Purchasing a residential property is often one of the most significant financial decisions an individual will make. While Ontario real estate transactions are traditionally governed by the principle of caveat emptor (“buyer beware”), that principle is not absolute. Where a vendor makes misleading representations, actively conceals defects, or is wilfully blind to serious problems affecting the property, Ontario courts are prepared to intervene.
The Ontario Superior Court of Justice’s recent decision in Austin v. MacFarlane provides a detailed and instructive examination of when a seller may be held liable for latent defects discovered after closing, particularly in the context of negligent misrepresentation and contractual warranties that survive closing.
A Post-Closing Discovery of Serious Defects
In Austin v. MacFarlane, the plaintiff purchased a residential property in North Bay, Ontario, in May 2019. The transaction followed a conventional path: both parties were represented by real estate agents, the plaintiff obtained a home inspection, and the parties had no direct communication prior to closing.
Shortly after taking possession, however, the plaintiff discovered significant water infiltration in the basement. When a piano was placed on the basement floor, water seeped up through the flooring. This issue was not apparent during the pre-purchase inspection or the final walkthrough. Subsequent investigations revealed extensive foundation cracking, longstanding moisture infiltration, mould, and structural deficiencies, all of which ultimately required significant repairs.
The plaintiff commenced an action alleging breach of contract, negligent construction, and negligent misrepresentation. Central to his claim was the assertion that the vendor either knew of the defects and concealed them or was wilfully blind to their existence. The plaintiff sought compensation for repair costs exceeding $119,000, as well as general damages for inconvenience and mental distress, and punitive damages.
Competing Narratives at Trial Regarding “Move-In-Ready” Property
The case turned largely on credibility and circumstantial evidence. The plaintiff relied on testimony from a contractor and a structural engineer who described extensive, longstanding defects inconsistent with the property being “move-in ready.” Of particular importance was evidence that sections of drywall removed during repairs bore manufacturer date stamps from years shortly before the sale, suggesting that repairs had been undertaken well after the vendor acquired the property.
The vendor denied any knowledge of water infiltration or foundation problems and characterized prior work as minor, cosmetic repairs. Her father, who performed some of the work, testified that he did not observe moisture or structural issues and denied undertaking significant remedial work.
The Court was therefore required to determine not only whether latent defects existed, but whether the vendor knew or ought to have known about them, and whether her representations about the property were misleading.
Latent Defects and the Limits of Caveat Emptor
Ontario law distinguishes between patent defects—those discoverable by reasonable inspection—and latent defects, which are hidden and not discoverable through ordinary diligence. As the Court reaffirmed, latent defects that render a property dangerous, unfit for habitation, or significantly diminish its value may give rise to vendor liability, particularly where concealment or misrepresentation is involved.
The principle of caveat emptor does not shield a vendor who actively conceals defects or makes misleading representations. Nor does it protect a vendor who is wilfully blind to serious deficiencies. The Court emphasized that home inspections, by their nature, are limited and not intended to uncover hidden structural problems behind finished walls or obscured by exterior features such as decks.
Surviving Warranties and Their Legal Significance
A key distinguishing feature of Austin v. MacFarlane was the contractual framework governing the transaction. Unlike many residential purchases, where representations merge on closing, the Agreement of Purchase and Sale and the closing warranties in this case expressly stated that certain warranties would survive closing.
The vendor warranted that no damage had occurred to the property since the purchaser’s last inspection and that these warranties would remain effective after closing. The Court found that these surviving warranties significantly altered the legal analysis. They provided an independent contractual foundation for liability and reinforced the plaintiff’s negligent misrepresentation claim.
This aspect of the decision underscores the importance of carefully drafted purchase agreements and closing documents. For vendors, warranties that survive closing can materially increase post-transaction exposure. For purchasers, they can provide an additional avenue of recovery where defects emerge after possession.
The Test for Negligent Misrepresentation
The Court applied the well-established five-part test for negligent misrepresentation, which requires proof of:
- A duty of care arising from a special relationship;
- A representation that is untrue, inaccurate, or misleading;
- Negligence in making the representation;
- Reasonable reliance by the plaintiff; and
- Resulting damages.
In real estate transactions, Ontario courts have consistently recognized that a special relationship can arise between vendor and purchaser, particularly where the vendor provides information through MLS listings, contractual warranties, and closing representations.
In this case, the Court found that the MLS listing describing the home as “very well maintained” and “move-in condition,” together with the surviving warranties, gave rise to a duty of care. The representations were found to be misleading in light of the extensive and longstanding defects that existed at the time of sale.
Wilful Blindness and Credibility Findings
One of the most significant aspects of the decision lies in the Court’s treatment of wilful blindness. Even if the vendor did not have actual knowledge of the full extent of the defects, the Court found that the evidence supported a conclusion that she was, at a minimum, wilfully blind to serious water infiltration issues.
The Court rejected the suggestion that a homeowner could repaint basement baseboards and oversee drywall repairs without noticing evidence of moisture, mould, or structural deterioration. It also placed weight on the contractor’s evidence regarding inconsistent materials, altered vapour barriers, and drywall date stamps that contradicted the vendor’s narrative.
These findings highlight the evidentiary role of circumstantial proof in latent defect litigation. Direct evidence of concealment is often unavailable, and courts may infer knowledge or wilful blindness from the surrounding facts.
Reasonable Reliance Despite a Home Inspection
The defendant argued that the plaintiff’s reliance on the representations was unreasonable because he obtained a home inspection prior to purchase. The Court rejected this argument, reaffirming that a home inspection does not absolve a vendor of responsibility for misrepresentation or concealment of latent defects.
The inspection in this case was conducted during winter conditions, limiting access to certain exterior areas. More importantly, the defects were hidden behind finished basement walls and beneath a deck, placing them beyond the reasonable scope of a standard inspection. The Court confirmed that purchasers are entitled to rely on vendor representations even where an inspection is obtained, particularly where defects are not reasonably discoverable.
Damages for Repair Costs and Mitigation
The Court awarded the full cost of repairs claimed by the plaintiff, totalling $119,595.75. The defendant’s attempts to challenge specific line items were rejected, as they had not been meaningfully tested through cross-examination or contrary evidence.
The Court also found that the plaintiff met his duty to mitigate damages. He acted promptly to address the water infiltration, limited repairs to affected areas, and remained in the home during construction to avoid additional accommodation costs. Notably, insurance proceeds received by the plaintiff did not reduce the damages award, consistent with the private insurance exception under Ontario law.
General Damages for Inconvenience and Mental Distress
In addition to repair costs, the Court awarded $10,000 in general damages for inconvenience and mental distress. While the plaintiff sought a significantly higher amount, the Court emphasized the need for proportionality and evidentiary support.
The decision reflects a cautious but evolving approach to non-pecuniary damages in real estate misrepresentation cases. Courts are prepared to recognize the real disruption and stress caused by discovering severe defects after purchase, but awards remain measured and fact-specific.
Punitive Damages: A High Threshold Not Met
Although the Court was critical of the vendor’s conduct, it declined to award punitive damages. Punitive damages are reserved for exceptional cases involving malicious, oppressive, or high-handed misconduct that offends the Court’s sense of decency.
While the misrepresentations in this case were negligent and potentially reckless, they did not rise to the level required to justify punitive damages. This aspect of the decision serves as a reminder that punitive awards remain the exception rather than the rule in civil litigation.
Broader Implications for Real Estate Defect Disputes
Austin v. MacFarlane reinforces several essential principles for real estate disputes involving defects and shoddy construction:
- Latent defect claims remain viable where there is evidence of misrepresentation, concealment, or wilful blindness, even in the face of caveat emptor.
- Contractual warranties that survive closing can significantly expand a vendor’s post-transaction liability.
- Courts will closely scrutinize credibility and circumstantial evidence, particularly where physical evidence contradicts a vendor’s account.
- Damages in these cases can be substantial, encompassing not only repair costs but also compensation for inconvenience and disruption.
Campbell Litigation: Dynamic Real Estate Litigation Services in Waterloo & Kitchener
Hidden defects and misleading representations can expose buyers to significant, unexpected financial losses. Where a seller has failed to disclose known issues or has been wilfully blind to serious defects, Ontario courts may award substantial damages.
Richard Campbell of Campbell Litigation is an experienced real estate litigation lawyer who can assess whether a claim for negligent misrepresentation, breach of contract, or related remedies is available. With extensive knowledge of construction and real estate law, he serves clients in Waterloo and surrounding areas, including Kitchener, Cambridge, Guelph, Milton, and Stratford. To discuss your real estate dispute, contact the firm online or call 519-886-1204.
