Litigation often arises in the real estate realm when buyers and sellers clash over the disclosure of property deficiencies discovered after a transaction is finalized.
In Bolduc v. Legault, the buyers took legal action against the seller, seeking compensation for the remediation costs associated with water and foundation issues discovered in a Sudbury, Ont. residential home they purchased in 2014.
The purchase and discovery of deficiencies
The plaintiffs, enticed by a property advertisement on Kijiji, entered into an agreement of purchase and sale (APS) with the seller for $239,000, subject to a satisfactory home inspection. One of the buyers, a mason by trade with a good deal of experience in construction, opted to conduct the inspection personally, and the inspection condition was subsequently waived, leading to the completion of the transaction.
In October 2014, a pipe in the downstairs bathroom burst, causing water damage. During clean-up, the plaintiffs discovered that the subfloor appeared black and rotted. When they removed flooring closer to the exterior walls, they found dampness in the cement block foundation.
A certified home inspector determined that a combination of the lack of exterior foundation seal, weak mortar and water penetration was leading to the deterioration of the foundation.
Subsequent inspections by a City of Sudbury official resulted in two orders to comply. The first required the plaintiffs to obtain building permits for the basement, rear yard deck, side entrance deck and front entrance deck and to build in compliance with the Ontario Building Code.
The second required them to obtain a building permit for all foundation alterations and repairs and build in compliance with the Ontario Building Code. The estimated cost to remediate the water and foundation damage exceeded $400,000.
The buyers sued the seller for breach of contract and negligent misrepresentation.
Breach of contract and negligent misrepresentation claims
The plaintiffs argued that the defendant breached the agreement of purchase and sale because he failed to disclose the water infiltration in the basement and the resulting foundation condition, which they argued were latent defects.
“Latent” defects are defects that were not readily apparent, in contrast to “patent” defects, which are readily apparent to someone exercising reasonable care in their inspection of a property. Patent defects need not be disclosed to buyers because they are there for the buyers to see for themselves.
Referring to the precedent set by McGrath v. MacLean, the court affirmed that buyers must accept latent defects unless specific circumstances exist:
- The sellers knowingly concealed the defect to prevent the buyer from discovering it.
- The latent defect made the property uninhabitable, dangerous or potentially dangerous, and the sellers were aware of it.
- The sellers made a reckless representation concerning the latent defect’s existence.
The court’s ruling
After reviewing the evidence, the trial judge concluded that the seller had no knowledge of the foundation’s precarious state during the property sale.
Amongst other things, there was no visible bowing or settling of the foundation or any cracks in the interior finishes or window casings. There was no evidence that the exposed block foundation revealed water infiltration at the time of sale.
While there was evidence that two prior water leak incidents had occurred in 2007 and 2010, the trial judge was satisfied that the issues were addressed at the time, and the seller did not have any knowledge of more serious damage to the property’s foundation. As the seller did not know of the latent defects, he had no liability on the basis of breach of contract.
The buyers also claimed that during the showing of the home and in response to their inquiries, the seller represented that there had never been any flooding, there had been no leaking of the foundation, and no water issues with the property. They claimed that the seller was liable for negligent misrepresentation as a result.
The trial judge dismissed this portion of the claim due to the written entire agreement clause in the APS, which stated as follows: “This agreement, including any schedule attached hereto, shall constitute the entire agreement between the buyer and the seller. There is no representation, warranty, collateral agreement or condition, which affects this agreement other than as expressed herein.”
The buyers could not point to a representation or warranty in the APS dealing with the state of the foundation, water leakage or past flooding of the property, nor any other written representation by the seller outside of the APS.
In the absence of an entire agreement clause, the close relationship between buyers and sellers would be sufficient to hold the sellers responsible for any negligent representation. However, by signing the APS, the buyers specifically agreed to the entire agreement with no other representations. Since the alleged misrepresentations concerning water damage, condition of the foundation or flooding were not contained in the APS or some other document arising from it, the plaintiffs were without recourse. The action was therefore dismissed.
The decision illustrates the perils of not conducting a thorough home inspection before entering into a binding APS. However, it is not clear that a standard home inspection would have uncovered the foundation issues at the time of the purchase. The buyers do not appear to have claimed that the seller engaged in fraudulent misrepresentation concerning the deficiencies, which might have negated the effect of the entire agreement clause in the APS.
The trial judge noted that he was not without sympathy for the buyers, who certainly did not expect to find themselves in a home with significant structural deficiencies. However, the issue is not one of sympathy or loss but liability on the part of the seller.
At the end of the day, the buyers were simply not able to prove that it was more likely than not that the seller was aware of the issues that they discovered after closing.
James Cook is a partner at Gardiner Roberts in Toronto and has been with the firm since he articled there in 2002. As a litigator in the firm’s Dispute Resolution Group, he has experience in a broad range of commercial, real estate and professional liability litigation. Phone 416-865-6628; email firstname.lastname@example.org. This article is provided for educational purposes only and does not necessarily reflect the views of Gardiner Roberts LLP.