By Bob Aaron

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.

12 COMMENTS

  1. I see this quite frequently in Waterloo where pretty much all basement apartment are illegal due to some strict by-laws. The trouble is that an agent can pretty much list whatever they want and some buyer agent may not care. Furthermore, we get a lot of agents from the GTA who are not aware of the legality. Sadly buyers usually only find out when it is too late.

  2. This issue could be dealt with very simply in my opinion. Describe the dwelling as it exists without speculating on potential usage other than as a single family residence. The secondary kitchen seems to be the issue that causes all of the trouble. Single family residences can have additional segmented rooms and bathrooms in their basements without problems being encountered, as long as they meet local bylaw/fire department requirements regarding egress if fire breaks out. Basement entrances can also be acceptable without local bylaw approval. The problems arise when owners add these additional rooms to their homes after primary construction has been completed according to approved initial construction plans. Enter the second kitchen, and the attendant problems.

    I would simply describe the interior of such a home thus: Basement area includes two/three separately partitioned rooms, a three/four piece bath and an apparent kitchen area including upper and lower cupboards, counter top, sink, 240 volt stove outlet etc. A separate entrance provides egress to the rear yard from the kitchen area. Seller makes no representation or warranty regarding what the basement can or cannot be legally used for according to local by-laws/fire codes. Potential purchasers are advised to contact the local municipal building department/fire department for further information.

    The above description would be a true statement. Speculation as to what the basement could be used for would thus be transferred onto potential buyers’ mindsets/wish lists. Pursuit of education regarding legal usage would then fall upon potential purchasers’ shoulders. A listing Realtor could do the same thing, research and verbally pass the information on to potential buyers, but that Realtor’s verbal advice would be hearsay, and potentially not admissible and/or called into question in court, because the Realtor could have spun/qualified the information in a manner designed to influence an offer to purchase.

    Purchasers: If you want something to be done right, do it yourself…with advice/guidance from your lawyer.

  3. The seller has arrived at an asking price based on the apartments/suites being legally rentable. The seller should provide documentation from municipality to support that claim. Buyers realtor should also use a condition for due diligence.

  4. would this not be good to have for the purpose of this problem ???

    SCHEDLUE “C”
    DISCLOSURE AND ACKNOWLEDGEMENT REGARDING THE AGREEMENT OF PURCHASE AND SALE ON:
    RE: address ___________________________________________________________________
    Between: ( herein referred to as the Sellers)
    And
    (Herein referred to as the Buyers)
    The following disclosure is made in good faith by the Seller and Acknowledged in good faith by the Buyer prior to the signing of the agreement of Purchase and Sale. The Buyer and the Seller understand, acknowledge that _____________________________________ and
    (Co-Operating Brokerage/Listing Agent), does not represent or warrant the legal status and/or retrofitting ability and/or future use of the subject property as a Rental Dwelling.
    Further, ______________________________________, hereby recommends the parties acquire independent legal advice regarding this Agreement of Purchase and Sale, prior to signing the agreement of Purchase and Sale.
    **The basement area is not legalized apartment in its present state in accordance with the Town of
    (Town or Municipality)
    The above disclosure(s) are acknowledged making it understood by all parties in which they hereby release each other and the real estate brokerages involved in this transaction, from any future claims or liability. The Buyer agrees that they are accepting the present use being a Single Family Dwelling as Indicated in Clause 8 of the Agreement of Purchase and Sale.

    Signed this day __________________________
    Witness____________________________ (print name)
    Buyer _______________________________________________
    Signed this day _________________________________________
    Witness ______________________________________ (print name)
    Seller_________________________________________________________

    • It’s a highly recommended to have a lawyer review any clauses created, do they put clients are properly protected.

      • sure — but that was not the question – due diligence should always be applied ! This I know well but i do agree when in doubt ask and make sure – maybe you should ask and use it .. it might be better than what I have seen of protecting all parties – it was only a thought– ! on the positive side of my post .

  5. I’m looking fwd to total elimination of word “agent” in articles involving “REGISTRANTS under REBBA” REM please address this change in your style book and editorial policy book.

  6. Hi Bob, can you elaborate a bit about the “potential” wording problem? I am not sure I understand the problem in the listing as long as “potential” is vague and the agent is working in the best interest of the seller, not the buyer. I mean if the listing for a residential building land says “potential great home” is that a fault? Or “unfinished basement, potential great family room” is that wrong?
    I understand the problem as buyer’s agent if they buy a property based on the fact they will rent the basement and then discovers that is not allowed and you didn’t done enough research but as listing?

  7. Interesting article, however including suggested wording for a proper MLS description would have been very helpful – i.e. what wording would RECO suggest be used to properly cover this scenario? Example: Would stating (e.g.) “Two kitchens; Two baths; Separate basement entrance” with no mention of an apartment or income potential be considered proper representation of the property?

  8. If I had to advise my client about “Buyer beware”, I might as well be saying “fire me” . I think the only time that term is viable is when it’s a private transaction on both sides. In that circumstance, they better be “aware”. The whole idea of representation is to have the professional skills to be able to protect the interest of all parties really. Our clients and ourselves. Our livelihood depends on it.

  9. Great Article, as usual, Bob.
    Question: wouldn’t the “Income potential” or “As-is” or “Seller and Agent do not warrant the retrofit status of basement apartment.” be good enough to present the existing situation in the listing?
    As to buying – it is still “Buyer beware” rule in force in Ontario, isn’t it?

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