Should I Sell My House With Or Without Legal Warranty?

It appears to be well known that Quebec, especially the metropolitan Montreal area, is experiencing a very hot housing market. Prices have been rising rapidly. Even very ordinary units can be the subject of multiple offers, even 10 or more, sparking virtual bidding wars.

It’s not unusual that property owners, who were not even considering selling, will be contacted by real estate agents without solicitation looking for properties to sell.(”Cold-calling,” as it may be known.)

If you decide to sell your property – condominium, single-family, multi-dwelling, industrial or commercial – under Quebec law, every seller has an implied obligation of quality, that they sell the property free of latent or hidden defects, “which render it unfit for the use for which it was intended or which so diminish its usefulness that the buyer would not have bought it or paid so high a price if he had been aware of them.”(Article 1726, Civil Code of Quebec)

What then is a latent defect? There are 4 essential characteristics:

• It existed at the time of sale;
• It was not declared by the seller prior to the sale;
• It was neither apparent nor known by the buyer when the buyer purchased; and
• It was serious, such either that the buyer would not have purchased at all or would not have paid as much.

There are problems which do not equal hidden defects. In an older house, the results of construction methods that are now out-of-date but were state of the art when the house was built are not considered defects. Furthermore, obsolescence does not equal defect. A system which performed beyond its expected lifetime is not considered defective because it is no longer functional.

That still leaves many possible types of hidden defects that can manifest years later and provoke your buyer to send you notices, demand letters and lawsuits looking you to pay for the repairs in consequence of the defect.

Until recently at least it was always standard for most residential property to be sold with the legal warranty of quality. There were exceptions, notably for judicial sales or foreclosure sales by banks. The legal warranty was implied by law, so it was automatic unless the parties agreed to exclude the warranty.

Article 1732 of the Civil Code of Quebec allows for sale without legal warranty by agreement:

“A seller may not exclude or limit his liability unless he has disclosed the defects of which he was aware or could not have been unaware and which affect the right of ownership or the quality of the property. An exception may be made to this rule where a buyer buys property at his own risk from a seller who is not a professional seller.”

In other words, an ordinary person who is not a professional seller can sell without warranty to a buyer who agrees to buy at his own risk, and the buyer would have no remedy should they eventually discover hidden defects. (There may be an exception if it can be proven that the seller outright lied or committed fraud.)

For the longest time, it was not even a serious consideration in residential real estate to sell without warranty. (On an anecdotal level, it seems to have become more frequent recently.) Property sold with warranty generally sold for more than property without warranty; it had a greater market value. This also meant that the realtor’s commission, usually on a percentage basis of the sale price, was more if the property sold with legal warranty. So the seller’s realtor had no incentive to advise his client to sell without warranty.

Thus, selling with legal warranty meant that you sold for more than without warranty. However, there was always the possibility that at some point in the future, even many years later, you might be dragged into a lawsuit by your buyer, or even into a lawsuit involving multiple future owners, since each owner in turn purchased with a legal warranty of quality.

Lawsuits are expensive. In addition to lawyers, the parties are also likely to hire and pay experts – engineers, architects, inspectors, constructors, etc. – to prepare reports and be witnesses. Lawsuits can also last many months, if not yet several years, until a judgment or an amicable settlement. And there is no certainty as to the result.

Of course, there is also no guarantee you will ever be sued, even if defects existed.

On the other hand, buying and selling without warranty means getting less for your property and paying less for your new real estate. It means a virtual guarantee that you won’t ever be sued over this house you just sold. As a buyer, it means that you need to have a good, thorough presale inspection to negotiate the final price, because there will be no chance down the road to go back to the seller should unpleasant surprises occur.

There is no single, legal solution to our question, as both options are allowed in our system. The choice depends upon what the buyer and the seller prefer.

A seller who wants a higher sale price and is prepared to risk being sued in future should sell with legal warranty.

A seller who is prepared to accept a lower sale price but to eliminate the risk and cost of being sued in future should sell without legal warranty at the buyer’s risk.

A buyer who is prepared to pay full price and keep his legal right to sue in future, even though that may never happen, should buy with legal warranty.

A buyer who is willing to give up his right to sue in future can pay less now and buy without legal warranty at his own risk, even if any future defects that may appear might eventually cost much, much more than was saved by buying without legal warranty.

Franco Tamburro, Attorney-at-Law

Alepin Gauthier Avocats Inc.

This text contains legal information of a general nature and should not replace legal advice with a lawyer or notary who will take into account the particularities of your situation.