Publications
February 2017
PFD | Construction
Hidden defects

Can you obtain compensation when the seller is insolvent or cannot be found?

By Jean-Philippe Desabrais Lawyer

This very interesting question may come up for a homeowner who discovers a hidden defect. Before going any further, it is important to review the criteria that apply to hidden defects.

To be considered a hidden defect, the deficiency must meet certain criteria:

  1. The defect must be serious.
  2. The defect must have been unknown to the buyer at the time of sale.
  3. The defect must be hidden.
  4. The defect must have been present prior to the sale.

It should also be noted that it is up to the Court to qualify the defect. As a rule but with some exceptions, to initiate a hidden defect claim, the property must have been purchased with a legal warranty. The warranty applies to the property, regardless of the change of ownership. The legal warranty is like a chain that links all of a property's owners and therefore makes it possible to take direction action against the seller's seller.

Having clarified this, let us assume that you purchase a property and discover a hidden defect several years later. When you report the defect to the seller, you realize that the seller is insolvent or cannot be found. If the seller is a legal person (company), it may have gone bankrupt or been dissolved. In these circumstances, you could report the hidden defect to your seller's seller (the initial seller), provided that the sale included a legal warranty.

For various reasons, the initial seller refuses to assume the repairs, so you undertake the work to fix the situation yourself. Then, you decide to file a legal claim to recover the cost of the work. The claim raises the following question: what amount could you claim from the initial seller?

The real estate market being what it is, you are likely to have acquired the property at a much higher price than the seller did. Therefore, the basis on which the Court will calculate the drop in sale price must be established. Should it consider the amount you paid to purchase the property? Or the amount the initial seller received?

The Court of Appeal was recently called upon to address the issue in Dupuis v. Leblanc (2016 QCCA 1141)*.

The Court determined that the selling price between the initial seller and the next seller had to be considered to determine an adequate reduction in the selling price. However, the amount paid by the current owner to acquire the property must also be considered. Returning to our example, the Court had to account for the selling price between your seller and the initial seller and the price that you paid.

In general, the cost of repairs, subject to the added value to the property, is a determining factor to assess the loss of use that was caused but does not necessarily equate to the amount to which you are entitled. The situation must therefore be examined from the following perspective:

If your seller (insolvent or missing) would have known about the defect at the time of sale, what amount would he/she have been willing to pay the initial seller?

Without setting out a specific formula, the Court instructs us that the amounts must be weighted to determine a reduction in selling price that accounts for:

  • the depreciation in value (age, state)
  • the added value of the work carried out to correct the defect in relation to the price you paid
  • the price received by the initial seller

In other words, you must not make a profit off the initial seller. Of course, the task is complex, especially when the defect is discovered several years after the sale.

In addition, the Court of Appeal underlined an important point: the legal warranty follows the property and not the owner. As such, purchasing a property without a warranty does not imply that you have no recourse against the initial seller. If your seller acquired the property with a legal warranty and then sold the property to you without the warranty, you may then invoke the warranty against the initial seller, subject to the criteria to establish the existence of a hidden defect.

For more information on hidden defects, contact an expert at PFD.

 

* On January 12, 2017, the Supreme Court of Canada dismissed the application for leave to appeal from the judgment of the Court of Appeal of Québec.