Frequently forgotten exceptions to caveat emptor in commercial real estate property transactions
The doctrine of caveat emptor, meaning “let the buyer beware”, is generally understood to operate in real property transactions, absent fraud. However, there are important exceptions to this general rule: a vendor will be held liable for undisclosed latent defects that render a property dangerous, or unfit for its intended usage. Defects are understood to be latent if they would not be discovered by conducting a reasonable inspection and making reasonable inquiries about the property.
It is the responsibility of the purchaser to investigate the real property they are buying or protect themselves through contract. Nonetheless, there are several decisions that suggest that a responsible vendor should consider whether to disclose latent defects to a purchaser. Cresswell Investments Ltd. v. Pavone, 2011 BCSC 1069 (“Cresswell”) is one such case.
Cresswell considered the sale of a commercial strata unit that contained a steel mezzanine structure which had been installed without the necessary building permits and did not comply with the B.C. Building Code. The purchaser became aware of the need to bring the mezzanine structure into compliance (which would cost over $30,000.00) three years after the purchase of the unit. The court stated that “[l]iability arises only if [a] latent defect is such as to render the property dangerous or unfit for its intended purpose”. The court decided that the status of the mezzanine was a patent defect, and therefore caveat emptor applied.
A vendor only has a duty to disclose latent defects that make a property unfit for its intended use when the vendor has knowledge of the intended use of the property. In Tony's Broadloom & Floor Covering Ltd. (Trustee of) v. NMC Canada Inc., 1996 CanLII 680 (ON CA) (“Tony”) a commercial party purchased land that had previously been used for industrial purposes. The purchaser intended to use the property to build a condominium complex. The court in Tony found that the vendor was under no obligation to disclose contamination that would prevent a residential usage of the land, because: “[T]he respondents agreed to sell, and the appellants agreed to buy industrial property [...] The respondents had no reason to believe that the appellants would use the property for any purpose other than an industrial one. The question of whether the contaminant constituted a defect in the property must be considered in this context”.
A vendor of real property can only have a duty to disclose a latent defect that they know about or recklessly disregard. In Home Exchange (Alberta) Ltd. v. Goodyear Canada Inc., 2007 ABQB 371 (CanLII), the court stated that “liability is founded on situations where the hazards are known as such by the vendor at the time of the sale”. A commercial vendor’s sophistication or specialized knowledge may be of some significance to this point, in that it may be easier to establish that such a party either had knowledge of a specific latent defect or was reckless in its lack of attention to the same.
The court in Cresswell suggested that a purchaser's sophistication could diminish the substance of a vendor's duty to disclose. The court suggested that a sophisticated purchaser's “reasonable inquiries” could be considered more likely to reveal defects than the inquiry of a non-sophisticated purchaser; therefore, more defects would be considered patent (instead of latent) when a sophisticated purchaser is involved.
We disagree with this suggestion. The court in Cardwell v. Perthen, 2007 BCCA 313 (CanLII) noted that “in general, there is a fairly high onus on the purchaser to inspect and discover patent defects” and “a defect [may] be patent if it would have been discoverable upon a reasonable inspection by a qualified person”. These points contextualize the applicable standard of reasonable inquiry by reference to the high standard of reasonable inspection by a hypothetical qualified person. To categorize a defect as patent or latent depending on the characteristics and knowledge of a particular purchaser would run contrary to the current trajectory of the law, and inject potential uncertainty and unfairness into its application.