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Latent Defect Explained With Examples

Latent Defect Explained With Examples
In the real estate industry, latent defect is a defect in the property that could not be discovered during a proper site inspection, but has been discovered later, after the deal has been signed. The WealthHow article explains what is meant by latent defect with the help of examples.
WealthHow Staff
Quick Tips
  • In your property contract, mention provisions that will limit liability for latent defects.
  • Items prone to latent defect claims should be given long-term subcontractor warranties.

The term 'latent defect' is used in a number of fields, viz., real estate, construction, insurance, etc. It is defined as a hidden defect in a property or an item that was not discovered prior to purchasing the same, and was discovered later. Whether the seller was aware of this or not, cannot be proved at a later point, for he can easily claim that he was unaware regarding the same.
For this reason, a clause related to a latent defect is introduced in contracts, otherwise the seller always gains an upper hand. The situation can be very delicate, and a number of situations are considered before any action is taken. The theory is explained further in the paragraphs below.
The Concept
  • In case of real estate dealings, a latent defect can be a leak in the roof, a slight depression on the floor, plumbing issues, etc.
  • Ideally, before signing a property deal, a thorough inspection is carried out and if defects are found, the deal falls through.
  • The defects mentioned above are generally detected easily; if not, they are termed as latent defects.
  • They can also be called hidden defects. Do not confuse it with a patent defect; for a patent defect is an obvious flaw.
  • Since the damage is discovered later, legally, the buyer cannot blame or sue the seller.
  • The buyer can misinterpret and claim that the seller was indeed aware of the damage, but he wouldn't have any evidence.
  • It would ideally be better if the seller himself claims that he doesn't know about any defect, instead of the buyer complaining so.
  • If a latent defect clause is introduced in contracts, the buyer can claim money to get the defect repaired.

Real Estate
  • Including the clause of latent defect in construction contracts will help the buyer secure money from the seller to repair the defects in the property.
  • A small crack on the wall or ceiling that can go unnoticed is one of the most common examples of latent defects in property dealings.
  • This small crack can very well expand if not repaired and lead to a greater problem later on.
  • Another example is a leak in the roof. This can cause tremendous problems during the rains and hailstorms, and is generally overlooked during an inspection.
  • Plumbing and wiring issues can both qualify for latent defects, and mostly, they too go unnoticed.
  • A few months after signing the commercial lease and moving into the house is when the issues begin to crop up, by which time, it is too late.
  • Weak foundation is another problem and is not discovered for a very long time; in fact, it is quite possible that the seller himself is unaware of the same. This can cause potentially serious problems later on.
  • Any kind of misplacement of building material in the structure can cause it to weaken.
  • If the tanking in the cellar is defective, it may cause extensive water leakage.

Industrial Products
  • Termed as material latent defect, this occurs when there is a hidden flaw in any item or material, and which is not discovered until the item is bought and used.
  • In this case too, the buyer cannot claim that the seller was aware of the defect.
  • If you discover the defect in the product within the warranty period, you will get a replacement, of course, if not, the seller is not liable to pay for the defect.
  • The disclosure of latent defects is not obligatory on the sellers, unless the material contains ingredients that are dangerous.

Insurance
  • Latent defects insurance is a way to recover the costs of repairing the defects.
  • It is specifically created if a fault is discovered in the make, design, or the working of the product.
  • It is also used to extend coverage for repairing unnoticed damages inflicted on the property.
  • The coverage, however, is provided only if the defect is declared to cause a serious risk in future.
  • Also, it extends up to a minimum sum; beyond which, no cover is provided.
  • A surveyor is appointed by the insurer to inspect the defects, check the repair, supervise it, and provide a certificate of completion.
  • The insurance is available for the first 12 years of the life of the property.
  • An insurance policy is more reliable than relying on building contracts and warranties.

Latent Defect Remedies

For the Buyer
  • He must prove that the defect existed before the sale, and that it has not occurred during his stay in the property.
  • If he has not specified a latent defect clause in the contract or does not have any insurance, he cannot get any costs covered.
  • If he has either of the above, he is in a safer position, financially, at least.
  • If he proves that he was completely unaware of the defect at the rime of sale and if the defect is dangerous, he can request for a price reduction on the selling price of the house or even return the property.
  • These actions, however, must take place within a year of sale, and the price reduction is also determined by the court.

For the Seller
  • The seller, ideally, is not obligated to mention any minor defects, unless they pose a significant risk.
  • The onus is on the buyer, he has to gather evidence.
  • If, through some means, it is found out that the seller knew of the defect, the court can order him to cover the costs of repair.
  • If the defects discovered are massive and the seller has to be excluded from the liability of payment, he has to mention the same in the contract.
The issue of latent defects occurs fairly commonly. During site inspections, most problems are unearthed; however, complex ones related to basement tanking or clogged pipes generally remain undetected. As a buyer, you must be doubly observant about what you intend to purchase. You can go in for an insurance policy or introduce suitable clauses in your contract. As a seller, you must ensure that your property/material does not contain any defect that is life-threatening, and even though you are not obligated to mention minor defects, do so in order to stay out of legal trouble.