Jan 22nd, 2020
Ideas Litigation Hidden defects and the sale of an immovable in Quebec: caveat emptor? 5 sales: 3 substantial reductions of the sale price, one cancellation of the sale and one claim dismissed by the courts
Jun 11th, 2019
By Laurent Debrun
Five recent decisions underline the importance for the seller of real estate property to disclose to the prospective buyer all known or suspected defects and problems affecting the immovable, even if apparent, and for the buyer to conduct a thorough investigation. The seller who makes false representations to the buyer or willfully omits to disclose relevant facts commits a civil delict, akin to fraud. This can lead the court to give apparent latent defects the legal effect of hidden defects.
Bérard v. Noël, 2019 QCCS 1018 - http://canlii.ca/t/hzbzq
Due to serious hidden defects discovered after the sale, the buyer sought the cancellation of the sale of a building while claiming reimbursement of the price paid as well as damages.
It is a country house of artisanal construction, the main part of which was recently rebuilt by or under the control of the seller. The seller has known the buyer for 40 years. The seller had the house appraised by a chartered appraiser who concluded that the market value of the property is $106,500.
The buyer is a businessman in the real estate field. He owns 120 homes in the Granby area. He visited the house for about an hour and knows that the seller, who is not a professional builder, renovated the house himself. The seller reassures the buyer that everything has been done correctly. The buyer trusts the seller.
The seller gave to the buyer copy of the appraiser's report. The appraiser indicates in his report important limiting conditions which do not allow for him to give an opinion on any defects or other problems that may affect the building. The buyer admits that all he was interested in was the rental income of the building. Therefore, he did not do any pre-purchase inspection.
In ordering the cancellation of the sale because of the extent of the defects, the court focuses on the information that the seller has provided to the buyer which, if false, led the buyer into a sense of security that has vitiated his consent and excuses him from the consequences of not having an inspection carried out. For example, the seller had informed the buyer that there was no crawl space, as the house would rest on a cement slab. This was false to the seller's knowledge and, after the sale, this void was discovered infested with fungi and rot. Even if the seller had disclosed to the buyer, before the sale, certain problems affecting various aspects of the house, it is what he knowingly omitted to reveal or that he deliberately concealed which generated his liability and released the buyer from the otherwise drastic consequences of his failure to carry out a pre-purchase inspection.
Leclerc v. Lemieux, 2019 QCCS 1209 - http://canlii.ca/t/hzkjl
The purchaser requests the cancellation of the sale of a residence purchased for $132,000. The defects discovered after the sale are so serious that only cancellation can be considered. The buyer claims that the seller could not have been unaware of such defects. In the alternative, it requests a substantial reduction of the price paid, in addition to damages.
The residence was advertised on the DuProprio™ site as being 100% renovated, the seller having done the work himself. Buyers make a total of four visits, including one with a friend or family member. Each time, they had free access to the entire house. The seller declares the presence of water infiltration in the basement due to rain and snowmelt, while indicating that these problems were resolved following corrective work. Shortly before the sale, water infiltration hit the ceiling and the seller had the roof repaired after notifying the buyer. Less than a year after the sale, water damage occurs in the basement and buyers notice the presence of puddles in some areas of the house. As part of the investigation of the origin of these water infiltrations, the buyer mandates an excavation contractor and then a building inspector to appraise the site and give an opinion on all the problems observed since the sale. The inspector quickly detects major construction defects. Thus, an error in the construction of the floor and agricultural drain in relation to the rest of the foundation would be the cause of many of the infiltrations. The court noted that the buyer must make a reasonable examination of the property before purchasing it; the possibility for the buyer to discover a defect is sufficient for it to be qualified as apparent. Here, the buyers did not use a building inspector before the purchase but relied instead on a friend with some cabinet making experience. Normally, this is not enough for the buyer to discharge his burden of proving that the defects are hidden defects.
According to the court, the lack of basic prudence by the buyers clearly demonstrates their negligence. Their behavior is not up to what one would expect from a prudent and diligent buyer. Involving a friend who has limited knowledge in construction does not meet the obligation of a prudent buyer. A careful and diligent visit, as the court will conclude, would have revealed much of the problematic condition of the residence. In this case, the amount of available evidence before the sale and the inaction of the buyers bring the court to conclude that they did not act as prudent and diligent buyers.
But it is the seller's behavior that will once again change the situation. A defect, to be hidden, must remain unknown and hidden after the buyer has examined it. The deceit or fraud of the seller, however, can not only influence the assessment of the denunciation, it can also transform an apparent defect into a hidden defect. Thus, false or reassuring misleading statements by the seller can distort the buyer's understanding of the defects, even those he has discovered or identified. For fraud to occur, the seller must not have disclosed the hidden defect he knew or must have made reassuring statements that distorted the buyer's understanding of a defect that the buyer had identified or could discover. Remember that the general rule is that the seller does not have to declare an apparent defect in the eyes of any prudent and diligent buyer. But here, the sellers had in their possession a report from an expert mandated by a previous buyer who made an offer which was terminated following this inspection. The sellers falsely claimed not to have a copy of the report any longer. The court considered the content of the report and concluded that the seller was under an obligation to disclose its content to another buyer. The expert had in fact discovered many problems, including those identified one year after the sale. The fact that the sellers hold such information and refrain from disclosing it even though the request was made to them constitutes fraud. The seller here claimed that the report was not available when he had it in his possession. The seller therefore misled the buyers and the defects which, even if they could be considered as apparent defects, became, by this behavior and this fraud, hidden defects. The court did not annul the sale but granted a reduction in the sale price of nearly $90,000 in addition to ordering the sellers to pay damages.
Boucher v. Labadie, 2019 QCCS 1009 - http://canlii.ca/t/hzbwl
The buyer of a luxury condominium seeks cancellation of the sale. The buyer claims to be a victim of fraud, the sellers failed to inform him of defects and deficiencies affecting not only the condominium purchased, but also the building in which it is located. As part of the pre-sale exchange of offers, the seller disclosed that a lawsuit had been initiated against the contractor and floor covering contractor by the condominium association but that the unit sold was not affected by a known problem concerning the windows, walls and curtains. A copy of the court claim was given to the buyer before the sale. A few weeks before the sale, at a meeting of the co-owners, some additional expert reports were distributed and, according to the buyer, these expert reports showed problems of a greater magnitude than those disclosed by the seller and dealt with in the association’s court claim against the contractors.
The buyer of real estate intending to prove the seller’s fraudulent conduct has a heavy burden. Fraud consists in deliberately misleading the purchaser with the objective of causing him to contract when, given the real and complete information, the purchaser would not have contracted with the seller or, if he had, it would have been on substantially different grounds. There is no presumption of fraud. Fraud can also result from the silence or reluctance of the person who commits it. Here the court considers that the seller has never deliberately attempted to mislead the buyer to encourage him to buy the condominium. Having in his possession a copy of the legal proceedings, it was the buyer's responsibility to obtain more information, either from the seller or from the association of co-owners before signing the deed of purchase. The reading of the procedure must have raised serious doubts in the buyer's mind and therefore imposed a duty on him to inform himself. Before a person who has an obligation to obtain information can bring an action based on an alleged fraud, he must prove that he has done all that is necessary and reasonable to gather this information. The purchaser’s claim was dismissed in relation with all that was covered in the co-owners’ pending claim against the contractors at the time of the sale (such matters were covered in any event by a limited release given to the seller by the purchaser).
However, after the sale, the association of co-owners discovered other deficiencies, this time affecting other aspects of the building. These deficiencies, which the buyer could not detect before the purchase, constitute a hidden defect that even the seller was unaware of. Consequently, even if the buyer had provided the seller with a waiver and release in relation to the deficiencies addressed in the lawsuit, this waiver did not cover unknown deficiencies identified only after the sale. The sale was not cancelled, but the court awarded $30,000 in respect of the post-transaction deficiencies amounting to affecting true hidden defects.
6983499 Canada Inc. v. Gagné, 2019 QCCA 536 - http://canlii.ca/t/hzfv8
This is an appeal from a judgment that ordered the sellers to reimburse to the buyer the sum of $113,000, an amount representing a reduction in the selling price of a condominium due to the failure of the sellers to deliver a property of a surface area that was in conformity with the plan. The offer to sell showed an area of 2,904 square feet when, in fact, the area was only 2,557 square feet, a difference of 12%. The reference to area in the offer to purchase, according to the seller, was gross and not net. The buyer disagreed.
The buyer, a lawyer, claimed that he had not been given any such explanation (gross v. net). At trial it was put in evidence that the buyers had already resold the condominium for a higher price than they had paid. Article 1737 of the Civil Code of Québec gives the buyer the right to obtain a price reduction if the area delivered does not match that of the deed or promise to sell. This is a proportional reduction of the correlative obligation. This compensation must not allow the creditor of the obligation to enrich himself, but to be purely and simply compensated for the impairment. The expert evidence as to the valuation of the impairment was based on factors such as the configuration of the unit, the market for units of a similar size in the same neighborhood, economic conditions at the time of sale and mitigating factors related to the unit itself, such as, for example, the absence of a parking space. Once the price per square foot had been obtained, the trial judge multiplied it by the number of square feet missing to obtain the amount of compensation. The Court of Appeal approved of this method. As for the fact that the purchasers were able to resell the unit before the trial for a higher price, the Court of Appeal considers that there is nothing here that could reduce the amount of damages to which they are entitled, because the loss and the amount of compensation are assessed at the time of the seller's breach of his duty to deliver the agreed property without taking into account subsequent factors.
Leclerc v. Succession of Diotte, 2019 QCCQ 1614 - http://canlii.ca/t/hzdlh
Here, the court concluded that, in the presence of serious evidence of a problem (cathedral-style sheet metal roof with traces of water infiltration), the purchasers had not exercised caution and foresight in investigating the causes of this apparent defect. Their appeal was refused.
Take-away from these 5 decisions: While a prudent buyer in Quebec must carefully inspect real estate before purchasing it, with a competent person, the conduct of the seller in dealing with the buyer in relation with the passing of relevant information, if found to amount to fraud, may allow the court to excuse the buyer from having conducted a thorough pre-purchase inspection which would have revealed defects. So, if you are the seller, it is best to disclose all known or suspected problems, especially if questioned by the buyer or his agents, even if they may constitute apparent defects.