Do Homebuyers Need a'Lemon Law'?

July 8, 2011 - Updated: July 8, 2011


By Mark Weisleder

Used car buyers get more consumer protection than resale home buyers. When you buy a used car you can check whether there are liens registered against the vehicle, or whether the car has required major repairs following an accident. The vehicle then has to pass a safety check before the registration can be transferred. Can you imagine telling the mechanic that, in doing the inspection, he could not look under the hood?

Resale home buyers aren't so lucky. There is virtually nothing to protect a buyer who discovers a hidden defect after closing, whether it's a leaking pipe, mould or a serious foundation problem. Although a buyer will make the deal conditional on a home inspection, this doesn't help in most cases, since the inspector can't "look under the hood" -  behind walls or under floors

The law talks about "caveat emptor" or buyer beware, which means too bad if you find problems after closing. It's not a good law and often results in judges feeling sorry for the buyers and looking for someone to blame. The targets have always been sellers, but now they include home inspectors and real estate agents as well.

Sellers used to complete disclosure statements to tell buyers about problems they experienced during their ownership, so the buyers could make appropriate investigations before deciding to buy. These were never meant to be warranties. However, when buyers did uncover problems after closing, judges in many cases turned these statements into representations and made the seller responsible for fixing the problems. As a result, sellers are now discouraged from telling buyers anything, which benefits no one.

Glenda and Jennifer Halliwell bought an old home on Dufferin St. in Toronto in 2006. Halliwell told her real estate agent she was concerned about mould. The agent recommended a home inspector assist her. The inspector found no visible evidence of water penetration, and thus could not find a connection to possible mould issues. The inspector did note the exterior brickwork parging at the base of the driveway was not in good shape and would need to be fixed. You could probably find this with most old homes.

The inspector also advised the buyer there was a limitation of liability in their report; if any mistake was made, the most they would compensate the buyer would be the cost of the report itself. This is a common clause in home inspection reports, mostly due to the fact that the inspector is not permitted to look behind walls or under floors. Three months after closing, serious mould issues arose. The buyers sued the seller, the home inspector and the real estate agent.

It turned out the seller lived in the house for six years and did not experience any leaks during his ownership. There was no evidence the seller tried to cover anything up by building a wall or repainting the basement walls.

In a decision dated Jan. 18, 2011, the judge determined the home inspector should have known that damage to the parging on the exterior wall could lead to moisture leaking into the foundation, which could then lead to mould. As a result, she said the home inspector should pay 50 per cent of the buyer's loss. She got around the limitation-of-liability clause by stating that, based on the evidence, she was not satisfied the limitation clause was adequately explained to the buyer.

The judge also found the buyer's real estate agent 25 per cent responsible, saying the agent should have read the inspection report and come to the same conclusion: the problem with the parging would lead to moisture penetration and mould. The buyers were found to be 25 per cent responsible for not reading the report themselves. The sellers were not responsible because they did not know about any leaking.

I find the decision difficult to understand. It seems as though the judge determined that real estate agents should have general contractor experience when they read inspection reports and advise buyers. This makes no sense. In my opinion, the judge felt sorry for the buyer and looked for someone to blame. The case is being appealed by the home inspection company and the real estate agent.

What this all demonstrates is that buyers need government assistance when it comes to hidden defects. In my opinion, buyers and sellers should be asked to take out hidden defect insurance on every resale home deal. They can both share the cost of the premium. The seller will have to answer some questions honestly on the application before the insurer gives coverage. If the seller hides or covers anything up, they can be sued later by the insurance company. If the seller refuses to co-operate, the buyer can draw their own conclusions and adjust their purchase price or conduct more detailed inspections before committing to the purchase.

When buyers are making the largest investment decision of their lives, they should have at least as much protection as the buyer of a used car.

Mark Weisleder is a lawyer, author and speaker to the real estate industry. Email him at mark@markweisleder.com


Tagged with: article home inspection home buyers
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