BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
The Legal Significance of Permits
and Why Advertising Permits is Problematic
QUESTION: Last year, I represented the Buyers on Property that had been advertised as having an “in-law unit built with permits.” The Sellers had their adult daughter living in the unit above the garage. I did not know the Buyers intended to rent the unit out but right after escrow closed they started using it as a vacation rental. Their neighbor turned them into the City after some of the vacationing tenants had an all-night brawl. The Buyers have now learned that the secondary unit was only “permitted” to be used as storage space and is not habitable. The space is not compliant with code and there are significant limitations on their ability to rent it out.
I told the Buyers they needed a qualified California real estate attorney. Their attorney believes that the Sellers and Listing Agent have liability for the inadequacy of the Sellers’ disclosures and their agent’s false advertising; however, the attorney seems to be more interested in suing me! The Buyers’ lawyer is claiming I breached my fiduciary duties to the Buyers by not investigating the permit issue when I forwarded the Sellers’ disclosures and the advertising flyer to the Buyers. According to the Agent Visual Inspection Disclosure form, I do not have to go off-site to investigate the permits. I am now confused. How am I responsible?
ANSWER: It is a potential breach of the Selling Agent’s fiduciary duty to simply forward information, such as Sellers’ Disclosures and Advertising Flyers, to Buyers without investigating that material unless you have specifically advised the Buyers, in writing, that you: “HAVE NOT AND WILL NOT VERIFY OR INVESTIGATE ANY INFORMATION SUPPLIED BY OTHERS” (the recommended statement that should be included in the e-mail signature block and/or any other document used to transmit disclosures, reports and/or any other information to your clients and other brokers).
The real problem in this situation is the lack of understanding that many people have about the practical and legal significance of obtaining a permit and what real estate professionals should and should not say about work that was done with permits. Buyers and Sellers often do not understand that, just because someone has secured a permit, it does not mean very much and that is why the topic of permits is now covered in the Advisories that many local Associations have created to supplement the Statewide Buyer Seller Advisory (or, in the case of PRDS, to supplement and replace the SBSA).
The issuance of a permit is merely proof that someone went to the requisite planning entity (at either the City or County Offices), paid a fee and submitted certain plans. When the governmental entity issues the permit, that entity is not stating, let alone warranting, that the construction is needed, that the work will be performed to code, that it was done well, or even that use of the space is legally authorized.
Obtaining a permit is strictly an administrative act that enables the governmental entity to obtain a fee. If a permit is required to commence work on a Property and the permit was not obtained, that is a material fact that must be disclosed because the lack of a permit in that situation means that the necessary upfront authorization to do the work was not obtained and thus the work may constitute an illegal and/or non-conforming space that must be remediated or removed.
If there has been, or will be, construction on a residence (either for repair purposes or to make an alteration or addition), permits are often necessary as the first in a series of governmental requirements
Real estate professionals are not obligated to secure the permits, but if there is any reference in advertisements or disclosures that there are or there are not permits, that issue should be pointed out to the Buyers who should then be encouraged to investigate the status of the permits, including whether or not the Property was “finalled” — that is, did an inspector come out and check the work to make sure that it was consistent with the plans submitted to secure the permits and that the work was done to code?
One caveat here: even if the work was “finalized,” that doesn’t mean that it was actually done to code or that the work was of any particular quality. Government inspectors can make mistakes and the government is immune from lawsuits for its mistakes in issuing permits or finalizing work.
Best Practice Tips:
1. As part of the visual inspection of the accessible areas of the Property, look for the “red flags” of the existence of an addition or remodeling – for example, second stories added in a neighborhood where all of the homes are single story, and/or more rooms exist than shown on the Assessor’s records – and make sure that the red flag is disclosed in writing;
2. Regardless of who an agent represents, do not assume that any work was legally done with permits, was done legally or to code and even if the work was permitted, it doesn’t mean that it can legally be used for any specific purpose;
3. Listing Agents should not advertise that work was done “with permits” since it may well be a misrepresentation and/or lead people astray. The existence of permits is simply a disclosure issue for Sellers and an issue that Buyers should be encouraged to investigate;
4. If Sellers provide copies of permits as part of their disclosures, no effort should be made by either the Listing or the Selling Agent to over-sell the significance of those documents. Buyers should be encouraged to investigate whether the permit was finalized and if the work was done in a workmanlike fashion and to code;
5. Selling Agents should only transmit documents using the disclaimer language quoted above in bold print; and
6. Consider using a receipt form for the permits that explains the lack of significance of those documents. A sample Receipt for Permit(s) form is included on the following page.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2017 08/18/17
RECEIPT FOR PERMIT(S)
Re: ________________________________________________ (Address)
The undersigned Buyers acknowledge receipt of a copy of the following permit(s):
Permit dated:
Permit dated:
Buyer understands, acknowledges and agrees that real estate licensees do not have a duty to investigate the public records or the status of permits concerning the title or use of the Property under Civil Code Section 2079.3. The fact that copies of the permits are provided to the Buyer does not mean that Broker has or will investigate or otherwise evaluate the status of the permits or the public records. Real estate licensees are not qualified to make such determinations.
Buyer(s) understand that the existence of a permit merely means that a governmental agency has authorized the commencement of certain work. It does not mean that:
1. The work actually performed was authorized;
2. That the work was done to code or other regulations;
3. That the work actually performed was of a workman-like quality or is guaranteed to remain in good condition; or
4. That any particular use is legal.
Buyer(s) are encouraged to retain the services of a licensed contractor and/or other experts to determine the quality of the work and its legality, even if a permit was issued.
Buyer(s) understand that if all required permits and/or final governmental approvals were not obtained, the Seller is not required to bring the improvements up to current code requirements unless there is a written agreement to that effect signed by the Seller and Buyer. The actual status of the permits and any required corrective work is not the responsibility of the broker(s).
Broker has not and will not verify the information supplied by others.
Date: __________________________________________
Buyer
Date: __________________________________________
Buyer