Caveat emptor, a Latin phrase that translates to “let the buyer beware,” is a legal principle often considered in consumer protection. However, it is equally important in real estate transactions in British Columbia.

The phrase suggests that the buyer is responsible for ensuring the property meets their standards and expectations. Moreover, the buyer is responsible for researching the property prior to the purchase in an attempt to locate potential defects—otherwise known as performing due diligence—and bears the consequences of whatever is uncovered during due diligence.

Zuo v. Chen and the Doctrine of Caveat Emptor

Zuo v. Chen, a recent case at the British Columbia Supreme Court, reinforced the principle of caveat emptor in commercial real estate.

The case revolved around an experienced investor (the plaintiff) who had sought to acquire a commercial property in 2018 for $8.25 million. The plaintiff backed out of the agreement because the property was contaminated. She later claimed that the seller fraudulently misrepresented the site’s environmental condition by failing to disclose that it was potentially contaminated.

The court found no evidence of fraudulent misrepresentation on the seller’s part. The plaintiff could not prove that the seller had knowingly concealed the environmental risks associated with the property.

In its detailed decision, the court maintained that the plaintiff had agreed to purchase the property on an “as is, where is” basis. In other words, the purchase was subject to the doctrine of caveat emptor. The investor was thus responsible for conducting any environmental assessments that might have revealed the contamination—and failed to act accordingly. She was ordered to pay the seller a hefty $2.67 million in damages for breaching the contract.

What Does Due Diligence Entail?

Subject to certain exceptions (including fraud and failure to disclose a latent defect of which the seller is aware), caveat emptor applies to all real estate transactions in British Columbia.

Due diligence is an essential step in a real estate transaction. Buyers must conduct due diligence to avoid the consequences of the doctrine of caveat emptor. The purchase and sale agreement typically includes a clause that outlines the specifics of the due diligence and allocates a period of time for the buyer to undertake their research.

Due diligence is an intricate and involved process. Some of its key components include reviewing the land survey, conducting environmental assessments, reviewing leases, searching title, and reviewing zoning bylaws and regulations. Each of these activities is described below.

Land survey

A land survey is a formal inspection of the property by a licensed surveyor. The surveyor measures and maps the land, identifies physical features, and establishes property lines. The results are then entered into a formal document.

When buying or selling real estate, the buyer should obtain a proper land survey to ensure that all legal documents accurately reflect the land’s boundaries.

Environmental assessment

Environmental Site Assessments (ESAs) are a crucial component of due diligence. An ESA, which occurs in two phases, involves an in-depth investigation into any environmental risks or liabilities associated with a property.

In the above decision, an environmental assessment revealed the presence of petroleum hydrocarbon and metal contaminants in the soil and groundwater beneath the premises. This was likely due to the property’s previous use as a gas station (though a wide variety of commercial and industrial activities can cause contamination or pollution).

Potential buyers should have a solid grasp of BC’s environmental assessment process, which is governed by the Environmental Assessment Act.

Leases

It is often the case that commercial property is leased. This was the case in Zuo v. Chen, where the property to be purchased had numerous tenants.

Leases are complex legal documents. Therefore, in a commercial real estate transaction, the buyer (under the guidance of a trusted lawyer) is advised to obtain and review copies of all leases and subleases and carefully examine their terms and conditions.

Title search

Searching title is another key element of the buyer’s due diligence. “Title” refers to the legal ownership of a property. By searching title, a buyer can confirm ownership rights and identify any encumbrances or title defects that might affect the property in the future.

For example, a title search might reveal that the seller was not legally authorized to sell the property or that liens or mortgages are registered on the title. Due diligence can help prevent these sorts of unanticipated surprises.

Zoning bylaws and regulations

Zoning bylaws regulate how land and various types of properties can be used. For example, a zoning bylaw might limit the height of buildings in a specific area or direct that a certain building be used for residential housing.

When a buyer understands the zoning bylaws of a property, they can ensure that their intended use of the property is permitted.

The precise parameters of the due diligence will vary depending on the unique features of the property in question. However, the above elements are common to most due diligence clauses in commercial real estate contracts.

Final Thoughts on Caveat Emptor and Due Diligence

The doctrine of caveat emptor warns buyers that they have no recourse if the property is inadequate or fails to meet their expectations. Potential buyers might be worried about this, and rightfully so. After all, real estate disputes have been known to result in significant costs and lengthy litigation.

However, buyers should rest assured that through comprehensive due diligence—which might include a land survey, environmental assessment, review of zoning bylaws, review of leases, and title search—they will likely uncover any issues that could later escalate into major problems. This allows them to participate in commercial real estate transactions with greater ease and confidence.

Vernon & Salmon Arm Real Estate Lawyers Providing Commercial Real Estate Services

This case highlights the importance of understanding the doctrine of caveat emptor when entering a commercial real estate transaction and carefully considering all relevant factors during the due diligence process. This is especially true for the purchasing side of the transaction. The experienced real estate lawyers at CM Lawyers in Vernon and Salmon Arm are dedicated to simplifying complex transactions, ensuring a smooth and stress-free process. To discuss your real estate matter with a member of our team, call us in Vernon at (250) 308-0338 or Salmon Arm at (250) 803-9171, or contact us online.