How does an interested buyer know if a home’s basement apartment is legal? And what information about basement apartments must real estate agents provide to buyers?
Mohamed came to my office last month with an agreement to purchase a two-unit house in Kitchener, Ont. The agents involved told him the basement apartment alone could rent for $1,200 a month.
Although the purchase agreement contained no reference to the legality of the basement apartment, the MLS listing described it as an “in-law suite” and an “accessory apartment” – industry code words for illegal unit.
After signing the agreement, Mohamed approached the City of Kitchener and was told the home’s basement apartment did not have the necessary approvals and was illegal. He wanted out of the deal.
I told him about three cases before discipline panels of the Real Estate Council of Ontario (RECO), the industry regulator.
In 2010, a real estate agent was charged by RECO with breaches of its code of ethics. The agent described a property in a listing as, “magnificent house … with two apartments in the basement ($1,150 income) … Seller and Agent do not warrant the retrofit status of basement apartment.”
The agent told the buyer it would be an excellent investment property but took no steps to ensure the buyer was informed of its legality and suitability for investment purposes.
After the deal closed, the municipality issued an order against the property because the basement apartment was in violation of the Building Code Act. The tenants stopped paying rent and the owner eventually filed for bankruptcy.
A RECO tribunal levelled a $7,500 fine and ordered the agent to take an ethics course.
In 2014, RECO charged another agent with a code of ethics breach. He had described a house by saying: “Income Potential 3 + 1 bdrm bungalow w/separate entrance/in-law suite.”
The listing included a disclaimer that the broker and sellers did not warrant the legal retrofit status of the “in-law suite.” Permits and inspections to ensure bylaw compliance had not been completed on the basement apartment.
The RECO discipline panel found the agent had acted unprofessionally and had failed to take steps to verify the legal status of the basement suite. The agent was fined $5,000 and ordered to take an ethics course.
In another 2014 decision, an agent’s listing read, “Fabulous home used as 2 family.” The house was stated to have “income rental.”
At the discipline hearing, the agent agreed that she failed to promote and protect the best interests of her client, and that the apartment was, in fact, “an illegal use of the property.” She was fined $10,000 for failing to determine and disclose material facts about the house and for not making her best effort to prevent an error regarding zoning.
Back to the Kitchener deal. On my client’s behalf, I approached the seller’s lawyer and requested that all parties sign a mutual release. The deal was eventually terminated.
The lesson: if the offer doesn’t say the basement apartment is legal, it probably isn’t.