Permitted To Close

Open permits, expired permits and code enforcement violations can wreak havoc on a closing when not properly addressed. Picture this scenario… contract negotiations were a breeze, the inspection results were perfect, title came back clean, and closing is looking oh so smooth. Then, out of seemingly nowhere, the municipal lien and permit search results reveal an open or expired permit or a code enforcement violation. What was once a picture perfect closing has now turned into The Rocky Horror Picture Show. The property owner is left scrambling and the parties are now pointing fingers as to who is going to be responsible for resolving the issue. Have you seen this film before? We certainly have.

Now let’s get to the basics, when are building permits required? Generally speaking, any owner who desires to construct or alter the occupancy of a building or structure, or to install or alter any electrical, gas, mechanical or plumbing system, is required to file an application with the local building official and obtain the required permit before the work can be performed. Once the permit is issued by the local building official, the permit is considered “open” and the work can commence. Upon completion of the work, an inspection is performed by the local building department and if the inspection passes, the permit will then be considered “closed” by the local government. There are several reasons why a permit may not be closed and remains “open” or is deemed to have “expired” with the municipality. The following are common examples we see:

1. The owner obtained a permit, but never started or completed the work to be performed;
2. The work required under the permit was completed, but the owner failed to notify the building department and schedule a follow-up inspection; or
3. The post-work inspection was completed, deficiencies were noted, and the owner failed to correct the deficiencies and/or have the work re-inspected.

So, who is responsible for resolving the issue once discovered? Well, it depends on the terms provided for in the purchase agreement and when the issue is discovered. For example, the FR/BAR Standard Contract requires the seller to resolve any permit related matters up to the permit limit so long as proper notice was delivered to the seller within the inspection period. Of note, if the buyer fails to deliver notice to the seller during the inspection period, the buyer is deemed to have waived the seller’s obligation to correct the issue. In contrast, the FR/BAR As-Is Contract places no burden on the seller to remediate improvements constructed without required permits, or to close open or expired permits. Similar to the Standard Contract, there is very little a buyer can do once the inspection period has passed. With that being said, it is important to note that both the Standard and As-Is Contracts require the seller to disclose any known improvements that were made without the required permits, or knowledge of open or expired permits.

If you have been paying attention, you now realize the significance of making sure that the municipal lien and permit search results are received and reviewed prior to the expiration of the inspection period under both contracts when representing the buyer. The next question should be, how do I protect a buyer from this potential exposure if the results of the municipal lien and permit search will not be available until after the inspection period? Option 1) request a longer inspection period! Option 2) include the following provision to the additional terms section of the Contract:

“The Seller shall, at Seller’s sole cost and expense, close any open or expired permits or code enforcement matters prior to Closing.”

If you represent the Seller and are presented with such a clause, now would be a good time to ask the Seller if they know of any open or expired permits or code enforcement matters with respect to the property. To avoid these problems, sellers should be diligent about closing out permits after the work is done. If the work is never started, the local government should be notified so that the permit can be withdrawn to avoid showing up as expired. We have also seen diligent agents perform independent municipal lien and permit searches upon taking on a new listing so that the seller will have ample time to correct such issues prior to getting under contract or closing.

Sincerely,

William C McComb, Esq., wmccomb@berlinpatten.com
Berlin Patten Ebling, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

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