Material Latent Defects Guidelines

• Guidelines

  BCFSA’s Guidelines provide a practical application of the information and give suggested best practice guidance to assist real estate professionals. These guidelines provide BCFSA’s interpretation of RESA and all other applicable legislation.

  In addition, BCFSA’s Guidelines may be a useful information source for the general public looking for information about standards of conduct for real estate professionals.

Purpose

Whether you are working with buyers, sellers, or landlords, you are expected to understand the difference between patent defects, material latent defects and stigmas in order to act in the best interest of your clients and to make mandatory disclosures where required. When uncertainty exists, broker and/or legal advice would be prudent.

1. How to discuss material latent defects with your client.
2. Responding to clients who do not want to disclose.
3. Stigmas are not material latent defects.

Guidelines

How to Discuss Material Latent Defects With Your Client

While you have an obligation to disclose material latent defects to all prospective purchasers and tenants, your client also has a common law obligation to ensure they disclose as well. If your client is unsure about whether they must disclose a particular defect, they should seek legal advice.

Before listing a property for sale, or leasing it, discuss the RESA definition of a material latent defect with your client. Make sure they understand what constitutes a material latent defect and when and how you must disclose that defect to buyers and tenants. You should also advise them that if they make that disclosure, you do not have to further disclose it. When consumers make the disclosure themselves, it must be done in a separate document from your written service agreement or a contract of purchase and sale/lease. Most sellers will use a PDS to achieve this while landlords will use other written confirmation to make the disclosure.

You must ensure that you or your client disclose material latent defects promptly which means immediately, as the disclosure of a material latent defect must be made before a contract to purchase or lease a property is entered into.

Responding to Clients Who Do Not Want to Disclose

The Real Estate Services Rules (“Rules”) provide that if the client instructs you not to disclose the material latent defect, you must refuse to provide further trading services to the client in respect of the trade in real estate.

Conversations around material latent defects should occur at the outset of your agency relationship. Outlining the obligations right away will eliminate any concerns that may arise if a material latent defect is identified. Your client should also be aware that any material latent defect that is discovered by you, whether through documentation or, a home inspection from a buyer who then does not proceed with the transaction, must also be disclosed to any potential buyers who are considering making an offer.

Some consumers believe that if you will not provide services without the required disclosure, another real estate professional might. Advising your client that all real estate professionals are bound under the Real Estate Services Rules to make the same disclosures may resolve the objection.

Learn more about disclosures

Stigmas Are Not Material Latent Defects

If a buyer has concerns about the less obvious structural and mechanical aspects of a property, the buyer may have a property inspection done to satisfy their concerns. However, consumers may have other areas of concern that would cause them to avoid a property all together. Certain events may cause a property to become stigmatized or deemed a ‘psychologically impacted property’. These terms are sometimes applied to a property that has had some circumstance occur in or near it, but which does not specifically affect the physical condition, appearance, or function of the property itself.

Examples of these in a residential context might include:

• A sexual offender is reported to live in the neighbourhood;
• A former resident was suspected of being an organized crime gang member;
• A death occurred on the property;
• The property was robbed or vandalized; or
• There are reports that the property is haunted.

The significance of these or any other stigma can be affected by a person’s beliefs, values and perceptions, culture, religion, gender, age, and other individual circumstances. Therefore, trying to determine all the possible circumstances that might cause a property to be considered stigmatized is challenging, if not impossible.

If you are representing a buyer and your client asks about something that concerns them, you must make the appropriate inquiries. Speaking with your buyer clients at the outset of your agency relationship to understand not only what they are looking for, but what issues whether physical or not, they may wish to avoid when it comes to properties they are viewing is prudent.

If you are representing a seller, you may only offer information around stigmas that your client has authorized you to share. Should you be aware of a stigma that is readily available to the public to discover, you may wish to ask your seller client if they want to offer the information up front instead of waiting for a buyer to ask about it. Sometimes providing the information can prevent complications during a transaction if a buyer were to discover the information at a later date.

When asked about the possible existence of stigmas that might affect the property, and your seller instructs you to, you may:

• (1) Answer the question; or
• (2) Advise the buyer or the buyer’s agent that you have been instructed not to answer.

If your seller permits you to answer a question posed by the buyer or their real estate professional about a stigma, you are expected to use reasonable care and skill to ensure the accuracy and completeness of the information you provide.

Sellers who are concerned that something about their property may cause it to be considered stigmatized will face a dilemma — do they disclose and risk hurting the property’s value, or do they not disclose and risk the buyer learning the information later and suing them. You should discuss all the variables with your seller and should suggest obtaining legal advice as to their rights and obligations.

Relevant Cases

The following are examples of material latent defects which real estate professionals have failed to disclose in accordance with section 59 of [Disclosure of latent defects] of the Rules:

• A covered deck was built on the property without the required municipal permit. The foundation of the home required repair. Read the full case
• The Homeowner Protection Office had issued a compliance order under the Homeowner Protection Act (British Columbia) requiring that the owner of the property cease offering the property for sale. The basis for the order was that the owner of the property had been registered as an owner builder and, contrary to the authorization given by that office, had not lived in the premises for the required 12 month period. Read the full case
• The property contained unauthorized accommodation. Read the full case
• The property had previously operated as a gas station which resulted in an environmental study being required as a condition of obtaining financing. Read the full case
• There was a capital cost assessment, or tax increase, on the property relating to the property’s sewer service. Read the full case

Managing Broker Considerations

Managing brokers must ensure the business of the brokerage is carried out in accordance with the Real Estate Services Rules. This obligation includes the requirement to ensure the brokerage’s real estate professionals understand the difference between material latent defects, patent defects and stigmas, as well as when and how disclosures should be made.

Brokerage policies should be in place to outline what is expected of real estate professionals and how disclosure documents are to be retained in the brokerage file.

Read more about document retention

Applicable Section of RESA/Real Estate Services Regulation/Real Estate Services Rules

• Section 30, Real Estate Services Rules, Duties to Clients
• Section 52, Real Estate Services Rules, Disclosure Under This Division
• Section 59, Real Estate Services Rules, Disclosure of Latent Defects

Definitions

Material latent defect: means a latent defect that cannot be discerned through a reasonable inspection of the property, including any of the following:

1. a defect that renders the real estate
   1. dangerous or potentially dangerous to the occupants,
   2. unfit for habitation, or
   3. unfit for the purpose for which a party is acquiring it, if
      1. the party has made this purpose known to the real estate professional, or
      2. the real estate professional has other wise become aware of this purpose;
2. a defect that would involve great expense to remedy;
3. a circumstance that affects the real estate in respect of which a local government or other local authority has given a notice to the client or the real estate professional, indicating that the circumstance must or should be remedied;
4. a lack of appropriate municipal building and other permits respecting the real estate.

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