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Home | K&S Blog | CASUALTY/FIRE INSURANCE AND ILLEGAL BASEMENT TENANTS IN YOUR HOME OR CONDOMINIUM (PART II)
CASUALTY/FIRE INSURANCE AND ILLEGAL BASEMENT TENANTS IN YOUR HOME OR CONDOMINIUM (PART II)

02/23/2012

   Last week we discussed the problems with illegal basement rentals in the case of any litigation involving the tenant or any casualty to the property.  Such usage of illegal basements is a common occurrence in Lakewood, Brooklyn and many other inner city neighborhoods.  The focus of that first installment related to issues that occur in New York City.  While the issues are somewhat similar in New Jersey, there are different, New Jersey specific issues, which warrant a separate article addressing local, legal and business concerns for New Jersey apartments.

   In Lakewood, many landlords can collect up to $1,150 or more for their basement apartments. They “finish” their basement cheaply for $25,000 to $35,000 and collect returns of up to 30% per annum. But there is a flip side to the seemingly simple business that must be taken into consideration.

   Absent a proper Certificate of Occupancy for the basement, the landlord has no ability to ensure that the construction of the apartment is safe and satisfies local building codes.  Building codes regulate electric, plumbing, sheetrock, insulation, structure and many other construction related activities. They are created by local municipalities, which seek, among other goals, to protect homeowners and tenants in their jurisdiction from shoddy construction.  Without typical governmental oversight, it is difficult, if not impossible, for the owner to protect himself. Even though many municipal requirement may seem pointless and unnecessary, absent a Certificate of Occupancy you are relying on a contractor who may or may not have the requisite experience, knowledge and honesty to complete the job safely, especially if he is working on a tight budget.
 
   Nobody wants to know that their thriftiness and negligence was the impetus for a fire that injured or even chas v’shalom killed a human being. Just as people maintain safety features in their cars, which can be deadly weapons, faulty wiring, or cheap kitchen installation, can lead to a fire in an apartment, which is equally deadly.

   As described in the last article, the reason that the New Jersey Insurance Company refused to pay for the damages to the Lakewood home that burnt down, was that the fire apparently stemmed from the basement.  The Insurance Company claimed that the kitchen was negligently constructed in that the venting was improperly installed.  Allegedly, the shoddy construction caused the fire which destroyed the house.

   To make matters even worse, an injured tenant and/or his health insurance company, which ends up paying for the tenant’s costly medical care, can turn around and sue the landlord for damages suffered as a result of the improper and negligent construction.  The landlord who used a questionable (possibly even unlicensed) builder  may end up with no recourse against his contractor or anyone else for that matter. The legal fees incurred in litigating or even settling such a matter with an insurance company with deep pockets, can be astronomical, far exceeding the amount saved by building the apartment without the CO.
 
   In order to obtain a Certificate of Occupancy after completion of the construction of your home, various building inspectors will require access to your basement.  They will inspect the wiring, plumbing, drywall and many other items.  These inspections can cause additional damage and the need for reconstruction of your existing apartment.

   If the City Inspector in unhappy with the construction, which happens fairly often, the Inspector will require the landlord to remedy the problem before a Certificate of Occupancy is issued.  The cost to rewire all or some of the apartments wiring, or to take apart drywall and replace it, can amount to many thousands, if not tens of thousands of dollars.

   Typical safety requirements require “hard wired” smoke and carbon monoxide detectors in every residence. Every one of these detectors may run a couple of hundred dollars if installed only after conclusion of the initial construction.

   Although Lakewood Township has generally turned a blind eye to illegal basement construction, which often takes place after hours or on weekends to avoid City Inspectors, that is not always the case.  There have been instances in which landlords were not careful and were fined for illegal construction.  Recently, a passing Inspector noticed a delivery of sheetrock in the driveway of a local family.  The Inspector issued a stop work order and multiple violations against the homeowner.  The owner had to find a new, licensed, fully-qualified contractor.  He had to retain a licensed architect who filed a full set of plans acceptable to the Township.  Of course, he also had to do a great deal of work to bring the basement up to Code.

LITIGATION RISKS

   In New Jersey it is also very difficult to evict a tenant from a non-legal apartment.  The eviction process for such a landlord will be extremely expensive and much longer than it needs to be, as the apartment must first be registered before a petition can be filed with the Court.  The typical landlord may be issued significant monetary fines by the municipality for any violations associated with illegal construction.  Additional fines will be issued because of the tenant’s occupancy of the premises without a proper Certificate of Occupancy.  The landlord may even face punitive damages of up to six times the rent paid, in order to relocate the tenant occupying an illegal apartment into a legal unit.

   Once the landlord decides to file the apartment as a properly registered residence, after completing all the steps described above, then, and only then, can the non paying tenant be sued in a holdover proceeding.  This is required because, generally speaking, a lease for an illegal basement apartment in New Jersey is generally deemed void as a matter of law, rendering it impossible to sue a tenant for a breach under the terms of the lease..

POSSIBLE SOLUTIONS

   Many local residents hope that existing basements will be “grandfathered in” and permitted to remain, as is, without compliance with any of the requirements described above.  The theory is that the Township will not cause thousands of homeowners to evict their tenants in order to register their units and to complete proper construction of these units.

   The likelihood of this eventually ever becoming law is slim. It depends upon the State legislature, and the political clout of the communities most affected by new legislation in this area.

ADDITIONAL RISKS
 
   Once a basement is discovered, the Township will often assess back taxes for the years that the basement was in existence and remained unreported to the authorities.

   A second issue is the apportionment of utility bills.  The local utility companies will not install a separate utility meter for an unregistered apartment.  Therefore, absent accurate sub-metering, disputes often arise between the several occupants of the illegal multi dwelling, as to the apportionment of the utility bills between the basement tenant and the owners of the property.  These disputes often flare up into major issues, causing the tenant to withhold rent, and the landlord with no recourse. Although nobody anticipates evicting tenants in a Court system, it is always important to entertain the opportunity. A tenant which is cognizant of the fact that he will never be sued may behave differently that one who will be accountable for any breaches under the lease.

   I will conclude with the same recommendation I made last time.  You should have your basement legalized even if it is costly.  A good set of architectural plans and a qualified contractor are the key to completing this task.  Better safe than sorry.
 
 
 

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