Introduction
A latent defect is one that is not visible and cannot be detected by external inspection. It typically occurs in the buildings and structures of a property.
The property is affected by a latent defect where it is materially inferior in quality to what could justifiably be expected of a comparable property, having regard to the purchase price and other circumstances (Land Code 2:17 §).
Requirements for a latent defect
A latent defect must be material in order to give rise to a claim for compensation. The buyer must tolerate certain minor deviations in the object of sale and may not invoke a latent defect where the fault or deficiency is of minor significance. Materiality is assessed with regard to factors such as the age of the property, the purchase price, general standards of habitability, the customary level of amenities in the area and other relevant circumstances.
It is also a requirement that the seller had no knowledge of the defect. A defect that the seller did in fact know of, but which the buyer is unable to prove may also constitute a latent defect. The default position under the Land code is that the seller neither knew nor ought to have known of the defect.
The defect must also be material enough that it would probably have influenced the making of the transaction.
Notice of defect
The buyer must give notice of the defect and any claims based on it within a reasonable time after discovering the defect, or after the buyer ought to have discovered it. No fixed time limit is prescribed for giving such notice.
The buyer forfeits the right to invoke the defect unless notice of the defect and the claims based on it are given to the seller within a reasonable time after the buyer discovered it (Land Code 2:25 §).
Seller’s liability for a latent defect
The seller is liable for a latent defect where it is material enough that it would probably have influenced the making of the transaction. Materiality is also assessed by reference to how the property compares with other comparable properties of the same age.
Buyer’s remedies
The buyer has certain remedies where the property is affected by a latent defect.
The buyer is entitled to withhold payment of the purchase price. This is available where the defect is discovered before the full purchase price has been paid.
The buyer is also entitled to claim a reduction in the purchase price. The price reduction generally corresponds to the diminution in value caused by the defect and is the most common remedy for a defect. The seller must pay interest on the portion of the purchase price refunded as a price reduction.
The buyer may also seek rescission of the contract. Rescission means that the buyer must return the property to the seller, and the seller must refund the purchase price received from the buyer. A latent defect in the property entitles the buyer to rescind the contract where the defect is material. A defect is material where the buyer is unable to make use of the property and the defect cannot be remedied within a reasonable time and at reasonable cost.
The staff at AASA-LAW have experience in other real estate transaction disputes.
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