Imagine this: a few months after purchasing your dream property, you uncover a significant hidden defect. Did you know that if the property was sold without a legal warranty, you may have no recourse against the seller?
Discovering a hidden defect is always unsettling. In most cases, however, the law provides automatic protection, and you can take steps to seek compensation from the seller. This protection is typically outlined in the purchase agreement you sign.
But sometimes, this protection is excluded from the contract. Some properties are sold ‘’at the buyer’s own risk,’ meaning the sale is made without any legal warranty.
What is the legal warranty in Quebec?
In Quebec, the legal warranty is a fundamental protection for buyers when purchasing a property. It requires that the seller ensures the building is free from defects, both in terms of its title and its condition. The warranty automatically applies to all property transactions, except in cases where the buyer is made aware of specific defects at the time of the sale whether through the seller’s declaration or the building inspector’s report.
The legal warranty consists of two key components:
- The warranty of quality.
- The warranty of ownership rights.
These components are automatically included in all contracts by law, meaning they apply to every property sale unless explicitly excluded. If either warranty is to be waived, it must be stated clearly in the contract with an additional clause.
1. The warranty of quality
The warranty of quality guarantees that the property being sold is free from hidden defects, defects that were present at the time of the sale, which would render the property unfit for its intended use or significantly diminish its value. Essentially, this means that if the buyer had been aware of these defects before the sale, they either would not have gone through with the purchase or would have offered a lower price.
However, this warranty does not cover defects that the buyer was already aware of, such as those disclosed by the seller or identified during a pre-purchase inspection. This highlights the importance of conducting a thorough inspection before buying a property. If a buyer neglects to do so, they could forfeit the right to claim the warranty for defects they could have reasonably discovered.
Importantly, the seller’s lack of knowledge about the defect does not affect the buyer’s right to claim under the warranty. If the seller was aware of the defect and intentionally concealed it, they would be held even more accountable, required not only to repair the defect but also to compensate the buyer for any loss in property value and any related damages.
2. The warranty of ownership rights
The warranty of ownership rights ensures that the property being sold is free from any encumbrances or claim that could limit or infringe upon the buyer’s right to full ownership. It guarantees that the seller has the legal right to transfer the property and that there are no undisclosed issues with the property’s title. Specifically, this warranty covers:
- The seller has cleared any mortgage or financial obligations tied to the property.
- The property does not encroach on a neighbour's land, nor is it subject to any encroachment.
- The property does not violate any restrictions or limitations under public law, except for those already disclosed by the seller or those that the buyer should have reasonably discovered through proper due diligence.
If the seller fails to pay off any mortgage as promised, or if the property is found to have any legal issues that were not disclosed or discovered, this would constitute a breach of the warranty of ownership.
Why sell a house without a legal warranty?
The warranty of quality is often excluded when the seller has limited knowledge of the property. This is typically the case in inheritance or foreclosure sales.
In both situations, the sellers have not lived in the property and cannot confidently certify its condition. To protect themselves from potential lawsuits, they include a clause in the sales contract that excludes the warranty of quality.
An elderly seller, wishing to protect their estate, may also use this close to prevent future claims against their heirs.
What can be excluded?
The legal warranty can be modified in various ways, depending on the circumstances, it can be increased, reduced, limited for a specific period, or completely excluded. In most cases, the warranty of quality is the one that is excluded, while it’s very rare to exclude the warranty of the ownership rights.
Exclusions of the warranty can be either complete or partial, meaning it could apply to the entire property or just specific components. For a complete exclusion, the following clause is commonly included in the purchase agreement:
"This sale is made without a legal warranty of quality, at the buyer's own risk."
If the exclusion only applies to certain parts of the property, the phrase ‘’related to’ is often added, followed by a description of the excluded components. For instance:
"This sale is made without a legal warranty of quality, at the buyer's own risk, related to the pool."
If the seller intends to exclude the warranty of quality from the outset of the sale, this must be clearly noted in both the rest estate agent’s brokerage contract and the property description sheet, ensuring that all parties involved in the transaction are fully aware of the exclusion.
The 'at the buyer's own risk' clause
While the ‘’at the buyer’s own risk’ clause indicates that the buyer is accepting the property with the understanding that they bear the risk of any hidden defects, it does not absolve the seller of their obligation to disclose known defects. The seller must still comply with legal requirements and act in good faith throughout the transaction.
In short, selling a property without a legal warranty does not give the seller permission to be dishonest or deliberately mislead the buyer. The seller must still be transparent and truthful about the property’s defects.
Limited or no recourse in case of hidden defects
When a property is sold ‘’at the buyer’s own risk,’ the buyer typically has little or no recourse against the seller if hidden defects are later discovered.
However, if the buyer does uncover a hidden defect, they may still be able to take legal action against the seller if they can prove that the seller acted in bad faith and intentionally concealed the defect. The buyer would need to show that their decision to purchase the property was influenced by the seller’s actions, such as lying or deliberately withholding crucial information about the property’s condition.
On the other hand, if the seller was unaware of the defect and acted in good faith by fully disclosing everything they knew about the property, they will not be held liable. In such cases, the buyer will have no legal recourse and will have to accept the condition of the property as it was sold.
What are the advantages?
Selling without a legal warranty has its advantages. For the seller, the main benefit is protection from potential claims, although they will likely need to lower the asking price.
For the buyer, the advantage is the opportunity to purchase a property at a lower cost. However, the price difference will depend on the market. If demand exceeds supply, the price reduction may be relatively small.
Pre-purchase inspection in a sale without a legal warranty
To minimize the risk of uncovering hidden defects after purchase, the best course of action for the buyer is to hire a building inspector to thoroughly inspect the property.
A qualified inspector has the skills and knowledge to identify visible defects and potential issues that may arise, depending on the severity of the problem. It is crucial that the inspector is informed that the property is being sold without a legal warranty, so they can take this into account when conducting their assessment.
It’s important to understand that a pre-purchase inspection does not guarantee the absence of defects. Hidden defects, by nature, are not visible, and the inspector may not be able to detect them during their visual inspection. However, the inspector may identify early warning signs that suggest potential issues, and in such cases, they may recommend bringing in a specialist for a more detailed evaluation.
In addition to the inspection, the buyer should request a copy of the seller’s disclosure statement, ensuring it is properly completed, to review any defects the seller has disclosed. This information will provide valuable insight into the property’s condition and help inform the buyer’s decision.
The duties of a real estate broker
In situations where the legal warranty is excluded, the real estate broker has the responsibility to inform their client about the implications of this exclusion of the quality warranty. They must ensure the seller understand that:
- The exclusion of the warranty may affect the sale price.
- The property description sheet must mention the absence of the warranty.
- The seller will not be protected from a lawsuit in the case of undisclosed known defects.
If the broker is representing the buyer, they must inform them that they will have no recourse in the case of hidden defects unless they can prove that the seller intentionally concealed the information. The broker should also strongly recommend a pre-purchase inspection before the buyer commits to the property.
If you are considering a house sold without a legal warranty, exercise caution and seek advice from real estate professionals.
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