Building Permit Issues in Real Estate Contracts

BUILDING PERMIT ISSUES IN REAL ESTATE CONTRACTS
By Mark S. Steier

Is a seller obligated to a buyer to obtain and close out permits? Section 29-265 of the Connecticut General Statues provides that no building or structure shall be occupied or used until a Certificate of Occupancy has been issued by the building official certifying that such building or structure conforms to the provisions of the state building code. The statute contains a safe harbor which provides that a building or structure will not have to be removed provided it was used for six year's unless there is an impact upon safety of life or property. Let's look at the context within which this issue gets raised.

1. The Real Estate Contract. - The contract prepared by the Greater Hartford Association of Realtors is silent, at best, on question of whether a seller is liable for conveying real property with improvements for which permits were not obtained closed out. The fact that the contract provides that the buyer will take subject to municipal ordinances and regulations and subject to any state of facts and accurate survey or personal inspection of the property might reveal, leads one to the conclusion that the contract does not require the seller to convey the property with all permits properly in place, particularly, if there is no affirmative representation in the contract requiring the seller to so comply.

2. The Property Condition Disclosure Report - There is little in the property condition disclosure report to suggest that the seller is making any representation therein as to the status of permits. Moreover, for the seller to incur any liability, it must be demonstrated that the seller's misrepresentation was made with actual knowledge of the condition complained of.

However, there is one recently decided Connecticut Superior Court case, Barbour vs. Zapata, which provides support for the notion that answers to the posed questions may create liability for misrepresentations involving permits. The sellers answered "No" to the question which asked them to disclose any knowledge they had regarding "patio/deck problems". The court concluded that the defendants represented in their disclosure that there were no problems with the deck and that lack of town approval of new construction is a problem which required disclosure.

The language in the property condition disclosure report which contains a statement that encourages purchasers to have properties inspected by professional inspectors and informs purchasers that any representation made by a vendor does not constitute a warranty by the vendor may provide a defense to sellers who claim that a purchaser has not justifiably relied on the seller's statements.

3. The Home Inspection Contingency - Buyers sometimes raise such issues as part of their home inspection contingency. They assert that the failure of the seller to obtain or close our permits reasonably leads buyers to conclude that improvements may not conform to building code, and therefore, may be unsound or unsafe. Assuming the issue relates to the basic structure of the house, or whether the mechanical, electrical and plumbing are in good repair, the seller is obligated to negotiate a resolution of such issues.

In Barbour vs. Zapata, the court observed that the plaintiff and the defendant attended the home inspection. The buyer asked the seller whether everything that needed to be done with the house was in order, whether all permits which needed to be pulled had been obtained. The seller stated that all permits had been pulled, since she needed to do so to obtain a daycare license. Because the buyer specifically brought up the issues at the time of the inspection, the Court found that the defendant knowingly misrepresented the condition of the residence and that the buyer relied on it.

4. Marketability of Title and Title Insurance Affidavit - As you know, the title insurance affidavit contains a representation the seller has obtained and closed out all applicable permits. Answering this question falsely can give rise to a lawsuit. There also may be an argument that the title to property is not marketable, a requirement of the contract, if the lack of permits is such that there may be a substantial probability of loss and litigation due to the failure to obtain a building permit, i.e. the title company may not be willing to provide title insurance. For example, a buyer might argue that the use of the property, without the applicable building permit, could result in the town issuing a cease and desist order, which might result in the owner of such property not being able to use a portion of it as a single family residence, thereby making the title unmarketable.

5. Seller's Liability for Negligent Misrepresentation or Fraud - Outside of express statutory language and contractual provisions, buyers have the common law right to terminate a contract if they can prove that the seller's nondisclosure constitutes a negligent misrepresentation, or fraud, and that the buyer relied on the truthfulness of such negligent misrepresentation or fraud of the seller. In such an event, a buyer may be able to terminate the contract, upon the discovery of misrepresentation, or fraud, at any time prior to closing. In the event such negligent misrepresentation or fraud is not discovered until after the closing, the buyer may have a right of action against the seller for his losses and damages.

The central elements of an action in fraud are: (1) that a false representation was made as a statement of facts; (2) that it was untrue and known to be untrue by the party making it; (3) that it was made to induce the other parties to act on it; and (4) that the latter did so act on it to his injury.

To be liable for negligent misrepresentation, one is liable if he supplies false information for the guidance of others which causes pecuniary loss as a result of their justified reliance upon the information, if the supplier fails to exercise reasonable care or competence in obtaining or communicating the information. A cause of action for negligent misrepresentation requires a plaintiff to prove that (1) the defendant made a misrepresentation and (2) the plaintiff reasonably relied upon that misrepresentation.

6. Suggested Language - If you represent a buyer who is concerned about status of permits, the best way to deal with it is to provide proper language in the real estate contract and to make sure that the requisite due diligence is done on behalf of the buyer by contacting, for example, the local building inspector's office to determine whether improvements to the property have been properly permitted. You can also include a provision in the contract requiring "attorney review". A diligent buyer's attorney should insert a provision in the contract requiring seller to obtain and close out permits for any required building, structures or improvement subsequent to the issuance of the original certificate of occupancy.

Here is an example that ought to be included as a seller representation in a real estate contract: "seller represents that the premises and the present use thereof are not in violation of any governmental rules, codes, permit regulation or limitations, unless same had become legally non conforming. The seller represents that seller has not received any notice of zoning or building code violation and that there have been no attempt to enforce same against seller during the time seller has owned the premises. Seller is not aware of any such violations which predate his ownership of the premises".

Another example would be "seller is in the material compliance with all state and municipal zoning, environmental, health and building regulations affecting the property and has no notice of any investigations, deficiencies, cease and desist orders, inspections or violations, actual or threatened, involving the property".

Please feel free to contact me if you have any questions regarding the foregoing.

Sincerely,
Mark S. Steier