald J. Manderscheid, Q.C., was Senior Legal Counsel with the Law Branch, Corporate Services Department. City of Edmonton, in Edmonton, Alberta at the time that this article was written. He is now a Justice of the Court of Queen's Bench of Alberta.
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Title Annotation:Feature Report on Consumer Law
Author:Manderscheid, Donald J.
Geographic Code:1CANA
Date:Mar 1, 2008
Previous Article:So I clicked "I Agree"--am I bound?
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