Permits are often an overlooked component of real estate transactions. So-called “open” permits can cause headaches for owners who are selling or financing their property. While title searches disclose encumbrances such as liens, mortgages, easements and restrictions, they do not disclose open permits, which must be independently searched at the local government.
When an owner obtains a permit to perform work on their property, the permit issued for that work is “open.” Typically the work is completed, an inspection is performed by the local building department, and the permit is then “closed” by the local government. If this process is not followed, a permit search will disclose it.
There are several reasons why a permit may not be closed. An owner may obtain a permit, but not start or complete the work. Perhaps the work is completed, but the owner never asked the building department to perform an inspection. Perhaps an inspection is done, but deficiencies are noted that the owner does not correct, or that the owner does correct but fails to get re-inspected.
An additional issue is that permits typically have expiration dates. Some local governments treat expired permits differently. Some may require the owner to reactivate and amend them to complete the work, while others may require the issuance of a new permit for the work, whereupon the open but expired permit for that same work is closed. Both scenarios usually require the payment of a fee. The owner can then arrange for completion of the work (if not already done) and a final inspection can be made so that the permit can be closed.
Failure to properly close a permit can be deemed a building code violation by the local government, and can result in the imposition of a fine, although this does not occur very often. The local government can also withhold new permits if the owner has open permits on the same property. Further, in the event that building codes have changed during the period between the issuance date of the permit and the completion date of the work, or between the completion date and the date of inspection, the work may not pass inspection if it is not in compliance with the current building codes. If an owner waits months or years before scheduling the inspection to close a permit, and the building codes have changed, the owner may be forced to redo the work in accordance with the current building codes before the work may be inspected and the permit is closed. The situation can be further complicated if the contractor who did the initial work is out of business, or has already been paid and therefore has no incentive to come back and do any more work without more compensation.
It is not unusual for sophisticated purchasers and lenders to require that all open permits be closed as a condition to their acquisition or financing of property, and this practice is becoming more common. If open permits are discovered late in the closing process, the owner may not have enough time to address them. If no permits searches are conducted by the purchaser before closing, the purchaser may have to address them at its own expense after the closing if it is seeking new permits or obtaining financing later.
To avoid these problems, owners should be diligent about closing out permits after the work is done. If the work is not done, the local government should be notified so that the permit can be closed on that account. Before selling a property, the owner should have a permit search performed so that it will have ample time to close any open permits. Purchasers should always require, as part of the purchase contract, that an open permit search be performed, specifying who bears the cost, and that the owner satisfactorily close all open permits before the closing date under the contract, without any liens attaching to the property on account of any additional work.
Finally, even owners that do not anticipate selling their property in the immediate future can benefit from obtaining a permit search and closing any open permit, since postponement can only result in increased expenses.