Disclosure Issues between landlords and Tenants – Part 2
Disclosure Issues – Part 2
We continue our series about disclosure issues with a discussion that is related to a specific question recently posted to our “1-on-1 Help Center.” The posted question concerned an issue which should be important to all landlords.
The question was as follows: “I own a 4-plex on which various improvements have been made during the 8 years I have owned it. Some of these improvements were done without permits. What problems might this cause me when I sell?”
The basic answer is that a seller should always be concerned about doing improvements that are (1) not according to zoning, (2) without building permits, (3) not done according to code, and (4), for some tasks, not done by licensed
contractors. Furthermore, it is best to deal with the issues before putting the property on the market.
I will further answer the question with a more comprehensive discussion than provided to the person who posted the question.
Almost all states no longer allow a seller to escape liability for known defects by selling the property “as is” except for certain transactions such as foreclosures or sales by government agencies. Many states now require that a seller fill out a disclosure form that discloses various issues that might be a material factor in deciding whether to purchase a property and how much to pay for it. In some of those states, the requirement is limited regarding property type – for example, residential properties of four or fewer units.
California, for example, is a state that has a statute that specifies its requirements for disclosure upon sale of a property. The disclosure forms required by law in the State of California as provided by the Department of Real Estate and as provided by the California Association of Realtors can be found at www.dre.ca.gov and www.car.org, respectively. Note that cities and counties are allowed by the relevant California statute to require additional disclosure items.
Even when the form isn’t specifically required, most, perhaps all states by statute or court decisions make disclosure by the seller a legal responsibility. Failure to disclose material facts that were known or, in some cases, should have been known, can result in time-consuming and costly problems.
Knowledgeable buyers will insist on certain disclosures even if not required by law and not represented by an agent. If the buyer is represented by a licensed real estate agent, such certain disclosures will likely be required by the broker even when not required by law. The disclosure statement will usually cover such items as known (1) zoning, building code, or permit violations, (2) utility services (including whether or not on city water and sewer), (3) soil stability problems, and (4) environmental issues such as lead, mold, and/or asbestos. Regarding the subject question, we will in this article be primarily interested in the items listed in the first category.
Lack of laws will not eliminate problems when selling a property absent adequate to zoning, building permits, and codes, whether the items are mentioned specifically or are included within a general contingency clause. Therefore, failure of the seller to disclose problems up front will likely mean a renegotiation of the purchase price or withdrawal of the offer when problems are discovered by the buyer or the buyer’s agents, meaning wasted time for a number of people.
Even if a sale escrow closes without discovery of a problem, failure to disclose any of the three issues can result in serious future problems in a number of ways.
Discovery of a zoning problem following close of escrow can result in litigation because the value of property with the actual zoning is significantly below the price paid for it. As a minimum, the buyer may require the seller to pay for the cost
of “fixing” the problem in order to avoid litigation and, quite likely litigation will occur if the problem is not “fixable.”
Even for jurisdictions where pre-closing inspections are not required, the buyer’s inspector did not notice any out-of-code work, and escrow closes without a hitch, unpermitted or non-code work can cause problems when discrepancies related to unpermitted improvements are discovered by a contractor doing work for the buyer after closing. For example, the owner calls in a plumber to repair a leaking pipe joint related to the gas water heater and the plumber discovers code violations related to installation of the water heater. As he should, the contractor states that the faulty installation is a safety hazard and that he can’t repair the leaking joint without correcting the out-of-code installation.
Such a scenario can result in a claim by the buyer to the seller for compensation, particularly if the cost of bringing the installation up to code is considerable. Even worse would be if an improvement that was improperly done results in injury or death months, even years following the close of escrow. The seller would almost certainly be sued in such a case, and the buyer would win. The seller might possibly even be criminally charged.
More importantly and potentially most costly, if non-permitted work someday contributes to damages, injury, or even death, the owner may be open to lawsuits, even possible criminal liability in extreme cases, and will almost certainly be at more risk than if the same work had been done with a permit.
Tasks that might require a permit can vary significantly among jurisdictions. In some jurisdictions one can construct an entire house without a single permit or inspection. In others, a permit is required to replace a leaking water heater
or even to add an electrical circuit.
Some local governments have formalized the subject disclosure issues by requiring an examination by the city or county building department of zoning issues and of building permit records for the property and then a physical inspection by qualified building department personnel.
The results of physical inspections are compared to original building plans and modifications done with permits. Escrow cannot close unless and until the city is happy with their investigations.
Non-permitted work may have to be redone if not per building codes or may have to be undone if not allowed by zoning regulations. Even if non-permitted work was performed per building codes, owners can be forced to obtain approvals and permits. This will be a time-consuming process and the fines and/or other financial penalties for violations will usually make correcting the problems quite costly.
In general, codes can require that all problems must be “fixed” if significant rehab is undertaken. That is, an owner who wishes to do improvements with permits can be forced to do a lot more work at a significantly greater cost than originally planned. Furthermore, inspectors may also flag other problems when inspecting work allowed under a permit.
Depending on the specific jurisdiction, the result may require getting the improvements permitted at a cost that will include the current permit fees and may include penalties, the penalties sometimes accruing from the year when the improvements were made. Simply deciding to not sell may not be a solution as, now that the building department has knowledge of the problem, the owner may be required to correct it anyway.
In addition to improvements done without permits, code violations are often found during the inspections. These violations must usually also be corrected and some must be corrected by licensed contractors. Accordingly, failure to take care of the problem before signing a contract can create significant problems when escrow is scheduled to close. At a minimum it will result in a significant delay while getting permits, even a longer delay if the inspection discloses numerous code
violations that must be corrected.
Some cities have had such procedures in place for decades and such requirements will likely be implemented in evermore jurisdictions in the future. In such jurisdictions, owners who think that can save money by ignoring the rules can be in for expensive surprises when they attempt to sell their properties.
If an owner decides to market the property without correcting known or suspected problems, he should disclose the issues up front, at least before signing a contract, even if in a jurisdiction that does not require building permits, in order to reduce ramifications of any issues occurring at some future date. Not making a deal is far better than defending against a lawsuit for failure to do so when (probably not if) the buyer discovers the issue, particularly if discovered after closing
escrow rather than in the course of performing due diligence.
Even if discovered by the potential buyer’s due diligence and he/she invokes a contingency to cancel the offer, you may have a couple of angry real estate agents whose time you’ve wasted. Many of those jurisdiction that require inspections
by their building departments will not allow an escrow to close without fixing the discovered problems even if a buyer is willing to buy the property as is.
Yet another potential problem involves having used unlicensed contractors for certain tasks. While most states allow owners to perform most repairs and improvements, even perform most tasks related to construction of a building – with required permits and all required inspections, of course – many states require the use of appropriate licensed contractors for certain tasks. As examples, some states require that electrical work beyond plugging a corded appliance into an existing outlet be performed by a licensed electrician and some states require that a licensed plumber install any gas appliances such as a gas water heater. Some jurisdictions even require building permits for relatively minor tasks. Many states aggressively search out and prosecute unlicensed contractors. Failure to utilize licensed contractors when required by law can impact both the unlicensed contractor and the property owner.
Knowledgeable owners will be sure that permits are pulled for any work that requires a permit and that work is completed in accordance with building codes. They will also be somewhat knowledgeable about contractor licensing laws of their states to be sure licensed contractors perform tasks when so required by law.