There are few terms in a real estate context like "material latent defect" that should make all clients and REALTORS® sit up and take notice. This term sounds like something serious, especially with the word ‘defect’ tacked onto the end, and rightly so. In Alberta, material latent defects must be disclosed, and for good reason, that has significant effects on the parties and the transaction. Let's break down some things to keep in mind regarding this term.
Clarifying the term
In the simplest form, material means major, and latent means hidden. So a material latent defect is a "major hidden" defect related to a piece of real estate. A material latent defect is usually associated with the physical property itself, and generally, these are defects in the property known to the seller that is not discoverable through a reasonable inspection. Additionally, they could be defects that may make the property dangerous or potentially dangerous to occupants or unfit for habitation.
Loads of liability
It is important to note that, under the law, any attempt to try and make superficial improvements to make it difficult to discover a known material latent defect would be considered fraudulent misrepresentation. For example, if a basement floods every spring, but the seller replaces the basement flooring and drywall in autumn for sale before the spring, the seller could face serious charges under the law. Similarly, any health orders, stop-work orders, or lack of development permits need disclosure to the seller's brokerage. This is so they can make the best efforts to ensure all parties are informed and the seller is making disclosures to avoid legal liability.
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Obligations of the seller
As part of the AREA exclusive seller representation agreements, sellers are stated some of the types of defects that may be considered material latent and asked plain yes/no questions about main disclosures that need to be made under the law by the seller. These disclosures made to the brokerage must then be passed along to interested parties to ensure potential buyers understand any major hidden defects that they need to account for in their inspections and remediation plans. Sellers need to understand that when they sign a purchase contract, they will be making a warranty statement to the buyer that there are no known material latent defects unless otherwise disclosed.
Obligations of the seller's brokerage
Because we are considering the legality of disclosure regarding material latent defects, it is good for buyers and sellers to understand that REALTORS® do not have the option of keeping such things confidential. Alberta law requires that anyone who knows of defects that are both major AND hidden must disclose that information to anyone involved in a transaction who does not know. A seller cannot instruct their REALTOR® not to disclose a material latent defect, and similarly, the sellers are not permitted to hide that information either.
Any exceptions?
There is an important distinction to be made about mandatory disclosure of defects. If a defect is major but not hidden (ie. visible roof problems), or hidden but not major (ie. the basement floor had a surface crack before the carpet was put down), these types of defects do not need to be mandatorily disclosed. If a buyer was to ask about a specific defect, REALTORS® are obligated by honesty first and cannot lie about what they know. Since these defects are not BOTH material AND latent, the seller can instruct the brokerage to actively not disclose such defects. They can also advise the brokerage on how to answer questions such as, "I have been instructed by the seller not to answer the question." Although this isn't always the best idea, this is within the seller's rights and those instructions should be sought at the time of listing.
The mandatory disclosure of material latent defects is a law meant to protect market integrity, prevent fraud in consumer transactions, and is very important to avoid potential litigation. Sellers who know of material latent defects in their property should seek legal advice on proper disclosure. REALTORS® and their brokers can help the seller properly disclose what must be disclosed, and how to frame things that do not need to be. It is always expedient to disclose any items that could be concerning to a buyer at the earliest stage possible. Many buyers are willing to navigate those things as long as they feel sellers have been forthcoming and have confidence they know about the things they should know about their new home.