BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Recently, we have received a number of questions and concerns from agents who are marketing properties that contain an unpermitted, illegal, or Non-Conforming structure or use (“Non-Conforming”). Consider the following scenarios:
SCENARIO NO. 1: I am listing a property which has an ADU that is not permitted. How do I properly market this unit?
RESPONSE: Be very cautious in marketing a unit that is not legal or is Non-Conforming. You may want to avoid marketing this unit altogether and ensure that your disclosures specifically note that the unit is not legal. Remember, a unit or space is not legal space even if built to current code but built without permits.
SCENARIO NO. 2: I am a listing agent and advertised a photograph of an in-law unit which was not permitted. The next-door neighbor saw the advertisement and contacted the Building Department. A building inspector has now red tagged the unit. The seller is blaming me. What should I do?
RESPONSE: As indicated above, it is risky to advertise a living quarter or other structure which is not legal or permitted. By doing so, you and the seller run the risk of a neighbor, competitor, or other third party notifying the local Building Department, who can red tag the unit. A red tag means that the unit cannot be occupied or rented out until the issue (i.e., illegality or lack of permits) is corrected. It is suggested that before listing or marketing a property with an illegal unit, you have the seller sign a disclaimer or release. BRM has prepared a release for its clients to use. It is attached to this tip.
SCENARIO NO. 3: I am representing a buyer of a property that has an ADU which is rented out. I have concerns that the ADU may not be properly permitted. How do I proceed?
RESPONSE: For any ADUs on a property, all buyers’ agents should recommend that their clients visit the local Building Department and confirm the legality of the ADU, including obtaining permits. Please note that pursuant to Civil Code §2079.5, you, as a licensed real estate agent, are not obligated to check permits. It is strongly recommended that you refrain from checking permits and refer your client to a professional, such as an appraiser, architect, or contractor to obtain permits. If you check permits and you miss something or fail to obtain all permits or misinterpret those permits, you could be held liable. Because checking permits is outside the standard of care for a real estate agent, it is not recommended that you pull permits. You should advise the buyer in writing to undertake this investigation prior to removing contingencies.
DISCUSSION: A listing agent needs to be cautious in marketing an ADU or other structure which is illegal (Non-Conforming, lacking permits, or does not comply with local building codes). In several instances, agents who marketed these properties have brought attention to the illegal or Non-Conforming unit or use which has triggered an investigation by the local Building Department. In these instances, sellers have blamed the agent for the attention brought to the unit. While an agent cannot be held liable for the existence of an illegal unit, since the agent did not create it, this situation certainly creates an adversarial relationship between an agent and a seller if an agent brings attention to an illegal unit which can lead to a red tag.
If a property is red tagged for a Non-Conforming use, the Building Department can order remedial measures including bringing the space into compliance or, in the worst case, require the removal of the Non-Conforming unit or space. If the Non-Conforming use is a tenant occupied space or unit, that tenant will have to leave, perhaps be evicted, which can result in that tenant alleging damages if they now must pay more rent. This is particularly onerous to the property owner in rent-controlled jurisdictions.
If an agent is going to list a property with an illegal or Non-Conforming structure, it is recommended that the agent have the seller sign a release and disclaimer. BRM has created that release for its clients, a copy of which is attached to this Tip.
If you are representing a buyer in the purchase of a property which has a Non-Conforming unit, it is recommended that you advise the buyer in writing to check the permits and determine the legality of the unit with the Building Department. Agents are strongly discouraged from undertaking that investigation themselves as under the law, such investigation is beyond the standard of care for a real estate agent.
PRACTICE TIPS:
- If you are listing a property that has a questionable structure or unit (i.e., ADU, in-law unit, or other questionable construction or repair), it is suggested that you inquire of the seller as to whether it is legal and complies with building codes and permitting. If the seller represents that the unit is illegal, ensure that the seller properly discloses that fact on the seller’s Transfer Disclosure Statement and the Seller Property Questionnaire. You should also disclose that fact to a buyer.
- If a property contains a Non-Conforming Use, it is suggested that you refrain from marketing that unit to avoid unwarranted attention from local building officials. It is also suggested that you utilize BRM’s release and disclaimer regarding Non-Conforming uses.
- If you are a listing agent of a property with a Non-Conforming Use, do not include the square footage of the Non-Conforming unit, rooms or space in your square footage calculations.
- Do not use euphemisms common in our industry calling the space “bonus room,” “unwarranted,” “legal” or “illegal,” as the public may not understand that this is Non-Conforming space.
- If you are representing a buyer in the purchase of a property which has a Non-Conforming unit, recommend that the buyer obtain permits. If the buyer is not sure how to obtain permits or check records at the local Building Department, recommend that your buyer consult with a professional such as an appraiser, architect, or contractor.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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.