Tenant Does Unapproved Improvement - Good thing or bad thing?

Question

RESIDENTIAL rental newbie question:  I have a solid B/B+ class SFR out in Denver in which the tenant came on in December.  The tenant is a contractor who just moved to the metro area with his family.  While working a utility issue with the PM and tenant, I was informed out of the blue by my property manager (who also had found and  vetted the tenant) last week that the tenant had actually finished out the basement. Dry wall, textured paint.....the works.  Electrical and plumbing were already installed as was insulation.  We also have stub outs for a bathroom, though he did not finish that out - but did ask if we would like that done too.

To be clear, he did not ask for prior approval, nor is he asking for any compensation or consideration - unless we do the bathroom. He stressed to the PM that he finished it for his family's convenience and is NOT looking for any compensation or consideration.  However, he did provide pictures to the PM, and if accurate, the work actually looks quite well done.

So my questions are:

1.  I am pretty sure he did not pull county permits, since as the owner I would have been notified - but am not sure if any of the work would have required permits since it was essentially only drywall and paint?  Any thoughts or experience?

2.  I have a rep out there who could verify the actual quality of the work, but if I were to get it county permitted after the fact (if needed), and thus counted as new living space, will the tax go up?

3.  What, if any, legal obligation do I encounter if he leaves after the year (or sooner) and decides to seek compensation?  Or, conversely, should I actually offer any consideration/compensation for his work now?

Bottomline, I suspect that the legal thing is that I do not owe him anything since this was unapproved beforehand - but if it was done correctly, he may have realistically added about $15-20K value to the home, or about another $200/month rent potential in the future - so what is the RIGHT thing to do.

4. Should I pursue getting it permitted - and add any tax increase pro-rated back into the rent?

What am I missing?

or  should I just shut up and enjoy my good fortune that I have a tenant who actually might take care of the property better than I would myself?

Thomas S. · Answer

I would immediately instruct your PM to tell him that he is not authorised to perform any work on your property and that in the future he submit a written request if he has a desire to do work. If he does make a request in the future tell him no. For liability and quality reason you never allow a tenant to pick up any tools in your property.

It's nice that the work is a plus but this is not relevant to the severity of his actions. It is not his property so doing renovations without the owners consent or knowledge is inconceivable.  Truth is you got off really easy this time since in most cases tenants put up and take down walls, do electrical and much more without permission and often placing themselves the owner and the property in peril.

You were very luck this time but you should not condone this type of behaviour from tenants in the future.

Jim Adrian · Answer

Answers to your questions:

1. Work needs to be inspected or done by a qualified trade person.  And could cause new work to be removed for inspections and then reinstalled.

2. Taxes would go up a little because you now have more "finished sq ft".

3. You are legally on the hook for his mistakes.   Its your house.

4. I would get permits unless you plan on ripping out his work when he moves out.

I wouldn't offer anything up until you get permits and get things finalized.   I would look at the work first hand to make sure you are happy with the work.  If you don't like you can make him fix/remove because this is unauthorized work.  I think you got a really good gift but get it legal to be safe.

Michael Noto · Answer

There is a serious liability issue in allowing a tenant to do work like this just as their would be when you hire a contractor which is why you always hire someone with insurance to do this type of work.

With that said, there is nothing you could have done to prevent this, but like others have said make the tenant sign an addendum to his lease that says no improvements are to be done to the property without written consent of the landlord.

Bill S. · Answer

@Doug Poff a permit is required in Denver for hanging more than 1/2 sheet of drywall (16 ft^2).  The references by @Eddie Memphis would be true but the building code adopted by the City determines what requires a permit and I have been told the above is true for drywall.

I would fall on my sword with the City. Ask them if it could be inspected after the fact. They might cooperate. Some inspectors would make you tear it all down and start over. The sheet rock screw pattern must be inspected before it is taped and textured so that they make sure it is adequately connected to the framing. If the City comes down on you, you come down on the contractor/tenant. If not then win for you. BTW the contractor could loose his license for doing work without a permit. Not likely but possible. My guess is your "contractor" is not really licensed he just does construction without permits. If he had a license he wouldn't have risked it in the manner he did.

Alex Craig · Answer

Seems like he added value. I would make sure the necessary permits were pulled. If your taxes go up, so should the rent.

Deanna McCormick · Answer

Was the basement inspected for wiring and plumbing prior to the tenant moving in.. were permits pulled earlier for that work.. if so great, if not - not so great... I'd call your city if other work was permitted and signed off on and if permit is needed for drywall .. if not then your good.. if you don't finish off bathroom then you wouldn't need a final inspection on that if pre inspection for plumbing rough in was done before.

Tenant could file lien on property for his work.. I would get him to sign off.

What's done is done. But don't permit him to do any other work unless authorized and contract is written.

As far as improvement now reason  for higher rent.. that's yet to be determined.. worse case is drywall will be removed to do wiring inspection, and plumbing ,so might need to be ripped out.

Good luck at least you had the insulation in... hope the heat ducts and vents were also inspected prior to the work.

Eddie Memphis · Answer

From Denvergov.org

Permits are required when your project includes the following:

• Alteration to the existing floor plan.
• Structural changes, such as adding or removing doors or windows.
• New or rerouted ductwork.
• New or relocated electrical or plumbing fixtures.

NOTE: If your project changes the use or occupancy of your home or creates an additional dwelling unit without altering the exterior of the structure, see the project guide for adding a new dwelling unit.

Doug Poff · Answer

Thanks guys, great advice!

@Deanna McCormickn, Wiring, ducts and conduits, plumbing stub outs and framing studs were in place, permitted, and inspected prior to his moving in (I had replaced the entire HVAC, ducts and hot water heater). Basically he threw up the sheet rock (and textured paint) and put in linoleum tile on the floors.  I had priced out a full finish beforehand, but the numbers did not work with what I could get in rent for the neighborhood, so had waived it off.

@Alex Craig.  Agreed.

@Bill S.  That's my game plan.  My rep out there (not my PM) has some rapport with the city, so I will see how it goes - worse case, they make my tenant pull it down.  I am pretty sure my tenant is a skilled 'laborer' with a licensed contractor.

Account Closed's advice on that.

Doug Poff · Answer

@Jim Adrian, you seem to be reinforcing my own initial thoughts,

@Eddie Memphis, thanks for the link - none of that was done, however, but it does add living space so I definitely think it requires permitting.

Thomas S. solid advice and warning, great point about the liability - totally missed that.

Thanks all - I'll definitely be setting the future rules out for both the PM and tenant, and in the meantime will get the work inspected to take out the liability issues.

Tenant Does Unapproved Improvement - Good thing or bad thing?

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