The expressions “buyer beware” and “caveat emptor” are not just everyday idioms. They also carry legal significance and form the basis of a nuanced area of the law that applies to real state transactions. Both vendors and purchasers would be wise to acquaint themselves with this area of the law, as it may influence their respective risk assessments in such transactions.
What is “Caveat Emptor”?
The phrase “caveat emptor” is a short form of the complete Latin phrase “caveat emptor, qui ignorare non debuit guod jus alienum emit,” which translates to “Let the purchaser, who is not to be ignorant of the amount and nature of the interest, exercise proper caution” (see the recent Superior Court of Justice decision in CanDeal Group Inc. v. Capservco Limited).
In the legal system, the phrase “caveat emptor” generally refers to the legal principle, “let the buyer beware.” In other words, it refers to a principle whereby a real estate purchaser must “protect himself or herself by the law of contract, that is, by bargaining for protections or for a careful inspection of the property being purchased” (see CanDeal Group Inc.).
The general rule is that purchasers of real estate must protect themselves against the possibility the property has physical defects. This protection is generally done by including appropriate terms in an agreement of purchase and sale or by inspecting the property before closing to ensure it is satisfactory.
Caveat Emptor Generally Protects a Vendor Against Claims Related to Patent Defects
Whether or not “caveat emptor” applies to a particular defect in property may depend on the nature of the defect. Generally, the principle applies to “patent defects” about the property’s physical quality. These are faults “that are perceivable by inspection and ordinary due diligence by the purchaser” (see CanDeal Group Inc.). This contrasts with “latent defects,” which are “not perceivable to an ordinary purchaser during a routine inspection.” Latent defects are also generally subject to “caveat emptor” but with notable exceptions.
Latent Defects May Render the Vendor Liable
Latent defects may render the vendor liable under specific circumstances, even though they are generally covered by the principle of “caveat emptor.” These situations arise when the defect is hidden and cannot be identified by a routine inspection, but the vendor knew about the issue and either failed to disclose it or intentionally concealed it.
Additionally, if the defect poses a significant risk to health or safety, courts may hold the vendor accountable, especially if the defect violates building codes or safety regulations. In such cases, the vendor’s responsibility is based on their knowledge of the defect and their failure to inform or address it.
Vendors May Be Liable Where They Actively Conceal a Known Latent Defect
The first such exception to “caveat emptor” is where the vendor either knows about or is willfully blind to the latent defect and intentionally or actively covers it up or conceals it from being discovered. A vendor cannot mislead a buyer. In other words, while a vendor is not obligated to disclose a latent defect of which they are aware (subject to the exception discussed below) if they take steps that constitute a misrepresentation, they may be held liable.
It has been held that where a vendor “who has no duty to speak, decides to break that silence … [they] must speak truthfully and completely about the matters raised” (see Outaouais Synergest Inc. v. Keenan).
In some situations, a vendor may be obligated to break that silence. Where, for example, they complete a property information statement, they must do so completely and truthfully. A failure to do so may constitute a misrepresentation, giving rise to the vendor’s liability (see Fors v. Overacker).
Vendors May Also Be Liable Where They Do Not Disclose a Known Latent Defect That Makes Premises Dangerous or Unfit For Occupation
The second exception to “caveat emptor” is where the vendor knows about and does not disclose a latent defect “that makes the premises dangerous or unfit for occupation” (see CanDeal Group Inc.). In such circumstances, the vendor has a positive duty to speak up. For example, in Sevidal v. Chopra, the High Court of Justice found that radioactive contamination found in the neighbourhood constituted a latent defect in the property that was the subject of the claim and, since it was potentially dangerous, should have been disclosed to the buyers.
What Constitutes a Defect?
One of the leading cases in Ontario on caveat emptor and its application to patent and latent defects is Tony’s Broadloom and Floor Covering Ltd. v. NMC Canada Ltd. from 1996. That case concerned a factory property purchased by a buyer who intended to redevelop it as a condominium. Unbeknownst to the buyer, the property was contaminated. The property was industrially zoned. The buyer did not tell the vendor about its redevelopment plans and the vendor did not tell the buyer about the contamination. Neither did the vendor conceal the contamination. An inspection of the property at closing would have made the contamination apparent. After closing, the buyer discovered the contamination and eventually sued to rescind the contract.
The Court of Appeal concluded that the contamination was neither a patent nor latent defect, referring to earlier case law. Specifically, the Court noted that, for a quality to be considered a defect, it must constitute a “failing, short-coming, fault, or imperfection,” which involves consideration of the “intended use of the land.” In this case, the subject matter of the agreement was industrial property. The vendor had no reason to believe the buyer would use it for any purpose other than an industrial one. The contamination did not prevent the use of the property for industrial purposes. Accordingly, the Court found that the buyer had got exactly what it had bargained for and, as such, there was no defect in the land.
The Court further noted that if it was incorrect in this regard, it would have found the defect constituted a patent one. It found that the defect would have been discoverable by the buyer had it exercised “reasonable vigilance.” In that regard, the buyer would have become aware of the contamination had it undertaken a reasonable inspection of the property, made “reasonable inquiries” of the vendor” and made “reasonable inquiries of the local and provincial authorities.” In light of this, the principle of caveat emptor applied.
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