Open Permits, Empty Pockets

 Gary D. Buchman and Eyal Schwartz

Real estate transactions can be influenced by various factors.  One often-overlooked aspect is the existence of open building permits at a municipal building department.

 These seemingly minor components may significantly affect the dynamics of buying or selling commercial or residential properties, potentially causing delays, financial burdens, and legal complications.

Understanding Open Permits: Open permits refer to permits that have been issued for construction or renovation projects and that appear as uncompleted at the local building department. They may have been left open because the construction was commenced but not completed, or the contractor failed to obtain final inspections, or the required land use or operational approvals were not obtained, such as a board of health license. Such permits remain open in the property’s records until properly closed out, potentially posing significant challenges when buying or selling commercial real estate.  This occurrence is especially problematic in the context of commercial real estate where a landlord may have multiple tenants who engage contractors for construction projects.  Such permits may remain open without landlord’s knowledge.  Landlords may also be unaware of the specific contractor undertaking the work, thus preventing landlord from directing such contractor to cause the permit to be closed.  The COVID-19 pandemic exacerbated this problem, as closures of municipal offices interfered with filings and on-site inspections, and the tenants that engaged the contractors (and sometimes the contractors themselves) went out of business, resulting in numerous permits being left open.

The Impact on Commercial Real Estate Transactions: Open permits can complicate real estate transactions in several ways.  Firstly, they can signal potential safety or code compliance issues, raising concerns for buyers about a property’s integrity and potential code violations.  Moreover, open permits can hinder the closings, as lenders may hesitate to provide financing; buyers may similarly be unwilling to take on the burden of owning a property subject to open permits.  Resulting delays may jeopardize a deal, or result in price reductions to offset risks associated with open permits.  Sellers may also be required to spend time and money to undertake necessary filings and obtain inspections.  Longstanding open permits may result in fines or penalties, further complicating matters and potentially souring the deal.

Mitigating and Preventing Harm: To mitigate the impact of open permits on real estate transactions, proactive measures are essential. For buyers, conducting thorough due diligence is paramount, including comprehensive inspections of building records at the municipal building department to identify any open permits and/or notices of building violations early in the sale process.  Sellers should prioritize closing out permits before listing a property in order to streamline the transaction and enhance marketability.

Commercial landlords should take additional measures with tenants to ensure these issues do not arise in the first place.  For example, landlords should include lease provisions requiring tenants to obtain landlord’s prior consent for any work requiring a permit, and require that all open permits be closed within a stated period of time (within 30 days of completion), with proof of closure furnished to landlord.  Landlords can enforce such provisions by mandating that the failure to adhere constitutes an event of default under the lease. They may also stipulate in the lease that a security deposit will not be released unless and until all open permits attributable to the specific tenant are closed out.

Conclusion: Open permits can pose significant complexities in commercial real estate transactions. By taking proactive steps to address them, stakeholders can minimize disruptions and facilitate smoother transactions.

A partner in the real estate department of Sherin and Lodgen LLP, Gary Buchman concentrates his practice in commercial real estate leasing, development and financing, and in franchising transactions. Gary has handled the acquisition, development, financing, and leasing of retail shopping centers and office and retail properties. In addition, He also represents clients in franchise development and registration. Gary can be contacted at gdbuchman@sherin.com.

Eyal Schwartz is an associate in the litigation department of Sherin and Lodgen LLP. He represents clients in complex commercial litigation matters in state and federal courts. Eyal’s email address is eschwartz@sherin.com.