The beautifully remodeled basement, the meticulously converted attic, a fully remodeled bathroom, and the new addition. All of these are places where the seller may hide a dirty little secret: the seller failed to obtain the appropriate building permits prior to, during, or even after the completion of the project.

“No one needs to know” thinks the seller. “Besides it’s only a way for the municipality to make money” or “if the assessor finds out, it may mean higher property taxes because the improvement could increase the assessed value of the property.” “It’s not hurting anyone” the seller says to justify his actions.

The seller is convinced that no one needs to know, and he goes about life as usual. One day, he decides to sell or transfer the property. And now, the seller's secret is part of your world.

This lack of permits may come to light in a number of ways. For instance, the seller discloses it on the Real Estate Condition Report (RECR), or rather mentions to the listing agent that he is not willing to disclose the lack of building permits on the RECR. Another way may be when the buyer’s home inspector mentions a concern relating to an item, such as electrical work pertaining to the remodeling work. Upon further investigation, the inspector determined the work was not done properly, and eventually it comes to the attention of everyone that the seller did not obtain the appropriate building permits needed at the time of the work.

Liability

If the licensee is aware that the seller did not pull the appropriate building permits, then the licensee should disclose such information as a material adverse fact. Whether a fact needs to be disclosed as an adverse material fact is a judgment that only the agent and/or his broker can make after considering all of the facts and circumstances in the situation.

The seller 

Shister v. Bipin, 2009 WI App 163, highlights the negative legal consequences of a listing agent’s direction to a seller not to disclose that the seller failed to obtain the building permits. Shister held that the Economic Loss Doctrine (ELD) does not bar home purchasers from suing the seller’s real estate broker for misrepresentations committed in a residential real estate transaction. 

In Shister, the buyers received the sellers’ RECR before making their offer to purchase. The sellers’ RECR stated the sellers had no knowledge of any remodeling done without the required permits and were not aware of any pending property tax reassessment. The sellers knew they should have had a building permit and told the listing broker that they had remodeled their basement without necessary permits. The listing agent advised the sellers not to disclose this information on the RECR. She told them not to worry because she would take care of it.

The listing broker’s property flier advertising a finished basement alerted the city of Mequon assessor that the sellers had remodeled and finished their basement — a fact not reflected in the assessment records or in the assessed value. The property was reassessed between the date of the buyer’s offer and closing.

After closing, the buyers learned that the sellers had remodeled the basement without required city permits and also learned that the property was reassessed due to the city’s discovery of the basement remodel. The assessed value increased by nearly $60,000, which resulted in a total of $4,408.34 in increased property taxes over a period of three years, and the buyer also had to pay $2,143.20 for retroactive remodeling permits.

The buyer sued the sellers for fraudulent misrepresentation under Wis. Stat. § 100.18, the false advertising statute, and for common law intentional and strict liability misrepresentation. The circuit court dismissed all claims against the sellers except the false advertising claim based on the ELD and allowed only the cost for the retroactive permits.

The licensee 

The buyer also sued the listing broker for breach of professional duties and intentional and strict liability misrepresentation. The tricky part is that third parties involved in the real estate transaction, which would include real estate licensees, are not provided the same protection under the law as the parties in the transaction. Real estate licensees’ duties and responsibilities do not arise out of the offer to purchase between the parties, and licensees are not provided the same protection under the law as the buyer and seller. Therefore, the agent and firm were liable when the agent told the seller to not disclose that the seller had not obtained the necessary permits. 

While a real estate practitioner cannot be held liable under a village or city ordinance requiring a seller to obtain necessary building permits (see Wis. Stat. § 66.0412), licensees may be held liable for failure to disclose and therefore must be very cautious when transactions involve property owners who have not obtained the appropriate building permit. 

Seller disclosure obligation

Sellers are required to disclose defects. Generally sellers of one-to-four dwellings are required to complete a RECR. Therefore, when a seller accurately completes a RECR, they will disclose to prospective buyers that required building permits were not obtained. See item C.20. on the RECR, which states, “I am aware either the remodeling affecting the property’s structure or mechanical systems was done or that additions to this property were made during my period of ownership without the required permits.” 

In addition, a prudent REALTOR^® would also provide the seller a copy of the WRA’s Listing Questionnaire Regarding Title Issues form. Question 2 on this form asks the seller to answer whether, “Remodeling or construction work without proper building permits?” occurred. 

Licensees’ obligation to research or investigate 

Brokers and agents are neither required to investigate independently whether a seller has obtained the required building permits nor to determine any financial consequences to the buyer for the seller’s lack of obtaining required building permits. 

When taking a listing, a licensee conducts a competent, diligent inspection of the property and asks the seller for a written report regarding property condition. The seller will be responsible for their disclosures, or failure to disclose. The licensee then compares the seller's disclosures with the licensee's observations. If the seller's disclosure is incomplete, inaccurate or inconsistent with the licensee's observations, a written material adverse fact disclosure letter may be compiled by the broker to make disclosure of items that are material adverse facts or information suggesting material adverse facts. This licensee duty to disclose trumps any request by the seller not to disclose.

Licensee disclosure obligations

Licensees are required to disclose known material adverse facts and information suggesting material adverse facts. (See Wis. Admin. Code § REEB 24.07(1) — (3) and Wis. Stat. § 452). 

If the broker, as a competent licensee, knows or is aware of information suggesting the possibility of material adverse fact, the broker must disclose. A material adverse fact will fit one or more of the following parameters:

• Has a significant adverse effect on the value of the property
• Significantly reduces the structural integrity of the property.
• Presents a significant health risk to the occupants of the property.
• Is information that indicates that a party to the transaction is not able to or does not intend to meet their obligations under the contract.

If a party to the transaction were to so indicate, or if a competent licensee would generally recognize that this fact is of such importance that it would affect a reasonable party's decision to enter into a contract or would affect the party's decision about the terms of the contract, the fact is both adverse and material. If this fact is both adverse and material, then Wis. Admin. Code § REEB 24.07(2) requires the licensee to timely disclose the fact in writing to all parties to the transaction, even if the client would direct the licensee not to disclose. The WRA’s Disclosure of Material Adverse Fact (WRA-DMAF) document is available in zipForm^®.

Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.