The seller’s liability for hidden defects is a legal obligation that may apply when a property is sold and it turns out to have defects the buyer did not know about and could not have been expected to know about, but which the seller knew or should have known about. In that case the buyer may be entitled to claim compensation from the seller. Here are some important points about the seller’s liability for hidden defects:
What is a hidden defect?
A hidden defect is a fault or problem in the property that the buyer was not aware of when the transaction was concluded and should not have discovered during a normal inspection. These can include structural problems, water leaks, electrical faults and so on. A hidden defect is a fault or problem in the property that:
- The buyer was not aware of when the transaction was concluded
- Could not be identified during a normal inspection
- The seller knew or should have known about
Typical hidden defects in property include:
- Hidden problems in the neighbourhood (e.g. excessive noise, future developments)
- Structural problems (cracks in walls, foundation problems)
- Hidden water or damp damage
- Faults in the electrical system or plumbing
- Illegal construction work or missing permits
The seller’s knowledge or duty to know
Under the Estonian Law of Obligations Act, the seller is obliged to inform the buyer of hidden defects they are aware of or should have been aware of. The extent of the seller’s liability depends on the circumstances, but an exclusion of liability for hidden defects in the sales contract may not always be valid if the seller has deliberately misled the buyer.
If the buyer discovers a hidden defect, they have a statutory right to submit a claim to the seller, but this must be done within a reasonable time after discovering the defect.
The buyer’s legal rights
If the buyer discovers a hidden defect, they may claim the following:
- Compensation or repairs – the seller must cover the cost of repairing the defects or arrange the repairs.
- A price reduction – the buyer may demand a reduction of the sale price according to the extent of the defect.
- Termination of the contract and a refund – if the defect is material, the buyer may withdraw from the transaction and get their money back.
By law, the claim must be submitted within 2 years of the purchase transaction, unless otherwise agreed with the seller in the contract. Hidden defects in property can cause unexpected problems for buyers and investors later on.
Compensation
The amount of compensation depends on the extent of the defect and the buyer’s evidence. The buyer must provide documentary evidence such as repair invoices, expert assessments and quotes that confirm the actual costs.
If the seller is not willing to pay compensation voluntarily, the buyer may go to court and claim compensation through legal proceedings. The law generally gives the buyer 2 years to notify a hidden defect and claim compensation, but this may depend on the contract terms and the severity of the defect.
Reducing the price of the property
If the buyer discovers a hidden defect that affects the value or usability of the property, they have the right to demand a reduction of the sale price. The size of the reduction depends on the extent of the defect and how much it affects the market value or usability of the property.
Cancelling the sales contract
In some cases the buyer may want to cancel the transaction, return the property to the seller and get the purchase price back.
Limitation period
Most countries have a fixed limitation period within which the buyer must submit a claim for hidden defects. In Estonia, the buyer must notify the defect within two years.
Law of Obligations Act § 218 (1) – If the seller is liable for the non-conformity of the item with the contract terms, the buyer must notify the seller within a reasonable time after discovering the defect.
Law of Obligations Act § 218 (2) – If the buyer does not notify the seller of the defect within two years of the handover of the item at the latest, they lose the right to rely on the defect (except where the seller knowingly concealed it).
Exceptions: if the seller acted in bad faith (e.g. knowingly concealed the defect), the buyer may be entitled to make a claim even after the two-year period has expired.
The most common hidden defects I have come across
Structural problems – Hidden structural problems such as poor construction quality, structural faults or concealed damage can emerge and lead to large repair costs.
Plumbing and electrical problems – Old and poorly maintained plumbing and electrical systems can be a source of future problems. Leaking pipes or outdated wiring can cause water damage and fires and increase maintenance costs.
A bad neighbourhood – Neighbourhood problems such as rising crime, noise or unpleasant neighbours can affect the value of the property and your quality of life.
Legal problems – Hidden legal problems such as undisclosed lawsuits, boundary disputes or a missing building permit can create legal difficulties and financial consequences.
Poor maintenance and repairs – If the owners have neglected maintenance or done cheap, temporary repairs, this can cause hidden defects that buyers may discover later.
Hidden costs – Additional costs such as high association or management fees can be hidden and affect the owner’s finances.
Environmental problems – Hidden environmental problems such as contaminated soil or former industrial land can pose health risks and reduce the value of the property.
Financial difficulties – If the seller or developer is in financial difficulty, this may affect the sales process or future management and maintenance. Before buying, it is advisable to do thorough research, including a professional property inspection, to identify possible hidden defects and avoid future problems. It can also be useful to consult a real estate professional for additional advice and information on the market situation.
In summary, both the seller and the buyer should be aware of hidden defects and their rights during the transaction. If doubts or disputes arise, it is advisable to consult an agent who can provide relevant legal advice and guidance based on local law and the specific situation.
