Open and expired building permits can be a challenge for sellers and buyers. Understanding the contractual obligations of each party regarding permits is the first step to avoiding unwanted, and potentially expensive, problems later. In the context of a sale and purchase of residential property, you should think of open or expired permits in the same way as the possibility of an unseen roof leak: a potentially serious, physical defect in the property, which the buyer might be stuck with if it is not identified and addressed in time.
The existence of an open or expired building permit indicates that at some point there was an intention to make improvements to the property that require a permit; but also that the inspection to ensure the improvements comply with the building code was never done. It is possible the planned improvements were never begun, or that they were substantially completed in compliance with code; but it is also possible improvements were done that violate the code and require correction. This could mean demolition and replacement work at substantial expense for the owner of the property.
The seller has to take care of these, right?
Not necessarily.
Both the FloridaRealtors/FloridaBar (FR/BAR) and Naples Area Board of REALTORS (NABOR) contract forms put the responsibility to identify open or expired permits on the buyer. While the NABOR forms include a representation that the seller does not know of any improvements made without permits or certificate of occupancy or substantial completion (where required), the disclosure does not specifically say the seller does not know of any open or expired permits, and the forms do not mandate that the seller investigate to find any unknown open or expired permits.
The FR/BAR Residential Contract For Sale And Purchase and the NABOR Sales Contract (Residential Improved Property) both expressly include open or expired permits as one class of items that the buyer can inspect. The FR/BAR form mandates that the seller resolve any open or expired permits identified by the buyer’s inspection, and identified to the seller within the agreed inspection period, so long as the cost of doing so does not exceed the amount agreed to in the contract (default amount = 1.5% of purchase price). The NABOR form requires the buyer to make a proposal to the seller within five days after expiration of the agreed inspection period for the seller to resolve the permits or otherwise settle the issue, which the seller can accept, counter, or refuse. If the seller counters or refuses, the buyer has the option to terminate the contract and have any deposit refunded.
The “As-Is” forms of both contracts do not expressly refer to open or expired permits as issues that the buyer can inspect. Instead, both provide that the buyer can inspect or evaluate the condition of the property as the buyer desires (with certain limitations or conditions on invasive or destructive inspections). If the buyer is dissatisfied with the property for any reason, both As-Is forms give the buyer the right to terminate the contract within the agreed inspection period and have any deposit refunded.
Under any of the four contract forms, if the buyer does not identify open or expired permits within the time allowed, then the buyer is deemed to have accepted the property with any building code violations, and loses any remedy for them.
But, title insurance …
Because open or expired permits indicate possible physical defects and are not title defects, property owners cannot rely on their title insurance policy for relief. Under the contract forms, the definition of “marketable title” is purely by reference to the Uniform Title Standards promulgated by the Florida Bar, which do not discuss building permits at all. All forms provide that the title conveyed to the buyer can be subject to land use restrictions (a general category that includes the building code) (FR/BAR) or specifically to building code restrictions (NABOR). The FR/BAR forms include land use restrictions in a list of six items to which the buyer’s title insurance policy may be subject, with the provision that an existing violation of any of five of them is deemed a title defect; but an existing violation of the land use restrictions is not deemed a title defect. Accordingly, the owner’s title insurance policy contains an express exclusion of coverage for claims “that arise by reason of … [a]ny law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to … the character, dimensions, or location of any improvement erected on the Land … or the effect of any violation of these laws, ordinances, or governmental regulations”; unless “a notice … is recorded in the Public Records setting forth the violation”. Such recorded notices generally only come about when the county or city identifies an actual improvement that violates the building code.
What does all this mean for me?
Buyers should be strongly advised to search for open or expired permits on the property, so that the proper notification to the seller can be given before expiration of the inspection period. From the seller’s perspective, it is probably wise to search for open or expired permits and resolve any that are found before listing the property, to avoid the stress of trying to resolve them before a set closing date, or the disappointment of having a contract terminated.
If open or expired permits are found, the first step to resolving them should be to contact the contractor named on the permit. It is the contractor’s obligation to close the permit, and they generally will deal with the city or county as required to resolve any that they forgot to close. If the contractor cannot be found, or if the permit was taken by the property owner without a contractor, then you will have to deal directly with the agency that issued the permit. The staff will be able to tell you what needs to be done to resolve the permit.
