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Did you get what you paid for? Caveat emptor stands for the proposition that a purchaser takes a property, with all defects of quality and condition, as he or she finds it.

The sale and purchase of a property is, legally speaking, a beautiful thing. The vendor and purchaser agree on the terms of sale. The terms of sale include such items as the purchase price, adjustments, closing date, warranties and conditions, and inspection dates. The terms are embodied in a written contract--the Agreement of Purchase and Sale. An inspection is done (to the satisfaction of the purchaser), the closing date comes, money and deed are transferred, and the parties live happily ever after.

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Yes, a property transaction is a beautiful thing, that is, until it's not, and the parties do not end up living happily ever after. Things are not so pretty when defects in the quality or condition of a property are discovered after a property has been purchased. These defects can take many forms ranging from relatively minor defects such as small cracks in the foundation, water quantity shortages, and water seepages into the basement to more serious defects such as infestation problems, structural defects, contaminated water or environmental problems on the land, and wholesale sewage problems. Such situations have proven to be fertile ground for litigation between vendors and purchasers, out of which has come a body of law in relation to property defects. It should be noted that the legal principles discussed here are of general application to both commercial and residential properties.

As will be discussed, the remedies available to a purchaser, who discovers defects after purchasing a property, depend upon the terms of the Agreement of Purchase and Sale, the nature of the defect, the vendor's knowledge (or apparent knowledge) of the defects, and his or her statements to or conduct towards the purchaser in relation to any defect prior to the sale of the property.

Caveat Emptor--Let the Buyer Beware

In general, transactions involving existing properties are subject to the principle of caveat emptor, or buyer beware, with respect to the physical amenities and condition of a property. Caveat emptor stands for the proposition that a purchaser takes a property, with all defects of quality and condition, as he or she finds it. A vendor is not bound in law to disclose all known facts which may be material to the purchaser's judgment or to remove a mistake not induced by his own act. With the exception of uncompleted homes (discussed below), there is generally no implied warranty that a property being sold is of any particular quality or suitable for any particular purpose.

A purchaser seeking assurances concerning the condition of a property must do so either by express terms in the Agreement of Purchase and Sale or by an independent examination of the property. Purchase agreements often contain provisions for inspections to be done prior to closing, which purchasers most often take full advantage of through the services of a professional property inspector. Inspections performed prior to a closing may reveal issues concerning the condition of a property which a purchaser can use to negotiate a reduced price or an adjustment to the purchase price on closing. If an inspection is inconclusive on an important characteristic or feature of the property--for example, the inspector cannot see the condition of the basement walls due to the presence of clutter--and the responses of the seller do not satisfy the purchaser, the purchaser should seek to have a warranty or condition concerning the walls included in the Agreement of Purchase and Sale. An inspection can therefore be a guide to the terms which a purchaser should include in the Agreement.

Completed versus Uncompleted Homes

The general rule, therefore, is caveat emptor-except when it's not. A major exception to this rule involves uncompleted homes. The doctrine of caveat emptor stipulates that in the absence of an express warranty, there is no implied fitness for human habitation when buying an already completed home. The situation is different for uncompleted homes or homes under construction. For such properties, the courts have recognized the existence of an implied warranty of fitness for habitation. This is consistent with a builder's non-contractual duty in tort to take reasonable care to construct a building in a skilful and workmanlike manner using appropriate materials.

Patent versus Latent Defects

A patent defect is a fault in the structure or condition of a property which is readily apparent to an ordinary purchaser during a routine inspection. A latent defect is one which is not. All things being equal, the rule of caveat emptor applies equally to patent and latent defects. However, this is most often not the case. When a vendor knows about the existence of a latent defect and misrepresents its existence or conceals its presence in some way, caveat emptor will not apply. In such situations, the characterization of a defect as either patent or latent is significant in terms of liability for misrepresentation and the remedies available to a purchaser. If a purchaser fails to observe patent defects on inspection prior to purchase, he or she cannot complain after the purchase of the property because caveat emptor applies. If a defect is a latent one, and the vendor knows about it and misrepresents its existence, or conceals its presence, a purchaser can seek damages or seek to rescind the contract.

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This does not mean that it is necessary to have actually done an inspection for caveat emptor to apply. Caveat emptor applies where a defect is discoverable on an ordinary inspection or where the defect would have been revealed if a reasonably competent purchaser had performed an inspection. This means that a purchaser who sees evidence of water leakage in a basement or ought to have seen the water leakage on a reasonable inspection is prevented from recovery for damage because the defect is a patent defect to which caveat emptor applies. Furthermore, the presence of a latent defect does not automatically mean that a purchaser will be successful in a legal action against a vendor. It may be that a latent defect, not readily apparent to the purchaser upon inspection, was also unknown to the vendor. As noted above, there must be knowledge by a vendor and misrepresentation or concealment of the latent defect for a purchaser's claim to be successful.

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A Modified Rule of Caveat Emptor

The cornerstone of the law of property defects is the doctrine of buyer beware. But the main edifice of the law in this area consists of exceptions to caveat emptor. Latent defects and uncompleted homes are specific examples of this proposition. Generally, the law regarding property defects can be summed up in what can be described as a modified Rule of Caveat Emptor, which can be stated as follows: Absent fraud, mistake, or misrepresentation, a purchaser takes an existing property as he or she finds it, unless the purchaser protects himself or herself by contractual terms.

Each part of this statement must be examined to more fully understand its meaning.

Fraud, Mistake, or Misrepresentation

A representation is a statement of fact made by one party to a contract (vendor) to the other (purchaser) which, while not forming a term of the contract, is one of the things that induces the purchaser to enter into the contract (M.P. Furmston, 1986, Cheshire, Fifoot and Furmston's Law of Contract). A misrepresentation is a representation that is untrue.

An important distinction to remember here is that a statement of opinion is not a representation of fact and so cannot form the basis of a claim for misrepresentation. For example, a vendor's opinion that the water supply at a property is adequate is not a misrepresentation if the water supply turns out to be inadequate. On the other hand, the statement that the vendor has never had any water supply problems, when he or she has had such problems, is a misrepresentation.

The existence of a misrepresentation with respect to the condition of a property in itself does not establish an actionable claim against a vendor. Liability depends on whether the misrepresentation is fraudulent, negligent, or innocent. The type of misrepresentation involved in any situation depends upon the representor's state of mind and degree of care taken.

A misrepresentation can be verbal or written. Many cases of written misrepresentations in the residential property context, whether fraudulent, negligent, or innocent, involve the representations made in a Property Condition Disclosure Statement (PCDS). A PCDS is a document separate from the Agreement of Purchase and Sale, although the Agreement often contains a term that the PCDS is incorporated into the Agreement. The standard PCDS contains a series of questions, in checklist form, about a property. Vendors are asked to answer yes, no, or unsure to questions concerning such issues as problems with the plumbing system; structural problems; unrepaired damage or leakage in the foundation; leakage, damage, or dampness with the roof or walls; and repairs which have been undertaken concerning any such issues. There is also space provided in the PCDS for the vendors to provide explanations if they answer yes to any of these problems.

The operative element in fraudulent misrepresentation is fraud. The courts have treated fraud as an elastic concept encompassing a wide range of circumstances. Central to a finding of fraud is the absence of an honest belief in the truth of statements made about the condition or quality of a property. If vendors honestly believe in the truth of their statements, there can be no fraud. In the 1889 British House of Lords decision in Derry v. Peek, fraud was defined as a false statement made "knowingly", or "without belief in its truth, or recklessly, careless whether it be true or false." Therefore, a vendor, for example, who truthfully informs a purchaser that he has always had an adequate water supply will not be found liable for fraudulent misrepresentation if the water supply proves inadequate for the purchaser's needs. However, fraudulent misrepresentation will be found if a vendor is aware of the purchaser's greater needs and represents that the water supply will be adequate for those needs when he or she knows that the quantity of water will not meet those needs.

As J. Victor Di Castri sets out in The Law of Vendor and Purchaser (1988), the courts have adopted the following requirements for a successful claim for fraudulent misrepresentation:

* the misrepresentations complained of were made by the vendor to the purchaser;

* they were false in fact;

* when made, they were known to be false or were recklessly made, without knowing whether they were false or true;

* by reason of the complained-of representations, the purchaser was induced to enter into the contract and acted thereon to his prejudice; and

* within a reasonable time after the discovery of the falsity of the representations, the purchaser elected to avoid the contract and accordingly repudiated it.

The application of these requirements has resulted in Findings of fraudulent misrepresentation in cases where the vendors have knowingly misrepresented such things as water leakage or damage in basements; the existence of structural or foundation problems with a property; water quality and quantity defects; and the condition of sewage disposal systems. In one example of such a case, a vendor knowingly misrepresented that the sewage disposal system was new when, in fact, the system was not new and failed to meet health standards.

Closely linked to the concept of fraud and fraudulent misrepresentation is the issue of concealment of defects by a vendor. This was alluded to in the discussion above on the application of caveat emptor to latent defects. If a vendor actively conceals defects which would otherwise be patent, this is treated as fraudulent, and a contract is voidable if a purchaser has been deceived by it. Resulting damages are also recoverable. Caveat emptor does not assist a vendor who has concealed a latent defect. In this way, conduct can be considered a form of material misrepresentation amounting to fraud. A common form of concealment amounting to fraud occurs when a vendor does repair work in a basement prior to the buyer's inspection to hide evidence of leaking from the walls or foundation, or when the vendor clutters a basement to hide evidence of structural damage.

There have also been cases in which vendors have been held liable for conduct calculated to mislead purchasers or lull their suspicions with regard to a defect known to the vendor. In these circumstances, the courts have found this conduct to have the same effect as a concealment and therefore have found them to be fraudulent. In King and Bowser v. Kesebi, a 1985 Nova Scotia case, a house had defective siding of which the vendor was aware. In fending the vendor liable for fraudulent misrepresentation, the Court noted that the vendor had "intentionally concealed deterioration of the siding of which he was well aware." In regard to the fact that the deficient condition of the siding had become obvious, the Court said that the vendor had "lulled the suspicions of the plaintiffs (purchasers) by (1) eluding to his knowledge and expertise, (2) by representing that the house was of sound construction and (3) by stating that the brown spots were of no importance and were due to normal wear and tear."

In Unrau v. Gay (1983), another Nova Scotia case, the vendor sold a house that had basement walls that leaked and were unstable. The plaintiff/vendor knew that the condition of the basement walls would be a problem if she was to sell the property and undertook repairs prior to sale. The Court found that the work undertaken by a workman, hired by the vendor, was only cosmetic in nature and had the effect of concealing a defect which would otherwise have been patent. Furthermore, the conduct of the vendor had the effect of lulling the suspicions of the purchasers with regard to the defects in the foundation walls. This case is interesting in that while the Court seemed to suggest that there was no fraudulent intent on the part of the vendor, it found that the combined effect of concealing a known defect and the lulling of the purchaser's suspicions concerning the defect gave rise to recovery of damages in the same way as if there had been fraudulent misrepresentation.

A key component in establishing fraudulent misrepresentation is that the purchaser must have been induced by the misrepresentation to enter into the contract for the purchase of the property. In other words, the purchaser must have relied upon the misrepresentation to the point of being induced to enter into the Agreement of Purchase and Sale. A vendor cannot be found liable for fraudulent misrepresentation if the representations were made after the contract was entered into.

Can silence amount to a misrepresentation? The general rule is that mere silence is not misrepresentation. A vendor does not have to disclose a material fact, or latent defect, which might influence a purchaser's opinion of a property. The silence of a vendor in the face of a purchaser who misleads himself as to the condition of a property does not lead to liability for fraud or any of the forms of misrepresentation unless the purchaser's serf-deception is due to active misrepresentation or misleading conduct on the part of the vendor. An exception to this rule is in relation to defects which make a property dangerous in itself or unfit for habitation. There is a line of cases which supports the principle that a vendor has a duty to disclose latent defects which make a property dangerous, or are dangerous in themselves. This may apply to situations involving infestation or contamination defects in properties.

A 1988 Ontario case dealing with termite infestation attempts to take the law further. In Jung v. Ip, the Court held that the law in Ontario is such that vendors are required to disclose latent defects of which they are aware, "Silence about a known major defect is the equivalent of an intention to deceive." Most cases on this issue do not seem to adopt this more expansive view. However, there may be some support for the existence of a duty on the part of vendors to disclose the existence of a latent defect that is known to them but that a purchaser has no means of discovering, and the vendor knows that the defect will render the property unfit for the purpose for which the purchaser seeks to acquire it.

Negligent misrepresentation is an innocent misrepresentation made without reasonable care or negligently. The requirements to establish a claim in negligent misrepresentation are:

* there must be a duty of care based on a special relationship;

* the representation in question must be untrue, inaccurate, and misleading;

* the representor must have acted negligently in making the representations;

* the representee must have relied, in a reasonable manner, on the negligent misrepresentation; and

* the reliance must have been detrimental to the representee in the sense that damages resulted.

As with fraudulent misrepresentation, reliance on the misrepresentation is a key element in a claim based on negligent misrepresentation.

In the 2005 case of Thompson v. Schofield, the Nova Scotia Supreme Court dealt with a situation in which the vendors had represented in a PCDS that they were unaware of any plumbing, structural, or foundation problems. After the closing, the purchasers found water stains in the basement and large cracks in the basement walls through which leaking had occurred. The Court found that the vendors were aware of the cracks and leaking and had failed to disclose to the purchasers certain repairs for this leaking. The PCDS answers were held to have been inaccurate and misleading, and the Court found the defendants acted negligently in making them.

Innocent misrepresentations are misrepresentations which the vendor honestly believes to be true. A purchaser cannot seek damages for an innocent misrepresentation but can seek rescission of the Agreement.

A mistake on the part of a vendor or purchaser as to the condition or quality of a property may also make the doctrine of caveat emptor inapplicable. A purchaser may be able to rescind an Agreement of Purchase and Sale if both parties to the Agreement are under a fundamental mutual mistake, or error in substantialibus, as to the quality of the subject matter. One example of this is where the parties believed the property to be built on a complete foundation.

Protection Offered by Contractual Terms

An Agreement of Purchase and Sale defines the legal relationship between vendor and purchaser. The terms of an Agreement determine the contractual rights and remedies available to a purchaser who is faced with the discovery of a defect. A purchaser who discovers a property defect after closing can bring an action both in tort (e.g., for fraudulent or negligent misrepresentation) and breach of contract.

An Agreement of Purchase and Sale will most often contain several terms with respect to the condition of the property. These terms can be either warranties or conditions. A warranty is an obligation or representation concerning the property which, if breached, will entitle the purchaser to seek damages. A condition is a fundamental term of the Agreement which, if breached, will entitle the purchaser to repudiate the contract or seek damages. The seriousness of the breach will often dictate whether it is treated by the courts as a warranty or as a condition. For example, a term that the property has no leaks in the basement will probably be considered a warranty whereas a term which represents that the property's foundation is sound will most likely be considered a condition.

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So, in conclusion, let the buyer beware is the general rule. But if there is fraud, mistake, misrepresentation, or breach of a warranty or condition in relation to the condition of a property, let the seller beware.

Mark V. Rieksts is an online municipal law lecturer and a lawyer with the Nova Scotia Department of Justice.
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Title Annotation:Feature Report on Real Estate Law
Author:Rieksts, Mark V.
Publication:LawNow
Geographic Code:1CANA
Date:Jul 1, 2007
Words:3304
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