What does an Open Building Permit Mean for your Real Estate Transaction?
An open municipal building permit (where the city has not done a final inspection and closed the file) may be a serious title defect, and allow a purchaser to back out of a real estate transaction.
A June of 2013 decision Ontario Superior Court of Canada, 1854822 Ontario Ltd. v. The Estate of Manuel Martins, 2013 ONSC 4310 highlights this issue. In this case, 1854822 Ontario Ltd. signed an Agreement of Purchase and Sale to purchase a home from the Estate of Manuel Martins.
Prior to closing the buyer’s lawyer discovered an open building permit for work on the property’s rundown garage. The buyer’s lawyer requested that the permit to be cleared by a city inspector prior to closing. The garage on the property had to be demolished and rebuilt at a cost of approximately $110,000. The purchaser knew of the condition of the garage when the agreement of purchase and sale was signed
The seller’s lawyer replied that an open building permit was not a valid title objection and said that although the permit was issued, no work was ever done and the permit did not force the buyer to perform any work.
The issue in this case was whether an open building permit, which has not been acted upon, affects title. Justice Wilson held that an open building permit creates potential risk and exposure:
“it is not clear that the permit can be closed quickly and easily; it is not clear what type of work needs to be done to satisfy the City that it is appropriate to close the permit; if demolition and construction is required, it is not clear what needs to be undertaken and its cost; and it is not clear whether the City will be satisfied by the work proposed or completed to make the changes or whether a work order will be issued.”
Further, Justice Wilson concluded that the open building permit creates a risk of litigation, and is not a minor defect, but rather it goes to the root of title and constitutes a valid objection to title, and the buyer is not obliged to close.
Does an open building permit facilitate a potential “out” for buyers?
An open building permit does not have to signal the end of a deal as evidenced in the March 2013 decision in Thomas v. Carreno, 2013 ONSC 1495. In this case, Ms. Thomas signed an agreement to purchase a house in Toronto from Ms. Carreno and Mr. Jennings.
Prior to closing, Thomas discovered that there was an open building permit for construction on the property that took place in 2007. Her lawyer wrote to the sellers’ lawyer requesting a final building inspection by the city of Toronto so that the outstanding permit file could be closed.
Acting under the terms of the purchase contract, the sellers’ lawyer arranged for a title insurance policy and a $100,000 holdback of funds to be used to repair any problems so that the deal could close.
While in this case, the deal did not close, the issue for the Court was whether the existence of the open building permit placed the sellers in default, and if so, did the fact they arranged title insurance for the buyer remedy that default?
In the end, the court ruled that the buyer was not entitled to kill the transaction once the seller had arranged for title insurance and a holdback of funds.
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