February 1, 2021
SELLING AND BUYING WITHOUT LEGAL WARRANTY
The real estate sector is specific and benefits from a set of rules that are specific to it. One of them concerns the legal warranty that applies during a transaction involving a residential or commercial property. It applies:
• Ownership rights, by making the seller guarantee that the property sold is free from rights (conventional or legal mortgages or others) and does not violate any public rights (that the use of the property does not contravene, among other things, municipal regulations, zoning, etc.).
• Quality of the property, by making the seller guarantee that the property is free from defects that make it unfit for normal use or that diminish its utility, such as water infiltration, presence of asbestos, etc. According to this principle, the seller must disclose to the buyer the presence of any known defects and also provides a remedy in the case of a hidden defect, i.e., a major problem affecting the normal use of the property or significantly affecting its value, the existence of which could not be discovered during a reasonable verification process by the buyer.
Exceptions
The legal warranty is generally applicable to all real estate transactions. However, in practice, three exceptional scenarios are frequently encountered:
• Estate Sale: In the case of the death of the owner of a property, the estate must exclude the application of the legal warranty to protect the heirs and close the administration of the deceased’s assets. This is because the person responsible for selling the property then lacks knowledge of the actual condition of the building, highlighting the importance of the transaction taking place without the application of the legal warranty.
• Sale under Judicial Control: Also known as “foreclosure,” when the property is not sold by the owner-occupant, the law provides for the automatic exclusion of the warranty in this type of sale.
• The exoneration or limitation clause. This involves excluding the application of the warranty through the use of a contractual clause for this purpose. For example, in the case of a sale by a corporation whose sole mission is the ownership of the property. Or, when an owner has identified several significant problems with the building or suspects the emergence of conditions negatively affecting the value or use of the property.
Attention: As soon as residential or commercial property is offered without a legal warranty, the seller and their agents must clearly indicate this in the listing, the offer to purchase, and in the sales contract, specifying that the buyer, with full knowledge, acquires it “at their own risk.” In fact, omitting to indicate “at their own risk” in the contract could invalidate any defense of the seller in case of future recourse.
Limitations:
Excluding a property from the legal warranty is not a safe conduct, and the process has its limits. The seller is not exempt from acting in good faith and being transparent in communicating information about the building, and they cannot use the exclusion to evade personal responsibilities.
Therefore, if the seller is aware of a defect or encroachment affecting the property, they cannot use the exclusion to avoid their obligation to disclose the true condition of the property to the buyer.
Moreover, this obligation also impacts the work of the real estate broker, as they have a professional duty to properly inform the buyer about the consequences of excluding the quality warranty. Assuring a buyer about the state or quality of the property or not disclosing an exclusion of the warranty could lead to shared liability in case of legal action.
Finally, even in a booming real estate market, it is clear that excluding a property from the legal warranty significantly affects its resale value. Such conditions may deter potential buyers, thereby limiting interest in the property.
Advisory Box
If you choose to exclude the legal warranty, it is essential to include the statement that the buyer is acquiring the property “at their own risk” — and not in other words! As for the buyer, the absence of the legal warranty does not exempt them from their duty of due diligence in gathering relevant information about the property or conducting an inspection, even if it involves hiring a construction contractor (or other specialized worker) with the benefit of the building inspector’s observations. While these steps may incur costs, they will undoubtedly be less than the expenses associated with addressing a major issue after the property is purchased.
WARNING: The information contained in this article, while of a legal nature, does not constitute legal advice. It is recommended to consult with a professional for advice that will address your specific situation.