The principle of caveat emptor, meaning “let the buyer beware,” remains an important legal doctrine for real property transactions in Canada. The Ontario Superior Court of Justice recently considered this legal principle in CanDeal Group Inc. v. Capservco Limited and issued a ruling that, while not overhauling the law, underscores to all buyers and tenants of commercial real estate the importance of express representations and warranties and thorough physical and legal due diligence. The decision also provides a good summary for vendors and landlords as to what their disclosure obligations are and their liability (or lack thereof) for failing to disclose defects and issues with the subject property.
Background
In early 2020, CanDeal Group Inc., a financial services company, signed an agreement to sublease office premises at 50 Bay Street from the existing tenant, Capservco Limited. 50 Bay Street is a 15-storey commercial office tower located adjacent to Union Station, the busy train station and commuter transportation hub in downtown Toronto. After taking possession of the premises (located on the 12th and 14th floors) and undertaking over C$1-million in tenant fixtures and improvements, CanDeal’s employees began working at 50 Bay Street. Not long after, the employees began complaining about the train noise emanating from Union Station, which they considered unbearable. A little over a year later, CanDeal sued Capservco and its broker, seeking, among other things, a declaration that the sublease was void as a result of train noise from trains idling at Union Station, which CanDeal argued constituted a latent defect that had been intentionally concealed.
The Law
As noted above, caveat emptor translates to “let the buyer beware” and is a legal principle that, in the commercial real estate context, places the risk of defects and associated issues on the purchaser or tenant of real property.
The general rule of caveat emptor is that the vendor or landlord of real property does not have a duty to disclose physical defects about its property. A purchaser or tenant must protect itself by conducting a diligent inspection of the property being purchased or leased and negotiating protections in the purchase agreement or lease. The principle of caveat emptor warns the purchaser or tenant that its rights to seek recourse against the vendor or landlord of a property with physical defects do not automatically exist, and to the extent that they do exist, they may be limited by the closing of the transaction and by the contractual terms negotiated between the parties.
As it relates to a vendor or landlord’s disclosure obligations, caveat emptor draws a distinction between patent defects (i.e., defects that are reasonably discoverable on normal inspection) and latent defects (i.e., defects that are not discoverable by reasonable inspection, even with due diligence). Specifically, there is no obligation for a vendor or landlord to disclose patent defects, provided that such patent defects are not fraudulently or negligently misrepresented. With respect to latent defects that are known (or ought to be known) by the vendor or landlord, there is no positive disclosure obligation unless the latent defect renders the property unsafe or unfit for use (in which case the latent defect must be disclosed). Also, known latent defects cannot be actively concealed by a vendor/landlord.
What the Court Found
In ruling against CanDeal, and finding that the principle of caveat emptor applies, the Court considered the provisions of the sublease and head lease, which provided that the landlord and sublandlord were not liable for noise or vibration from nearby transportation facilities and that CanDeal accepted the premises “as is” after inspection.
The Court also considered CanDeal’s argument that the sublandlord and its broker fraudulently concealed the noise from CanDeal during inspections. CanDeal had undertaken numerous site visits, including visits to the premises for up to six hours at a time, and the random nature of idling trains made concealment by the sublandlord and its broker impossible. Expert testimony also showed that the renovations CanDeal made, including a reconfiguration of the office layout, contributed to the noise issue experienced by the office workers.
The Court found that there was no fraud in the conduct of the sublandlord and its broker, and that, absent fraud, the exculpatory clauses in the sublease and head lease shielded the sublandlord and its broker from liability. The noise emanating from Union Station was perceivable (i.e, patent), and CanDeal should have protected itself in the contract negotiated with the sublandlord.
Key Takeaways
Vendors and landlords selling or leasing real property have a positive duty to disclose latent defects that render the subject property unsafe or unfit for use, but otherwise, generally speaking, are not under any obligation to disclose latent defects. While they cannot fraudulently or negligently misrepresent a defect, they have no positive obligation to disclose a patent defect that is reasonably perceivable by the buyer or tenant upon investigation. While vendors and landlords are protected by the principle of caveat emptor, it remains prudent (as a “belt and suspenders” approach) for vendors or landlords to ensure that strong “as is” language and waivers of liability are negotiated and incorporated in agreements of purchase and sale and commercial leases.
Buyers of real property and commercial tenants would be wise to conduct thorough due diligence and thoroughly inspect premises before they sign a purchase agreement or lease, and should seek to include robust legal protections in the governing contract. Absent the few exceptions to the principle of caveat emptor outlined above, buyers and tenants have no protections at law for defects in property or leased premises and must look to the commercial terms negotiated with the vendor or landlord. To ensure purchaser or tenant protection, express warranties and representations should be negotiated with the vendor or landlord to ensure that any defects not disclosed are covered under the negotiated contract.
For more information, please contact the author or any other member of our Commercial Real Estate group.
