Has the seller of your property affected by latent defects declared bankruptcy? Here’s how to proceed

The buyer who discovers a latent defect following the purchase of a property must opt for one of two legal theories to compensate for his or her losses. First, there is the warranty of quality, which is outlined in article 1726 of the Civil Code of Quebec (“CCQ“). The second consists in establishing the error caused by fraud, in accordance with article 1041 CCQ. In any event, both theories may be invoked in the same legal proceedings¹.

Notwithstanding the choice made, the buyer may, among other possible remedies, claim a reduction in the sale price. This is based on the value of the loss suffered and the cost of corrective work estimated or carried out to rectify the defect².

On the one hand, in the context of proceedings instituted under the warranty of quality, in addition to the obligation to denounce the defect in writing within a reasonable period required by article 1739 CCQ, the buyer must satisfy the four criteria for recourse. The defect must be hidden, sufficiently serious, existing at the time of sale and unknown to the buyer ³.

The seller’s knowledge of the defect stands independently of the above-mentioned criteria. Proving the seller’s knowledge of the defect allows him to claim damages as well, according to article 1728 CCQ. It is therefore sufficient that the seller knew of the existence of the defect, without requiring his awareness of the precise identity of the defect or its cause. The consequences of concealment and reticence are the same in this context⁴.

On the other hand, if the buyer chooses to base his recourse on error caused by fraud, the seller’s false representations or failure to disclose a fact whose disclosure would have influenced the buyer’s judgment to finalize the transaction must be established⁵. Thus, the seller may be convicted of fraud, breach of trust or deceit, misleading the buyer to induce him to contract⁶.

In a scenario where the seller declares bankruptcy⁷ in anticipation of or following recourse to the quality guarantee, it becomes a major concern for the buyer to recover the sum of money awarded by a successful judgment. The main principle is to release the bankrupt from good faith debts. Nevertheless, the bankrupt will not be discharged from a debt arising from a fraudulent misrepresentation of facts, according to article 178 (1) e) BIA⁸.

When dealing with a bankrupt seller, the sole viable strategy is to demonstrate not only his knowledge of the defect, but also the actions that resulted in the vitiation of his co-contractor’s consent. This is done by fraudulently misrepresenting the property condition. Even without of an explicit reference to fraudulent misrepresentation, the failure to disclose a material fact may lead to the application of article 178 (1) e) BIA⁹. In fact, misrepresentation involves the willful omission to declare decisive facts, also referred to as strategic silences¹⁰.

Upon proving fraud on the part of the seller, the buyer prevents the latter from discharging the debt arising from the civil court judgment.

Combined with the need to obtain a distinct court authorization to continue proceedings already instituted against the seller due to its suspension caused by the bankruptcy, this event adds an additional dimension of challenge for the practitioner¹¹. The latter will have to prove that the seller has not fully disclosed to his client the facts of which he is aware while preventing him from discovering them at the time of inspection¹². To this end, all means of proof, including presumption, are at his disposal¹³.

For further explanations on this topic, we invite you to consult the judgment of May 31, 2023 (Gestion NW v Yin, 2023 QCCS 1843 (CanLII)), in which AVENS obtained the seller’s condemnation to the reduction of the sale price, by proving her perpetration of a civil fraud against our client, a debt that will be non-dischargeable, despite her release from bankruptcy.

Should a similar situation arise, AVENS will be delighted to represent your interests and assert your rights before the courts