Disclosing Property Defects

Sellers often struggle to get their head around what and what not to disclose relative to the status of their For Sale property. To provide clarification on this matter is Francois Louw, Managing Director of the legal firm Louw & Coetzee Attorneys, he is also the Managing Director of Louw & Coetzee Properties.

1. Why is there a law governing disclosure relative to property sales?

Laws governing disclosure of defects protect buyers from misleading or fraudulent representations by, or on behalf of, the seller in respect of the immovable property they wish to purchase. When buying and selling a home, the contracting parties ordinarily agree to a purchase price directly related to the condition of the property at the time of the sale.

This requires disclosing to the seller the good and the bad attributes of the property. Defects, or faults, include those that are either obvious to the eye upon reasonable inspection, or those that may only come to light at a later stage.

2. How is the law defined?

The law on defects has always been governed by common law, and is today further governed by the Consumer Protection Act (CPA), which as its main objective, serves to protect consumers whilst establishing certain duties for suppliers in respect of a consumer agreement. However, the CPA only applies to specific scenarios or transactions, and technically is not applicable to the sale of an existing property by an owner-occupier, but does apply to developers and estate agents, who have a duty to ensure that all defects are declared to the purchaser.

2.1 Common law

To clarify: In terms of the common law, two types of defects are recognised. First is a defect that is not obvious to the naked eye upon reasonable inspection, also known as a latent defect. Second is a defect that is clearly visual, commonly referred to as a patent defect.

In terms of common law in South Africa, there is a 'voetstoots' clause in sale agreements that states that the purchaser buys property from a seller as it stands at the time of sale, regardless of latent or patent defects, and that the seller is then indemnified against a claim for damages in respect of any defects to the property. However, voetstoots does not protect the seller against claims for latent defects where there was fraudulent misrepresentation or fraudulent non-disclosure by or on behalf of the seller/agent.

Fraudulent non-disclosure is when the seller is aware of a latent defect that could potentially affect the sale, and deliberately conceals it.

2.2 Consumer Protection Act

The CPA has a significant influence on the common law warranty against latent defects, but it does not apply under the following circumstances:

• To a transaction where the buyer is a juristic person whose asset value or annual turnover at the time of the transaction equals or exceeds the threshold value of R2-million, as is determined by the Minister of Trade and Industry from time to time; or
• Where goods and services are not supplied in the ordinary course of business, which would be the case if a homeowner sells the primary residence as a once-off transaction.

In either of the above scenarios, where the CPA does not apply, the common law principle is applicable. Therefore, it is important to note that not all sale agreements will fall or undertake CPA for buyer protection against defects.

Our view is that the law exists to protect consumers from fraudulent business practices and to place a burden on suppliers to provide certain warranties against defects.

3. What are considered 'serious' defects and are they only relative to the immovable property or also applied to the land on which the building is constructed?

Defects can be associated to the land on which the property is situated as it forms part of the property. This includes underlying defects in the subsoil such as ground water, subsidence issues or damage to plumbing caused by tree roots. However, most defects relate to the improvements on the property. A servitude for example, which negatively affects the value of the land or how the land is used, can also be seen as a defect.

As for the immovable part of the property, roof leaks are considered a defect and these are often not evident depending on the season during which the sale occurs. Damp on walls is another clear indicator that the home may have water issues, and sellers may try to disguise those by placing furniture strategically. Electrical installations, plumbing issues and slow leaking pools can be serious problems. Also factored in should be any faults relative to external structures like carports that have not been built according to approved building plans.

4. How and when is defect disclosure made, to whom, and what paperwork applies?

All known latent or patent defects should be disclosed by the seller to the estate agent immediately upon inspection of the property, and ordinarily is done during the first meeting between the two parties when a property valuation is undertaken. Defects may affect the price of the property, so it is crucial that the agent be aware of any potential risks. The agent is also responsible to ensure that patent defects are pointed out to the prospective purchaser and listed on the Declaration of Sale contract.

In terms of the EAAB Code of Conduct, the seller must complete a mandatory Disclosure Form before the purchaser signs an offer to purchase. The EAAB holds that "although the proposed mandatory disclosure form does not constitute a guarantee, and should not be regarded as a substitute for due diligence by prospective purchasers, it will nevertheless, alert prospective purchasers to any material defects that may be apparent in the property."

The Disclosure Form must be accepted and signed in full by the purchaser before an offer to purchase is presented to a seller.

5. If the seller fails to disclose and on inspection it is evident the seller was aware of the defect/s, is there any legal recourse?

If it can be proven that the seller was in fact aware of the defect and purposefully failed to disclose it, the purchaser is entitled to recourse from the seller. Each case is based on its own merits, and, depending on the defect and scope thereof, a buyer could litigate and the recourse could be financial compensation, remedy of the defect, or in severe cases, request cancellation of the sale.

There is no recourse applicable to latent defects however as it would be unreasonable to expect the seller to have known about such a fault. The purchaser also has no claim against a seller for certain obvious defects, which would have been revealed by a reasonably careful inspection of the property. The buyer cannot withhold payment of costs to force the seller to remedy such a defect either. How the matter is resolved is on a case-by-case basis, which may require a conveyancer in support to assist the parties with further negotiations and the drawing up of addendums to sale agreements as a form of remedial action.

6. What sort of questions should the agents be asking the seller about defects?

The agent should discuss the detailed Declaration Form with the seller, for completion and signing, and the best time to do this is prior to signing a mandate. It is the duty of the agent to ensure that most of the common defects are mentioned in the Declaration. These steps ensure the agent has enough information to communicate effectively with potential buyers.

Agents, and buyers, should be aware that patent defects could look more damning than they are, so it is important for agents to ask the seller if a specialist can be appointed to undertake a review, and produce a comprehensive report on the defects. In this way both the seller and buyer have the right information to consider in their negotiations.

Pool pumps, alarm systems, irrigation systems, boreholes and solar panels are often ignored in this process, so the agent is advised to ask the seller about the condition of those and any other improvements to the property that could be subject to deterioration and/or signs of being defective. Disclosing a defect does not place a burden on the seller to fix it, but it does allow the buyer to factor this into the overall condition of the property.

7. Final tips?

The purchaser should consider appointing a home inspection firm to perform a thorough inspection of the property and provide a detailed report on the home. It could be made as a suspensive condition of the Deed of Sale, that no adverse findings regarding serious latent defects be revealed by such inspection. The downside is naturally the cost implication, which will then be for the purchaser, but it could give a buyer far more peace-of-mind.

Finally, always remember that transparency is key.

Article by: Kerry Dimmer, Private Property