Buyers and sellers may differ significantly on the information that should be disclosed as part of a real estate transaction. The buyers will want to know everything. On the other hand, the sellers will want to be “protective” of information that they feel may bias a buyer’s decision to purchase a property. The disclosure of certain information may negatively impact the perceived value of a property, or the ability for the seller to find a buyer at all. The topic of this blog is – What information or defects must be disclosed in a real estate transaction?
Caveat Emptor
Caveat Emptor is a Latin phrase that can be roughly translated in English to “let the buyer beware.” While the phrase is sometimes used as a proverb, it also applies to Common Law. Common Law is a body of unwritten laws based on legal precedents established by the courts. These court decisions have helped to guide the standardized legal contracts that buyers and sellers use in a real estate transaction in Alberta. The principle of caveat emptor places the onus on the buyer to perform due diligence before making a purchase.
The Alberta Real Estate Association (AREA) is responsible for producing the contracts which are used on a day-to-day basis by REALTORS® when helping buyers and sellers in real estate transactions. Within the standardized Purchase Contract is the following statement (Section 3.1 (g)); “the seller and buyer are each responsible for completing their own due diligence and will assume all risks if they do not”.
This is reference to the principle of caveat emptor. The contract is clear that the buyer has a responsibility to perform their due diligence on the property prior to purchase. If the buyer is negligent in that duty, the seller may not be held accountable. In a similar example a buyer of a used car is required to perform some due diligence prior to purchasing the vehicle. Typically, this means having a mechanic expect the car. If the buyer simply shows up, kicks the tires, and buys the car, they are assuming the risks. The major difference is that real estate is typically a higher value transaction than that of an automobile.
Property Inspections
In the purchase of a home, there are no mechanics. The equivalent would be a licenced Home Inspector who is knowledgeable about the foundation, structure, mechanical systems, building envelope, etc. One of the best ways that a buyer can protect themselves and uphold their obligation of caveat emptor is by making their offer to purchase conditional to their satisfaction of a property inspection. The second step is to hire a reputable and knowledgeable inspector to conduct the inspection on their behalf.
What happens if the “defects” are hidden? Afterall, even the most thorough home inspections are limited in scope. Inspectors cannot “look behind” or “see through” the walls. Moreover, no one will know the detailed history of the property in the same way that the sellers do. What are the sellers required to disclose? Or is the onus put squarely on the shoulders of the buyers?
Material Latent Defects
Material Latent Defects are known defects in the property that are not discoverable through a reasonable inspection and that may make the property dangerous or potentially dangerous to occupants or unfit for habitation.
The above statement comes directly from AREA’s standardized Seller Representation Agreement (Listing Contract) which further explains that the seller is required by law to disclose material latent defects they are aware of. As a reminder, the buyer has a responsibility to perform their own due diligence. However, if the issue in question is not discoverable through a reasonable inspection and will affect the use or value of the Property, the seller has a common law responsibility to disclose the defect.
So, what IS a material latent defect? The Real Estate Council of Alberta (RECA) provides the following examples;
• a seller finished the basement of their house and in the process covered a large crack in the basement wall that affects the structure
• a seller knows that whenever it rains, water enters the house
• the home was a former marijuana grow-op and the property hasn’t been remediated. The growing conditions for a large marijuana grow operation create an ideal environment for potentially dangerous mold and mold spores and these may linger and continue to make the property unfit to live in if it hasn’t been remediated
These are just a few examples of material latent defects that might impact a buyer’s use and enjoyment of a property. All of these are situations with tangible consequences. What happens when the buyers concerns may be more subjective in nature? For example, is a seller required to disclose a death on the property?
Stigmatized Properties
RECA notes that “the term ‘stigmatized’ means an unfavourable quality in a property or one that makes the property less attractive or unattractive, but that is unrelated to the physical condition or features of the property.” Stigmas may include;
• a suicide or death that occurred in the property
• the property was the scene of a major crime
• the address of the property has the wrong numerals
• reports that a property is haunted
Stigmatizations are generally more individual or personal in nature for a buyer. What one person finds unacceptable may not be a stigma to another. For example, a natural death of an elderly individual on a property may weigh different on a perspective buyer than a violet death or suicide. Some potential buyers may not see them as different at all. Sellers are not required to disclose property stigma in the same way they are required to disclose material latent defects.
To Disclose or Not to Disclose
It has been said that the three most important words in real estate are Location, Location, Location! Some would argue that has changed to Disclose, Disclose, Disclose…
When positioning your home in the real estate market as a seller, the goal is almost always to get the highest possible return. As mentioned from the beginning, buyers and sellers may differ significantly on the information that should be disclosed as part of a real estate transaction.
Buyers have a contractual and common law obligation to do their own due diligence because of the principle of Caveat Emptor, or “Buyer Beware”. On the other hand, sellers have an obligation (both contractually and in common law) to disclose Material Latent Defects. This does not apply to stigmatizations which may impact a buyer’s use and enjoyment of a property. The seller or the seller’s representative is not legally required to answer questions about stigma; however, they cannot lie. If they choose to answer a question about stigma, they must do so honestly. If the seller refuses to answer the questions, this may raise a red flag as a buyer.
In my experience working with buyers and sellers, the best outcomes are often a result of full transparency throughout the process. People often feel “blindsided” when information is not shared openly, even if neither side had an “obligation” to share it. On the other hand, when transparency exists, both sides often feel empowered by the information which will allow them to come to a practical conclusion about their involvement in a particular transaction. If a buyer or seller is unsure about an obligation to disclose, it is prudent to seek a legal opinion about what the obligations and requirements are and how to proceed with the information at hand.
Navigating these conversations and situations can be complex. Having a professional and competent real estate professional, such as myself, to guide to through these issues can play a vital role in ensuring that your best interests are protected on either side of a transaction.
