Deal structure

How to structure a novation agreement with an unpermitted addition

Structuring a novation agreement for a property with an unpermitted addition requires careful consideration of disclosure, remediation, and buyer acceptance. The key is to clearly outline who is responsible for addressing the unpermitted work and how it affects the final sale.

October 25, 2026 · 4 min read

Understanding unpermitted additions and novation

An unpermitted addition is any alteration or expansion to a property that was completed without the necessary local government permits and inspections. This can range from a converted garage to an entire extra room. A novation agreement, in real estate, is a contract where a new buyer steps into the place of the original buyer (you), typically with the seller's consent.

When you combine these two, you are attempting to sell a contract for a property with an existing defect. The challenge is that the unpermitted work can create legal liabilities, difficulty in obtaining financing for the end buyer, and potential safety hazards. The novation structure means the end buyer will inherit this issue directly from the seller.

Disclosure requirements for unpermitted work

Transparency is paramount when dealing with unpermitted additions. You must ensure the seller fully discloses all unpermitted work to the end buyer. In most jurisdictions, sellers have a legal obligation to disclose known material defects, and unpermitted construction typically falls into this category. Failure to disclose can lead to significant legal repercussions for the seller and potentially for you, if you were aware of it and did not ensure proper disclosure.

Make sure the novation agreement clearly states that the end buyer is aware of and accepts the property with the unpermitted addition, and that he or she understands the associated risks. It is advisable to have the seller provide a written disclosure statement detailing the unpermitted work and its history.

Options for resolving the unpermitted addition

There are generally three paths to address an unpermitted addition. First, the seller could legalize the addition by obtaining permits retroactively and bringing the work up to code. This is often the most straightforward but can be costly and time-consuming, and some additions might not meet current codes.

Second, the end buyer could take responsibility for legalizing or removing the addition after closing. This would need to be reflected in the purchase price and explicitly stated in the novation agreement. Third, the addition could be completely removed prior to closing, returning the property to its original, permitted state. This is also a significant undertaking for the seller.

Drafting the novation agreement: key clauses

Your novation agreement must include specific clauses to address the unpermitted addition. Clearly state that the end buyer acknowledges the unpermitted status of the addition and assumes all risks and responsibilities associated with it. Include an 'as-is' clause that specifically references the unpermitted work.

You should also include an indemnification clause where the end buyer agrees to hold the seller (and you, as the original assignee) harmless from any future claims related to the unpermitted addition. If any repairs or legalization efforts are agreed upon, detail who is responsible for costs, timelines, and necessary permits. Legal counsel is strongly recommended to draft these complex clauses correctly.

Buyer considerations for unpermitted additions

When marketing a novation deal with an unpermitted addition, you need to target cash buyers or those with unconventional financing, as conventional lenders are often hesitant. Lenders require properties to be fully permitted and up to code. An unpermitted addition can prevent an end buyer from securing a traditional mortgage.

Educate your potential end buyers about the risks: difficulty with future resale, potential fines or demolition orders from the city, and increased insurance costs. The price must reflect these inherent issues, offering enough margin for the end buyer to either legalize or remove the addition.

When a novation might not be the right fit

Not every property with an unpermitted addition is suitable for a novation. If the unpermitted work is extensive, poses serious safety risks, or is located in a jurisdiction with very strict code enforcement, it might be too risky. If the cost to legalize or remove the addition is prohibitive, it may make the deal unattractive to any end buyer.

You also need a highly motivated seller who is willing to be transparent and cooperative through this process. If the seller is resistant to disclosure or any price adjustment, a novation might not be feasible. In such cases, walking away from the deal or pursuing a direct cash purchase (where you assume the risk) might be better options.

Obtaining legal counsel for complex situations

Due to the complexities and potential liabilities associated with unpermitted additions, especially within a novation framework, it is highly advisable to seek legal counsel. A real estate attorney can help you navigate local building codes, disclosure laws, and draft robust agreements that protect all parties.

Do not rely on template contracts for these types of deals. Every unpermitted addition situation is unique, and the legal framework varies by jurisdiction. Investing in proper legal review can save you from significant headaches and financial losses down the line.

Questions people ask

What exactly counts as an "unpermitted addition"?

An unpermitted addition is any construction, alteration, or expansion on a property that was done without the required permits from local government building departments. This includes anything from converting a patio to adding a bedroom.

Does the seller have to get permits before novating?

Not necessarily. It is a point of negotiation. The seller could, or the end buyer could agree to take on that responsibility post-closing. The novation agreement must clearly state who is responsible and how it affects the price.

Can the end buyer get financing on a house with unpermitted work?

Typically, no, not conventional financing. Most traditional lenders require properties to be fully permitted and up to code. End buyers for such properties often need to pay cash or secure alternative financing.

What's my liability if I novate a property with unpermitted work?

While a novation agreement usually shifts the original buyer's position, you could still face liability if you were aware of the unpermitted work and did not ensure proper disclosure to the end buyer. Always be transparent and seek legal advice.