Latent Defects, Negligent Misrepresentation and Real Estate Litigation

Oliver Cooper

February 24, 2026

Caveat Emptor vs. A Well-Drafted Contract

Purchasing a home is quite often the largest financial commitment a person will make in their lifetime. While Ontario real estate transactions are traditionally governed by the doctrine of caveat emptor (“buyer beware”), that principle has clear limits. Where a seller makes misleading representations, actively conceals defects, or is willfully blind to serious issues, the courts will intervene. The Ontario Superior Court of Justice’s decision in Austin v. MacFarlane, 2026 ONSC 463 ("Austin") provides a concise and instructive roadmap for understanding how latent defects and negligent misrepresentation operate in modern real estate litigation.

 

A Post-Closing Discovery of Serious Defects

 

In Austin, the purchaser acquired a home in North Bay, Ontario. The transaction was typical: real estate agents were involved, a home inspection was conducted, and no direct communication occurred between buyer and seller. Shortly after closing, water seeped up through the basement floor when a piano was placed on it. Further investigation revealed:

 

  • Significant foundation cracking
  • Long-standing water infiltration
  • Mould behind basement walls
  • Evidence of prior drywall removal and repairs

 

The repairs cost the purchaser more than $119,000. The purchaser sued the vendor for breach of contract and negligent misrepresentation, alleging the vendor either knew of the defects or was willfully blind to them.

 

Latent Defects and the Limits of Caveat Emptor

 

The first principal is whether the defects were, or at least ought to have been, obvious or not. Ontario law distinguishes between:

 

  • Patent defects – discoverable through reasonable inspection
  • Latent defects – hidden and not discoverable through ordinary diligence

 

A vendor is generally not liable for patent defects – the purchaser ought to have discovered these.  However, caveat emptor does not protect a seller who:

 

  • Conceals defects,
  • Makes misleading representations, or
  • Is wilfully blind to serious problems

 

The court affirms limits to home inspections: structural defects hidden behind finished walls or obscured by decks may not be discoverable.  The fact that the purchaser had an inspection performed does not insulate a vendor from liability for latent defects about which the vendor had actual knowledge.

 

A Well-Drafted Contract: Warranties That Survive Matter

 

A key feature of Austin was the language in the contract. The Agreement of Purchase and Sale contained warranties that:

 

  • The building suffered no damage since the purchaser’s inspection; and
  • The vendor’s warranties would survive closing

 

The existence of the warranties combined with the fact that the warranties survived closing was significant. The default rule in contract drafting is that warranties and representations merge on closing. In Austin the warranties did not merge due to some sound drafting. The fact the warranties survived closing strengthened the purchaser’s contractual and negligent misrepresentation claims. For vendors, this case is a reminder that surviving warranties materially increase post-closing exposure. For purchasers, warranties that survive closing provide a legal foundation for recourse in the event defects emerge later.

 

The Test for Negligent Misrepresentation

 

The Court applied the established five-part test:

 

  1. A duty of care arising from a special relationship
  2. An untrue, inaccurate, or misleading representation
  3. Negligence in making the representation
  4. Reasonable reliance by the purchaser
  5. Resulting damages

 

Ontario courts recognize that a special relationship exists between vendor and purchaser in a real estate transaction. In Austin, the MLS listing described the home as “very well maintained” and in “move-in condition.” The vendor’s representations were found to be misleading considering the defects were long-standing. The court in Austin concluded that the vendor was, at minimum, wilfully blind to serious water infiltration issues and therefore negligent in her representations

 

Credibility and Circumstantial Evidence

 

Latent defect cases often turn on credibility and circumstantial proof. In Austin, the court relied on:

 

  • Drywall date stamps inconsistent with the vendor’s testimony
  • Inconsistent insulation and vapour barrier repairs
  • Physical evidence suggesting prior remedial work

 

There was no direct proof of concealment. There was, however, evidence that supported an inference that the vendor had knowledge of the defects or else was willfully blind to same.

 

Damages: Repair Costs and Beyond

 

The Court awarded the purchaser:

 

  • $119,595.75 for repair costs
  • $10,000 for inconvenience and mental distress

 

The purchaser was found to have mitigated damages by acting promptly and remaining in the home during repairs. Notably, insurance proceeds did not reduce the damages award consistent with Ontario’s private insurance exception. Punitive damages were sought but denied. While the vendor’s conduct was criticized, it did not rise to the exceptional level required for punitive relief.

 

Key Takeaways for Real Estate Litigation

 

For Sellers:

 

  • Marketing language such as “move-in ready” can have legal consequences
  • Cosmetic work does not shield against findings of concealment
  • Surviving warranties significantly increase liability risk

 

For Purchasers:

 

  • A home inspection does not eliminate claims for latent defects
  • Including warranties in the contract and having them survive closing can be critical
  • Repair costs, mitigation efforts and disruption may all be compensable

 

For Counsel:

 

  • Credibility findings are central
  • Circumstantial construction evidence can be decisive
  • Failure to challenge damages in evidence (not just submissions) can be costly

 

Conclusion

 

Austin reinforces that caveat emptor is not a licence that allows a vendor to mislead. Where latent defects are concealed or ignored—and particularly where warranties survive closing—Ontario courts will hold vendors accountable. For those involved in real estate transactions or disputes, the decision underscores a central truth of modern real estate litigation: representations matter, documentation matters, and silence in the face of serious defects can result in substantial liability.

 

- Oliver Cooper

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Draft Wills, Digital Files, and When Validation Can’t Help

By Ian Keay • February 3, 2026
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Understanding Henson Trusts in Ontario: A Plain-Language Guide for Families

By Ian Keay • February 3, 2026
When a loved one collects government benefits, there is a risk that receipt of an inheritance could result in disqualification. Families want their loved one to live a safe, comfortable life—without accidentally causing the loss of vital government benefits. In Ontario, an effective legal tool for protecting a disabled loved one is by including a Henson Trust in the Will. 1. When Helping is Actually Hurting Many people with disabilities receive government support, such as: i. ODSP (Ontario Disability Support Program) ii. Subsidized housing supports iii. Prescription / medical benefits (the “ Benefits ”) Qualification for and receipt of the Benefits are often based on the applicant’s financial eligibility. In simple terms: If the applicant has too much money / resources / assets in their own name, they may not qualify / lose access to the Benefits. So how do family members (often parents) leave an inheritance for their disabled loved one? A badly drafted Will can result in an inheritance that risks the recipient's disqualification from the Benefits. 2. A Solution: The Henson Trust A Henson Trust is a special type of trust purposefully designed to help a person with a disability receive financial support without owning the assets personally. A Henson Trust provision is written directly into a Last Will & Testament. A key feature of a Henson Trust is that it is a fully discretionary trust. The Will-drafter (parent) appoints the trustee of the Henson Trust in their Will. The parent also identifies the beneficiary (disabled child). The important concept for a Henson Trust is that the trustee has sole and absolute discretion: i. whether to make payments to the beneficiary ii. how much or how little to pay or whether to make a payment at all iii. when to pay iv. what the money can be used for The beneficiary does not have the legal power to demand the money. The trustee has total authority over the Henson Trust. The term “fully discretionary” references that it is the trustee that has total discretion in all decisions surrounding payments out of the trust to the beneficiary. 3. How Does a Henson Trust Protect Access to the Benefits? When a Will includes a Henson Trust clause, it requires the inheritance to be set aside for the disabled beneficiary. The "setting aside" is what prevents the disqualification. This is because the fully discretionary nature of the Henson Trust means whatever inheritance lands inside the Henson Trust can never be considered to be owned by the disabled beneficiary: i. The trust owns the inherited assets ii. The trustee controls the inherited assets iii. The beneficiary receives only whatever help from the trust that the trustee decides in their sole discretion Only once a payment is made from the trust to the beneficiary does the beneficiary own that property, but only in the amount of the payment that is actually advanced. The goal of the Henson Trust is to ensure the trustee only makes payments in amounts that keep the disabled beneficiary qualified. 4. The Trustee – Tell Me More These are the important considerations when creating the Henson Trust. In particular, who should be named as the trustee. Factors to consider are: i. The trustee is in charge of the disabled child’s inheritance ii. The trustee will: a. manage the money b. make investments c. keep statements / records d. ensure the rules governing the Benefits are not breached during the management of the Henson Trust iii. Who should be trustee? a. a sibling b. a trusted family member c. a trusted friend d. a trust company e. a lawyer f. an accountant iv. Should I appoint multiple trustees? 5. How is a Henson Trust Created? In this context, a Henson Trust is created in a Will. If parents have a disabled child who collects ODSP, then the parents make an appointment with their lawyer to draft their Wills. In the Will, the lawyer prepares a clause that causes the share of the estate destined for the disabled child to be placed in the Henson Trust rather than go directly to the disabled child. By doing so, the parent is taking the correct steps to protect their disabled child’s qualification for their Benefits. 6. Important Considerations i. ODSP in particular has rules about income / gifts received during a disabled person’s qualification – not following the rules will result in disqualification ii. Whomever is appointed trustee must be reliable – a poorly managed Henson Trust can result in all kinds of different problems, not the least of which is disqualification from the Benefits iii. Registered Disability Savings Plan (RDSP) is an investment that could be used by the Trustee – but is not typically used instead of a Henson Trust iv. If a person has a family member who: a. receives ODSP (or might in the future) b. is or could be financially vulnerable (i.e. susceptible to influence or exploitation) c. makes poor / questionable financial decisions d. requires support then a Henson Trust may make sense in those circumstances. 7. Final Thoughts on Henson Trusts A Henson Trust is about more than the money. It’s created by someone who wants to provide an inheritance to a vulnerable person in order to: i. preserve dignity ii. provide stability iii. provide necessary supports iv. avoid interruption of government supports v. ensure that the support provided endures for years and decades The best time to set up a Henson Trust is before the crisis occurs – you do not want to die and leave your executors / beneficiaries scrambling. A well-crafted estate plan will protect both your estate assets and your vulnerable loved one. - Ian Keay