Hidden Defects: Nature, Detection, Solutions, Instructive Examples

Hidden defects are a topic that clients from Kaanon Real Estate have inquired about quite frequently or sought assistance with. Siim Kabel, head of Kaanon's Tallinn residential real estate department and real estate agent, broke down the topic in detail.

The nature of hidden defects

A hidden defect in real estate is non-conformity with the terms of the contract that existed on the property before the purchase and sale transaction. Key terms in defining a hidden defect are the words "knew" or "should have known." These are also the words that cause the most problems between people regarding this topic.

If the seller knew that defect X existed but forgot about it or deliberately failed to mention it, then it is a hidden defect. If the new owner discovers a defect but the seller says they know nothing about it, it is still a hidden defect.

Identifying and recognizing hidden defects

Hidden defects are determined based on the principle of reasonableness. If a property has a hole with a meter diameter in the kitchen floor but the buyer says sorry, I didn't see it before the transaction, then clearly they are lying. Similarly, if there is a hole in the wall or the building has no roof, then the buyer cannot claim they inspected the property but didn't notice the defect.

But if, for example, there is a hole in the wall but the seller had moved a cabinet in front of it ten years ago, then it is a hidden defect. It also doesn't matter if the seller allegedly forgot about the hole and moving the cabinet.

The most sensible solution is to order a building inspection for any property you are about to purchase. For example, in the case of a typical three-room apartment, the inspection fee comes to around a couple of hundred euros. If we consider real estate in Tallinn and Tartu, the minimum value of real estate is approximately 20,000–30,000 €. In such cases, ordering an inspection for a few hundred euros is certainly justified. Yes, the buyer also has the right after the transaction to demand removal of the hidden defect or reversal of the transaction. However, against the backdrop of one real-life example (read more in the examples subsection), a court may indeed decide that the transaction should be reversed, but if the seller has no money or ability to borrow, then the buyer gets no benefit from exercising their right. They are left with a property they cannot use for its intended purpose.

From the seller's perspective. If it is an ordinary small rural residential property, hidden defects are difficult not to know about. But if the property for sale is indeed a (large) building or structure, then an expert should certainly be involved. Be it an experienced real estate agent, a building expert, or simply someone with in-depth knowledge of the field.

Very often, hidden defects are not related to malice but rather to the fact that a person simply does not realize that X thing could be a hidden defect for another person. For example, a property owner has long become accustomed to water leaking through the roof during heavy rains. However, to prevent water from entering the room, they have had a bucket in the attic for a long time, so they have grown accustomed to the situation and see no problem with it. This is admittedly an extreme example, but the point remains the same.

Or take a hypothetical noisy neighbors example. A young person sells an apartment. Their neighbor is a man who throws parties often, but this did not bother the seller, perhaps they were even at those parties themselves. Therefore, the seller does not realize there is a problem. The apartment was sold and the new owner was immediately bothered by the neighbor's parties. This is a hidden defect.

With neighbors, a hidden defect may not only be their possible noise but also simply malice. For example, there are quite a few real cases where police are called without reason out of pure spite, access roads are blocked, etc.

Notifying of hidden defects

Sales of Goods Act (VÕS) § 218 subsection 1 establishes that the seller is liable for non-conformity of the goods with the contract terms if the non-conformity exists at the time of transfer of the risk of accidental loss or damage to the buyer, even if the non-conformity is discovered later.

According to subsection 2 of the same section, in consumer sales, the seller is liable for non-conformity of goods with the contract terms that becomes apparent within two years of the goods being handed over to the buyer. In consumer sales, it is presumed that non-conformity with the contract terms that appears within six months from the day the goods are handed over to the buyer existed at the time the goods were handed over, unless such a presumption is contrary to the nature of the goods or the defect.

That is, according to the Sales of Goods Act, the seller must be notified of a hidden defect no later than two years after the property is handed over to the buyer, but there are court rulings in which notification significantly later after the transaction has been justified.

For example, a person buys themselves a house, lives there for five years, and then thinks that now it is time to start repairs. They lift the floor and discover mold underneath. The property owner decides to order an inspection, which reveals that the mold did not develop there in the past five years but much earlier. Since it is proven that the defect existed before the transaction, from the moment the owner discovered the defect, they have two months to lodge a claim:

According to § 220 subsection 1 of the Sales of Goods Act, the buyer must notify the seller of non-conformity of the goods within a reasonable time after learning of the non-conformity or when they should have become aware of it. In consumer sales, the consumer must notify the seller of non-conformity of the goods within two months after becoming aware of the non-conformity.

Reversing the transaction

Reversing a transaction is a rare case; for this, the defect must be very serious. For reversal, the defect must be such that it does not allow the intended use of the purchased property.

If a person buys what is allegedly a habitable house in good condition but after the transaction it becomes clear that there is mold underneath or the foundation has sunk (the house is at risk of collapse), then this is a hidden defect for which the transaction can be reversed.

But if a farmhouse requiring capital renovation is purchased, and it is subsequently discovered that there is mold, then generally this transaction will not be reversed. The reason is that the buyer could not have immediately used the property for living but would have had to undertake capital renovation anyway. In such a scenario, removing the mold would be an additional expense that the buyer initially did not account for, and in which case it would very likely be the seller's obligation to remove the mold or compensate for its removal.

There are people who live in their old farmhouse for ten years and have no idea that there has been mold underneath (for a long time). They have never lifted the floor before, there is no direct unpleasant smell coming from there, and there are no other signs of house mold. How should the person have known there was mold? Should everyone assume before selling that they have house mold? Or should they lift the wooden floor before selling? Questions to which we must again apply the principle of reasonableness.

However, mold is considered a very serious (hidden) defect. If transaction reversal is usually the very last option and is done very rarely, mold is certainly a problem for which transactions have been reversed.

However, every hidden defect dispute must be viewed separately. It is not possible to draw conclusions in the style of "I had such a situation three years ago, so your case will probably be resolved the same way." Each hidden defect dispute is different; there are no universal solutions. This is what makes the topic of hidden defects very complicated.

Most hidden defect disputes are, however, settled between the buyer and seller by agreement. With minor hidden defects, one party often gives up quickly because they don't bother to argue about it in court and elsewhere.

Recommendations for sellers

It is recommended that sellers clarify for themselves before selling what is considered hidden defects. It is also worth researching what are the most common hidden defects (for objects similar to the property in question) and then checking that your property does not have any of them. Obviously, one should not lift the floor on a farm to see if there is mold or not. But for such cases, there are various inspections and options that can be performed, observed, and followed to keep your risks as low as possible.

The seller should tell the buyer everything related to the property as truthfully as possible from the outset. If a defect appears about which the seller is actually aware but has simply forgotten to tell the buyer, then a (compromise) solution should be found that is acceptable to both parties. However, if a complaint about a defect arrives that the seller was not aware of, then first one should consult with experts to determine whether it even qualifies as a hidden defect or not. If it qualifies as a hidden defect, then the seller could first try to resolve the problem. If that doesn't work, the next step is to reach an agreement, for example in the form of a compensation amount.

Instructive real-life examples

There are essentially endless different scenarios of hidden defects. Some real examples from the article's author's daily work:

1) Siim has encountered a couple of cases that ended with the seller, so to speak, giving up.

Once, a potential buyer viewed an apartment repeatedly and examined it very thoroughly in every aspect. The interested party knew that the apartment had last been renovated over ten years ago.

After the interested party had purchased the apartment, they notified that there was an unpleasant smell in the kitchen. However, the lawyers Siim spoke with believed that this does not qualify as a hidden defect in any way. However, the seller said they had no desire or willingness to deal with the dispute further and compensated the buyer with approximately 1,000 euros.

It does not refer specifically to this case, but unfortunately there are people in Estonia who buy property directly from the owner and then later start demanding money from them. There are not many such malicious people, but there are some. There are also simply people who have bought property for themselves and then start thinking that they paid too much for it. Subsequently, they look for ways to get at least part of the money back.

2) A case that Siim is dealing with at the time this article is being prepared and which has not yet reached a resolution.

An apartment was sold to a person who began making renovations after the purchase and discovered that something was wrong with the floor. The property's new owner decided to order a building inspection, which revealed that the building's main structures (the metal floor beams on the first floor) had rusted through and rotted. This means that living in this apartment is dangerous and the apartment cannot be used for its intended purpose – the building is at risk of collapse.

However, the person who sold the apartment to the person who discovered the problem had also recently purchased the property themselves. And they did so with a bank loan. When they sold the apartment to the person who discovered the problem, the bank took back its loan money (which constituted the majority of the property's value), as is customary.

However, the new owner went to court, where a decision was made that the transaction must be reversed. That is, the seller must refund the purchase price to the buyer. But since it was bank money, the seller now has no money to refund. And since the building has become unattractive in the bank's eyes, no new loans are being given by banks anymore. A stuck situation.

 

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