QUESTION: I represented the Buyers on a Property that had been advertised as “significantly remodeled.” The Buyers saw the before & after photos and were really impressed; the Seller had converted the garage into a master bedroom suite and made other improvements as well. The Seller disclosed he had done all of this work to code but he clearly stated he had not bothered to obtain any permits. The Buyers knew there were no permits; the Buyers did not express any concerns about the lack of permits and they closed escrow.
I just learned from the Buyers that the City has demanded all of the unpermitted improvements be removed immediately. I advised the Buyers they need to retain a qualified California real estate attorney because this is now a claim. I am worried that the Buyers and their attorney may try to blame me. I did not say anything about the lack of permits when I e-mailed the Seller’s disclosures to the Buyers. Do I have any potential liability?
ANSWER: Yes, you may have liability for your silence. It is a potential breach of the Buyer’s Agent’s fiduciary duty to simply forward information to the Buyer, such as Sellers’ Disclosures, without investigating that information 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 Agent’s 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). Hopefully, you included that important warning in your e-mail.
One of the problems in this situation is the existence of a discrepancy in the Seller’s disclosures: If the Seller did not obtain any permits for the remodel, then the work was not “done to code” because the building codes require the issuance of a permit and the finalization of those permits. Therefore, the Seller has arguably made a misrepresentation in the Transfer Disclosure Statement by stating that the remodel work was done to code. An argument could also be made that as the Buyer’s Agent you should have pointed out that discrepancy to the Buyers and should have recommended they investigate that issue before proceeding with the transaction.
Many cities have enacted pre-sale city inspection ordinances (such as Inglewood, San Rafael and 10 other cities in Marin County); other jurisdictions are considering such a requirement to enable the building department to not only secure additional fees but also to find and correct zoning and code violations. These city inspections often note the lack of permits and the need for corrective action. If corrective action is needed, this could delay the Close of Escrow or could impact the ability of the Buyer to secure the desired loan.
In and of itself, the lack of permits is a definite “red flag” all Agents should point out to the Buyers whether or not there is a city inspection. Buyer’s Agents should tell Buyers about the significance of the lack of permits, including, but not limited to, the fact that the work is arguably not to code, the work may be deemed by the local planning entity to constitute illegal work, and that the owner must take some additional, corrective action such as: (a) retroactively securing permits for the work; (b) securing a final inspection of the work; and/or (c) removal of some or all of the work.
Generally, illegal work is excluded by Appraisers in determining square footage and property value; thus, illegal work can negatively affect the lender’s willingness to fund the loan. Since the absence of permits can greatly impact the ability of the Buyer to close escrow, Buyers should be warned not to remove their inspection, appraisal or financing contingencies until after they have received and reviewed any required city inspection report and/or determined what action, if any, may be needed to correct the problem created by doing unpermitted work.
Although the lack of permits is a significant problem, everyone should keep in mind that the existence of permits may not mean there are no problems. The existence of a permit merely means that the owner went to the requisite planning entity, paid a fee and submitted certain plans; the existence of permits does not prove anything about the quality of the construction or the legality of the work.
See our prior Weekly Practice Tip: “Permits, Their Legal Significance and Why Advertising Permits is Problematic.”
Real estate professionals are not obligated to conduct a search of governmental records. However, if there is any reference in advertisements, disclosures or reports that there is a lack of permits for any or all work, that issue should be pointed out to the Buyers who should then be encouraged, preferably in writing, to investigate the status of the permits with the governmental entity themselves and/or with the assistance of a licensed general contractor.
BEST PRACTICE TIPS:
- 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 this red flag is disclosed to the Buyer preferably in the Agent’s Visual Inspection Disclosure.
- Regardless of who you represent, do not assume that any work was done with permits, was done legally or to code; even if permits were pulled, that does not mean they can legally be used for any specific purpose.
- If there is any indication in an advertisement, disclosure or report that some or all work was done without obtaining permits, that “red flag” should be pointed out by the Buyer’s Agent in writing, preferably in the Agent’s Visual Inspection Disclosure, with the strong recommendation that the Buyer needs to investigate the permit status with the relevant governmental entity themselves and/or with the assistance of a licensed general contractor who is familiar with how the local planning entity handles permits.
- Buyers should be advised to not remove any inspection, financing or appraisal contingencies until after they have determined what additional action may be required by the local planning entity to correct the permit issue and/or what impact, if any, the lack of permits will have on the size or value of the Property.
- Agents should refrain from giving their personal opinions on: (a) how quickly or how easily permit issues can or will be resolved by the local governmental entity; (b) how to best resolve permit issues; and/or (c) who is legally responsible for any problems relating to or arising from any permit issues.
- Agents should refrain from attempting to personally resolve any permit issues with the local governmental entity.
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 2019 09/27/19