The purchaser of a 60-year-old residential property (Lot A) on Salt Spring Island in BC chose not to complete the purchase on the closing date because of alleged latent defects. The purchaser alleged that a dam or berm constructed on a neighbouring property encroached on Lot A and also caused Lot A to flood. He took the position that the dam and the flooding were latent defects not discoverable on reasonable inspection and that the vendor of Lot A knew about the dam and earlier flooding and should have disclosed them to the purchaser.
The purchaser did discover the presence of the dam shortly before the closing date. The vendor's efforts to satisfy him that the property had no flooding problems were unsuccesful. So the transaction did not close and the vendor sued the purchaser for loss of value (Lot A was ultimately sold to another purchaser at a lower price) and other losses including loss of rent and interest.
The BC Supreme Court found that the vendor did not fail to disclose a latent defect (i.e. a propensity to flood). As stated by the Court: "The doctrine of caveat emptor applies in real estate transactions with respect to defects that are discoverable on reasonable inspection. A vendor does not have to disclose patent defects; rather, a vendor must only disclose latent defects." On the evidence before it, the Court found that there was only one relevant flooding event and that was caused by vandalism combined with poorly maintained highway ditches - not by the dam encroachment. This was not a latent defect known to the vendor.
Also, the sale contract provided for an inspection to confirm property boundaries, which would have revealed the actual boundaries and whether there were any encroachments (i.e. the dam). However, the purchaser did not complete an inspection. If there was an encroachment, the Court found that it could have been identified by reasonable observation (i.e. a patent defect). Moreover, the encroachment that did exist was a minor one and in no way rendered the residential premises unfit for habitation.
The purchaser was bound to close the transaction and, as a result of his failure to do so, was found liable to pay damages including the decrease in the sale price obtained by the vendor and various carrying costs incurred when the property had to be offered for sale again.
Read the decision at: Ganges Kangro Properties Ltd. v. Shepard.