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  • Writer's pictureAnisa Arra

The Dangers of Open Permits in Real Estate Transactions

Updated: Jan 2

During a real estate closing one issue that is often overlooked is the potential existence of an open building permit on the property. In Ontario, the Building Code Act provides that no one can build or tear down a building unless a permit has been issued. Building permits are issued to ensure compliance with building, zoning, land-use, and safety standards specific to each jurisdiction. This process typically includes several steps beyond the scope of this article and concludes with a final inspection to confirm compliance and close the permit. It may be that in the course of that inspection, the inspector may identify other work that is required in order for the building to comply with applicable laws, giving rise to the issuance of a work order. Until the permit has been closed, it is commonly referred to as an open permit. Please also refer to Fasken's article, Open Building Permits: Closing a Door in Real Estate Transactions.

The presence of an open building permit on a property can lead to serious consequences depending on the type of permit and the extent of incomplete work. An open permit implies municipal approval for a project, but the status of completion and compliance with the approved permit remains uncertain. Non-compliance may prompt municipal inspectors to issue work orders for deficiencies or code violations, ranging from minor fixes to extensive, costly work.

An illustrative case is 1854822 Ontario Ltd. v The Estate of Manuel Martins (2013 ONSC 4310), where an open building permit for a dilapidated garage led to its demolition and a $110,000 rebuilding cost. This case underscores the financial risks and potential litigation associated with open building permits.

In Ontario, purchase agreements typically allow potential buyers to make title requisitions, identifying issues that could compromise "good and marketable title" to the property. While requisition clauses often omit explicit mention of open building permits, their impact on title remains a critical consideration. The definition of "good" title, equated with marketable title, stems from an Ontario Court of Appeal case:

"one which at all times and under all circumstances can be forced upon an unwilling purchaser who is not compelled to take a title which would expose him to litigation or hazard: one which is free from litigation, palpable defects and grave doubts and couples a certainty of peaceful possession with a certainty that no flaw will appear to disturb its market value." (Holmes v Graham, [1978] 90 DLR (3d) 474, 21 OR (2d) 289, at para 8)

Historically, zoning and building infractions were not deemed defects in providing good title. However, recent Ontario cases have shifted the treatment of open permits under the law. In Thomas v Carreno (2013 ONSC 1495) an open building permit prompted a title insurance policy and funds holdback, allowing the deal to close. The court considered the potential for substantial work orders due to the open permit.

In Martins (above), an open permit was deemed a defect. The Court states that the existence of an open permit clearly gives "an inspector has the authority under the Building Code Act to make an order that certain work be undertaken immediately to bring the garage into compliance with the code". The implications of this finding are significant, as open building permits can lead to work orders, which are considered in real estate law not merely clouds on title or minor defects but they go to the "root of title".

MacDonald v Chicago Title Insurance Company of Canada (2015 ONCA 842) the court found that a building permit affects the “marketability” of a property, which in turn affects title.

"Real estate law is a funny animal, with a unique and tortured history, and the case law in Ontario has evolved to address commercial realities despite any number of judicial hiccups", writes Simon Crawford, Partner at Bennet Jones. While some courts have addressed building permits similarly to title issues, an open building permit may not necessarily go to the root of title. Ultimately, courts assess the materiality of the defect caused by an open building permit to determine if the purchaser received what was bargained for. Purchasers should confirm that any open permits have been closed before the sale is completed, understanding that title insurance might be limited if an open permit is disclosed. Including a provision in purchase agreements to close open building permits, especially in residential contexts, is advisable. Commercial agreements should consider the risks associated with open permits, even if addressed in off-title searches.

The unknown status of open building permits creates significant risks, emphasizing the importance of thorough due diligence in real estate transactions.

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