What do I advise my seller when the buyer alleges a governmental compliance violation?

QUESTION: I recently listed a property with a nice finished basement that my sellers enjoy using to watch movies and access a beautifully landscaped yard. We accepted an offer using the revised 2023 Offer to Purchase and Contract (Form 2-T). During the due diligence period, the buyer’s agent told me that her clients believe the basement is in violation of governmental compliance because the tax records show the home with less square footage. My sellers claim they made improvements over the years by hiring licensed professionals. The local permitting department has confirmed that there are no permits on record, but they cautioned that they kept none of the records prior to 2014. The buyers have sent a mutual termination with a request to return the due diligence fee and earnest money deposit. What do I tell my sellers?

ANSWER: We recently discussed the new paragraph 8(h) governmental compliance provision here. Remember, the buyers cannot claim breach, even if they have proof that the seller failed to obtain proper permits to make the improvements to the basement, until the seller is provided the opportunity to remedy the violation. If the sellers clearly decline to fix the violation, the buyer would then have the option to terminate or close.

The burden of proof is on the buyers to demonstrate that the property has governmental violations. In this case, it may be impossible to demonstrate that the permits were never obtained, as the records are limited to less than a decade by the retention policy of the permitting office. Perhaps, if the home is on a septic system, the buyers could compare the septic permit with how many bedrooms are in the home now. This would be especially relevant if the basement renovation added a bedroom. Otherwise, the buyers may have difficulty meeting their burden of proof to terminate for legal cause.

Ultimately, if the buyers maintain their position that the basement renovation is noncompliant and the sellers continue to hold their stance that the improvements were properly made, it will be a decision that only a judge or jury can decide. Hopefully, the parties can negotiate a settlement. Otherwise, both agents should advise their clients to seek legal counsel to weigh their options.

Note that the parties should always consider whether the dispute is material. If the seller doesn’t think the alleged violation is a material violation of the contract, it’s likely that the issue can be resolved for little expense and present an easy resolution. When the cost grows, that’s potential evidence that the dispute is material.