Welcome to this month’s Dear Urbaneer, where I answer most any questions on real estate, housing, and home from our readers and clients. This time around, a Seller is wondering about the implications of doing renovations without the proper permits, when it comes time to sell her property.
Dear Urbaneer:
I’m planning some home renovations to better accommodate our family; I hope to do some of the work myself but will likely use a contractor for much of it. I’m also keeping in mind the likelihood that my improvements will increase my home’s value. Thinking ahead to selling my home down the road, what might the implications be concerning these changes? Do I need a permit for all work that gets done or just certain jobs? What happens during the sales process regarding upgrades completed without permits?
Signed,
Permit Perplexed
Dear Permit Perplexed:
First, I want to begin my reply by stating that the principal reason local municipalities require property owners or their contractors to get permits (when required) is to protect against the safety and well-being of their occupants. While it’s easy to bypass the regulatory system thinking it’s a means for your municipality to keep tabs on your property and justify increasing your taxes, building compliance is integral to the urban fabric. In a city centre with high density, the possibility that innocent others may suffer because a permit was bypassed is troublesome.
Yet, being a realist, I also want to acknowledge that renovations completed without required permits are not uncommon, particularly in a city where square footage is limited, and modifying the size and space plan of a structure is almost inevitable during the life span of a property, especially in a location where houses date as early as the 1850s older property’s evolution. However, if your interest is motivated by resale profit, I believe that any upgrades and additions executed to a good standard – and that were obtained with approvals and permits – are one of the very best ways to generate the highest return on value. After all, most consumers are willing to pay for work that has been done correctly and to the standards of the building code, so provide copies of all the required closed permits to prospective purchasers as part of the due diligence process in advance of negotiating a sale. Alternatively, there could be serious implications for you if it can be demonstrated that you knowingly undertook changes to your dwelling without the required permits and it proved to be to the detriment of others, even after the sale is completed. Although bureaucracy can be a nuisance at times (I share my own struggles with the permit and approvals process in my Tales From Tennis Crescent series), it’s highly advisable to have the necessary permits secured – especially if you are doing work yourself.
Let’s explore some of the scenarios and what could be at stake for a Seller with renovations completed without permits.
When Are Building Permits Required?
First off, let’s discuss when a Building Permit is required when doing renovations.
There is a reason that Building Permits are required – and it has to do with health, safety, and standards. The permit process is in place to protect the occupants (current and future) and to ensure all property renovations meet the basic requirements for health and safety (including fire protection), as well as municipal standards for zoning and heritage. Being a health and safety issue, the city takes the matter extremely seriously, and violations can be met with severe consequences.
In fact, just recently in Toronto, there was a great furor when a builder didn’t wait for city approvals to be issued, demolishing a heritage building in the process – without a permit! Read about the fallout from that in “A Luxury Homebuilder Tore Down A Toronto Heritage Home Without A Permit. What Happens Next Could Test Ontario’s Heritage Rules“. Clearly, there is a lot at stake when people proceed without following the process. It will be interesting to see if the property owner emerges from this relatively unscathed or has a bigger cost to pay than a modest fine.
With respect to renovations and extensions, a permit is required when one is making changes to the structure or the systems of a dwelling such as:
> constructing new additions, or building a deck,
> reconfiguring a space plan by moving or removing walls,
> opening the existing dwelling to add new windows and doors,
> installing a fireplace or wood stove,
> or updating electrical and plumbing systems.
For a better understanding of this, you might begin with my post Understanding The Six Essential Layers Of Property.
Although the specific requirements for permits do vary across different municipalities, generally anything that is a cosmetic change doesn’t usually require a permit, including installing a new roof, replacing your exterior siding, switching out fixtures and fittings, or upgrading existing windows and doors. Generally speaking, when you are taking on smaller, maintenance or decorating tasks (like minor remodel, painting, repairs, etc.) you don’t need a Building Permit, and when you are altering the space plan or reworking structural and building components (like existing walls, electrical, plumbing, etc.) you do.
However, it’s important to know that while your local jurisdiction grants permits for the purposes of demolition, expanding the footprint of a property, or substantially reconfiguring an existing structure – be aware there other specific permits required for HVAC (heating, ventilation, and air conditioning), plumbing, electrical (a certificate from the Electrical Safety Authority), signage and – in Toronto – for Tree Protection.
Full Disclosure, Or Not
Regarding selling your home one day in the future, you were wondering what the process is for disclosing renovations and their permit status to potential buyers.
For those who watch American HGTV – in particular, the shows focused on house flipping – you’ll often see situations where a property has been purchased only for the flipper to discover a number of additions were completed without permits, rendering them illegal and having to be torn out in their entirety. In Canada, this circumstance does not exist. In fact, a property owner is rarely on the receiving end of serious fines or penalties if a property was modified without permits or lacks building code compliance unless it results in death or bodily harm as a byproduct of negligence. Furthermore, many jurisdictions do not actively monitor the building stock within their boundaries to identify signs of construction or renovation, so it may escape the knowledge of the authorities unless someone, like a neighbour annoyed for the lack of quiet enjoyment, issues a complaint. In other words, this means the likelihood that upgrades and renovations have been executed at some point to most properties in Toronto without the required permits leans to probable.
Furthermore, when a property is listed for sale there is no obligation for a Seller to provide any summary or timeline as to when improvements were made. We realtors certainly like to provide this information as it helps facilitate a sale but there is nothing in the Agreement of Purchase & Sale making this a requirement. Because Canadians tend not to complete a lot of due diligence, nor is a lot of information provided in the trade of property (a presale inspection report, a survey, and a summary of operating expenses at most) when you see a listing for sale that says a renovation was ‘completed with permits’, it’s an important piece of information that is also value-added. In fact, over the past two decades, the demand for Toronto real estate has exceeded supply, and the speed at which properties have traded has become faster (a function of technology). This has contributed to Realtors not having to dig deep in researching a property as part of the sales process, Sellers being comfortable selling their property with a limited warranty, and Buyers not asking for more information either because they don’t know to ask, or these questions will either be rebuked by the owner or potentially put them at a disadvantage if pursuing a dwelling in a bidding war. As a result, Buyers are purchasing properties that have numerous deficiencies, many of which are not in compliance with the required codes.
In Ontario, a property is basically being sold ‘caveat emptor’ or ‘buyer beware’, putting the onus on the Buyer to complete their due diligence including when repairs or improvements may have been made as well as the condition of the property. This includes patent defects, which are defects that are visible or discoverable through a reasonable inspection (but not necessarily observable on a casual inspection), such as cracks in a visible foundation, water stains in a ceiling, or a leaning garage. Issues may arise if there is fraud, active concealment, or misrepresentation but absent of these, a buyer accepts the condition of an existing property at the time of their purchase.
One clarification, though. There is a legal obligation for a Seller to disclose latent defects, which are hidden defects not easily seen by a buyer or their representative. In that situation, should issues arise after the sale is completed the Buyer may have a claim against the Seller. However, if the defect was not known to the Seller, the Seller cannot be held liable for the defect and the damages that arise from the defect.
To that end, personally, I always list a freehold property with the provision of a presale home inspection, in part because it demonstrates a Seller’s willingness to disclose the state of the property at the time of sale to help mitigate a claim of a latent defect. There are many more reasons why I do this, which I outline in my post, Dear Urbaneer: What Are The Benefits Of A Presale Inspection Report For Property Sellers & Buyers?
When Open Permits Are Discovered Prior To The Closing Date
A property that has an open building permit which should be discovered by the Buyer’s lawyer during the Requisition Date (usually a week or two before the closing date – here’s my blog I’m Buying A Property. What Does A Real Estate Lawyer Do?) to search title and complete due diligence (open building permits are not registered on title) can have the closing date extended until the permit has been closed. But that is far from ideal if the Buyers don’t have alternative accommodations.
Regardless, the obligation would be on the Seller to complete the work specific to the building permit to the satisfaction of the authorities in advance of the sale unless the Buyer and Seller negotiate an alternative, meaning the Buyer subsequently accepts the open permit. When this occurs, it may, or may not, include an adjustment in the purchase price. And before you continue, this isn’t exactly straightforward. There are legal precedents whereby a Seller arranging Title Insurance in lieu of closing a building permit has been deemed an acceptable recourse, which is mentioned in this interesting article that explains the complexity of an open building permit in “Open Building Permits: Closing a Door in Real Estate Transactions“.
However, a Seller could come to market offering their property in ‘as-is where-is’ condition. The Seller is still obliged to disclose latent defects but they’re also making it clear that any surprises found are not their responsibility (or they may be defaulting on a mortgage which could result in the sale being derailed or delayed). I often include a clause like this on listings where a Seller is relocating to another province and they’re keen to move forward and not be tied to their past. Or if the presale inspection reports sufficient deficiencies that the property leans more to land value. This clause is also a requirement for the trade of an ‘Estate Sale’ because the Executors do not own the property, such that they cannot truly represent the property nor can they be held liable when acting on behalf of a third party.
Interestingly, a client emailed me asking whether Title Insurance Will Cover A Prior Renovation Completed Without A Building Permit?, and the answer was ‘Yes’. However, a link in the post shares how one couple’s claim was denied because their inspection report had a line in it that said the Buyers should check to ensure all upgrades were permitted, which nullified their claim.
Reasons Why You Want To Get Permits As A Homeowner
In addition to adding to your comfort and the enjoyment of your home in the present, many home renovations increase your home’s value. Here are some links that offer our design counsel and guidance with an eye to maximizing your return and enjoyment:
Dear Urbaneer: How Do I Renovate A Washroom With Resale In Mind?
Dear Urbaneer: How Should We Renovate Our Kitchen With Resale In Mind?
Dear Urbaneer: How Do I Boost The Value Of My Condominium?
Dear Urbaneer: Should I Renovate My House In Stages Or Do A Full Gut?
Dear Urbaneer: What Architectural Design Features Elevate The Value Of Toronto Real Estate?
How COVID-19 Will Likely Change How We Design Our Homes
Keeping that in mind, the overarching message is that doing unpermitted renovations could potentially erode or negate any financial gain you might otherwise have achieved with those improvements – in a variety of ways!
• It is important to mention that you, as the homeowner, would ultimately have to shoulder future financial implications or repercussions of unpermitted work, even if you worked with a contractor and they assured you that permits weren’t necessary.
• Having permits in place means that your contractor (or yourself) will be accountable for keeping work to set standards to preserve your family’s health and safety, the integrity of your home’s structure, and the investment value of your home when you go to sell. *If using a contractor, make sure they are licensed and reputable; I like to check HomeStars.*
• It’s always a possibility that the municipality (or other governing body) could discover that work has been done or is being done at your home without a permit; they could require you to re-do it according to the permitted code. This could be very costly!
• Similarly, if a permit is issued for work that you’ve already started, you could be subject to a “work without permit penalty”; it’s an additional fee equal to 50 percent of the permit fees for the project or $198.59 – whichever is greater – to a maximum of $27,234.64 (current 2021 rates).
• Unpermitted work could invalidate your home insurance coverage, or make it challenging to make a claim.
• There is also the possibility that having unpermitted work could be a red flag for potential buyers, complicating your sale or giving them leverage for negotiation. It’s possible that you might have to lower your sale price to help the buyer mitigate the risk of taking on the responsibility of owning a home that might have deficiencies.
• It’s also possible that when your home gets appraised post-renovations, the appraisal may not include unpermitted work (for example, an increase in square footage in the assessment of the home’s value).
Specifically in the city of Toronto, if you discover that you need a permit after work has begun (or been completed), or if it is discovered that you have completed unpermitted work, the City of Toronto says that you could be subject to:
> A “work without permit” penalty, which is an additional fee equal to 50 percent of the permit fees for the project, or $198.59 whichever is greater, to a maximum of $27,234.64 (current 2021 rates).
> Work must stop while your permit is processed, so you will face a delay.
> Possibly having to undo work that has been done already. You may also end up having to do more work than you had intended or budgeted for if it is discovered that you need additional structural or mechanical work to accommodate permitted work.
> Possible legal and /or financial issues down the road, such as impacts on selling your property or making an insurance claim.
My advice is this: while getting permits can occasionally be a hassle or feel like an unnecessary expense, it is time and money well spent.
Multi-Unit Properties And Landlords
The conversation becomes even more serious when it comes to dwellings that have been converted into non-conforming multi-unit properties, including single-family residences with supplemental income suites. An owner landlord is legally obliged to ensure the safety of every tenant who occupies their property, so why so many investors buy multi-unit dwellings that are non-compliant amazes me. In fact, I estimate less than ten percent of former single-family houses that have been converted into apartments or have basement suites are legal. The sale of non-conforming properties – whether for zoning, legality, fire and/or retrofit requirements – is an everyday occurrence in Toronto. In fact, the majority of properties that have more than one unit that is sold in the central core of Toronto will typically include a clause in a Schedule attached to the Agreement of Purchase And Sale that says:
The Buyer acknowledges that the Seller, Listing Broker, and Co-operating Broker are making no representations with regards to zoning by-laws, building code, fire code and electric retrofit requirements of the property’s current permitted legal use, as well as any proposed or future use by the Buyer. The Buyer agrees to hold the Seller, Listing Broker, and Co-operating Broker harmless from any and all liabilities arising from the Buyer’s use of the property. The Buyer acknowledges that it is the Buyer’s responsibility to satisfy himself/herself regarding these matters.
I suspect many Buyers underestimate the risks they’re taking on becoming the landlord of a property that is non-compliant. Years ago, as I was signing the closing documents to purchase a property I was turning into a duplex, I mentioned I was considering making the basement a self-contained suite. My lawyer asked me if it would be building code compliant and I mentioned it would not, to which he responded, “Just be aware that if your tenant were to be injured or die because of non-compliance, you will be going to jail. Is it worth it to you?”
In Toronto, it’s not uncommon for dwellings to contain basement apartments that are not legal (one of the more common violations) as discussed in “Selling Homes With Basement Suites A Legal Landmine“. Usually, these income supplements are modest, originally done under the radar, and serve as an easy opportunity to offset one’s mortgage costs in a city with sky-high real estate prices (Cash in my pocket every month? Heck yeah!). On resale, the next Buyer might purchase the property and even identify all the changes necessary to make the basement apartment legal (7′ ceiling heights that require basement underpinning, suitable egress windows that require foundation fixing, properly installed fire-rated drywall that necessitates removing all existing recessed lighting), and boom! – the renovation estimate lands at $150,000. After calculating it will take 10 years for the basement rent to recover those renovation costs, at that moment the Buyer is likely to fall prey to the dangerous “that’ll never happen to me” mindset and decide to just keep renting the existing non-conforming basement suite as-is, thinking that out of a City filled with illegal suites, the chances of an incident or being caught in violation is too slim to be a matter of consequence.
My friend Whitney, who has struggled with innumerable obstacles and hardships as a renter in Toronto, shared the following anecdote with me. It demonstrates the common quagmires that accompany illegal suites where permits were bypassed or building codes ignored.
After a fire in the street-level restaurant incinerated the second and third-floor apartments located in a Main Street commercial residential building due to faulty wiring, Whitney and her building neighbours were left with no apartment, no belongings, and nowhere to go. Fortunately, her parents live in Mississauga so she relocated there temporarily while she searched for new accommodations. Only weeks had passed when Whitney was informed by her ex-partner that he was exiting their old ground floor apartment in a converted house (the one they had shared a year previously, before parting ways), so she speed-dialed her former landlord to inform her she was moving back in. This was both to her landlord’s dismay (who was anticipating charging a much higher new market rent) and resistance (including much screaming on the landlord’s part), but Whitney prevailed by proving she had the legal right to occupy the unit because her name remained on the original lease. Believing Whitney couldn’t afford the rent (or perhaps in an attempt to railroad her) the landlord made Whitney provide four months of rent upfront and a year’s worth of pay stubs. Whitney complied and moved back in.
After a month in occupancy, Whitney was informed by the Landlord that some Toronto City workers were coming to the apartment to check out the unit. On their arrival, the City workers informed Whitney they were there to work on the plumbing because her ex had flushed incompatible bathroom products down the toilet clogging the sewage line to the point it burst and shot the backflow waste into the basement apartment below Whitney’s suite. After attempting to replace and repair the damage, the City worker conveyed that none of the plumbing in the dwelling complied with the City of Toronto building code, and that the basement apartment was completely illegal.
The city came back three more times that year to check on the work that the landlords had done, plus go through a full week of renovations, drilling, opening up the floors, changing the pipes, opening up walls, turning off the power, and turning off the water; Whitney was essentially living in an on-going construction zone. The work continued with no end in sight, and when the tenants – including Whitney – voiced complaints or concerns, the landlords (already in hot water – so to speak) threatened the tenants; they said if the tenants weren’t compliant with the construction (or the frequent last-minute requests to have the tenants leave the units while certain jobs were happening) that it would be grounds to evict them. Not even trying to disguise their ulterior motives the landlord said that they could get “way more money for the units”.
Pretty horrific, right? Particularly when the guilty landlord continues to flirt with further illegal activity, despite having already been cited by the City. This situation is still ongoing. This story highlights the magnitude of problems that can exist both for owners and tenants when a property is incorrectly constructed, while shedding light on how the city’s infrastructure, in particular, its waste and water systems, are operating at, or over, capacity.
The disappointing and worrisome truth is that only a small portion of income suites in Toronto – basement apartments in particular – have been deemed “legal”. Obtaining that approval requires many considerations, including bylaw permissibility, compliance with the building, fire, and electrical safety codes, and registration. For a Seller to warrant that a unit is legally retrofitted – as opposed to using the absolving real estate clause noted above – it must meet municipal bylaw requirements, be registered with municipal property standards, and have a certificate of compliance verifying it has passed fire and electrical inspections.
The news isn’t completely bleak for Buyers who acquire properties where it’s discovered that the building (and/or its units) has undergone renovations without permits nor to building code. Even if a Buyer has agreed to an Agreement Of Purchase And Sale that includes any clauses that “do not warrant the legality or retrofit status of any units”, should the City temporarily condemn a rental unit due to unsafe conditions or work done without permits, the former Seller AND the Seller’s realtor can be sued for not clearly disclosing illegal components. Here’s a Toronto Star article that discusses this in more depth: “Basement Apartments Must Comply With Zoning, Fire, Building And Electric Codes”
And it can get much much worse. The owner of a rooming house in Etobicoke was sentenced to three years in prison and issued a fine in connection with a fire that claimed one person’s life 9 years ago. The landlord was found guilty of criminal negligence causing death, criminal negligence causing bodily harm, and four counts of criminal mischief because he failed to follow proper fire code regulations at the home. Here’s the CTV News article “Landlord Given 3 Year Sentence After Fatal Fire“.
The propensity for renovations without proper permits and approvals has become somewhat of an epidemic in Toronto. Property owners (and future Sellers) must be conscientious, and willing to invest the time and expense to completing property retrofits with permits and approvals. Otherwise, the risk of repercussions becomes heightened, and the potential downfall severe.
As a homeowner, it is always wise to plan ahead with an eye to the future and how your residence can secure your financial well-being. It is, after all, likely your biggest asset! Although for many the process to achieving top dollar for their property begins when they reconcile the time to sell is near; the strategic shrewd seller has always recognized the value of their property will be reflected in the ongoing maintenance, repairs, and renovations they’ve made throughout the years demonstrating pride of ownership.
Thank you for your excellent (and oft undiscussed) questions!
Toronto is a city where the intricacies of securing a property purchase in competition, and the strategies of executing a precedent-setting sale are not to be underestimated. If you or someone you love is thinking of buying or selling in any of Toronto’s diverse and dynamic neighbourhoods, please consider the service of my team and me.
We are here to assist! We would love to serve you.
Thank you for reading!
~ Steven
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
– we’re here to earn your trust, then your business –
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As a homeowner, it is always wise to plan ahead with an eye to the future and how your residence can secure your financial well-being. It is, after all, likely your biggest asset! Although for many the process to achieving top dollar for their property begins when they reconcile the time to sell is near; the strategic shrewd seller has always recognized the value of their property will be reflected in the ongoing maintenance, repairs, and renovations they’ve made throughout the years demonstrating pride of ownership.
Thank you for your excellent (and oft undiscussed) questions!
Toronto is a city where the intricacies of securing a property purchase in competition, and the strategies of executing a precedent-setting sale are not to be underestimated. If you or someone you love is thinking of buying or selling in any of Toronto’s diverse and dynamic neighbourhoods, please consider the service of my team and me.
We are here to assist! We would love to serve you.