The most recent biennial Wisconsin budget bill, signed into law by Governor Walker on July 12, 2015, as 2015 Wisconsin Act 55, contained a provision that was not widely noticed before its passage but changed residential and commercial real estate transactions significantly. The new law prohibits local governments from imposing or enforcing time-of-sale (TOS) requirements on the sale of real estate. The most common example is a requirement that a home pass a building code inspection before closing. These local ordinances are now illegal and thus unenforceable.
More recently, 2015 Wisconsin Act 176, enacted on Feb. 29, 2016, expanded the law and created a similar prohibition against local ordinances that impose a fee for inspections or meeting code-compliance obligations in connection with the purchase or occupancy of a home. Further, Act 176 also prohibited local ordinances that require rental properties or rental units to be routinely inspected without an administrative warrant, registered with, or certified or licensed by a municipality. This series of statutory changes to Wisconsin real property law therefore reduces the instances in which local building inspectors may inspect private property.
However, two issues remain that Wisconsin lawyers should consider in working with these new laws. First, although the new laws prohibit enforcement of TOS ordinances, the ordinances remain on the books. Second, references to these TOS requirements also appear in the form offer to purchase mandated in Wisconsin. The practical effect is that offers signed before these laws came into effect might still contain contractual obligations to submit to inspections, pay fees, or complete repairs or improvements. Offers entered into after the effective date might need to be modified to comply with the statutes and prevent imposing those obligations on pending transactions.
Section 4595(c) of the 2015 budget bill reads, in part, as follows: “… no local governmental unit may by ordinance, resolution, or any other means restrict the ability of an owner of real property to sell or otherwise transfer title to or refinance the property by requiring the owner or agent of the owner to take certain actions with respect to the property or pay a related fee, to show compliance with taking certain actions with respect to the property or to pay a fee for failing to take certain actions with respect to the property” at the time of sale, refinance, or transferring title.1
Act 176 added a paragraph and replaced the “sell or otherwise transfer title to” provision with “purchase or take title to” and “take occupancy of” real property. These prohibitions apply to “actions with respect to a property” that include “requiring inspections, making improvements or repairs, removing junk or debris, mowing or pruning, performing maintenance or upkeep activities, weatherproofing, upgrading electrical systems, paving, painting, repairing or replacing appliances, replacing or installing fixtures or other items, and actions relating to compliance with building codes or other property condition standards.”
From this detailed list, two things can be gleaned: municipal ordinances currently require homeowners to make both code and cosmetic repairs before sale, purchase, or occupancy; and the reach of the new TOS prohibition in the statute is equally as broad to address more than just code-compliance inspections. The prohibition on TOS requirements also specifies that any such ordinance on the books is now unenforceable and cannot be grandfathered.
Why Laws Were Overhauled
Local municipalities have and need the right to enforce building codes and zoning requirements. The state of Wisconsin also has the authority to impose requirements on residential housing stock and occasionally uses the time of sale of a property as the moment at which to enforce laws, such as the payment of transfer-tax fees and compliance with the weatherization law. Municipal adoption of TOS requirements, however, has spread in recent years. Many homeowners and actors in the real estate business, such as brokers, builders, and title companies, perceive the increase in TOS requirements as a new means by which municipalities generate revenue but that impose additional obligations on property sellers without notice or due process in their adoption or enforcement.
John D. Finerty Jr., Marquette 1992, is a trial attorney at Michael Best & Friedrich LLP, Milwaukee, representing lenders, insurers, and investors in all aspects of litigation, including workouts, derivatives, and contested commercial and residential foreclosures.
Nancy Leary Haggerty, UCLA 1980, is a real estate attorney at Michael, Best & Friedrich LLP, Milwaukee, concentrating in commercial real estate development, purchases, and sales, condominium development, and TIF and other municipal financing.
Most of today’s TOS ordinances arose from clear-water compliance certificates that municipalities required at closing to confirm that downspouts were disconnected from the public sewer system. These “clear-water” ordinances imposed relatively minor costs on homeowners while helping to offset the potentially ruinous cost to the local municipality to build or expand a combined sanitary sewer and treatment system to purify rain water.
In many communities, these ordinances later were expanded to require inspections of an entire house, not just downspout connections, and require full building-code compliance before closing on a property sale. Stated municipal interests behind expansion of these inspection requirements include preserving an aging housing stock in urban areas and ensuring new development is built to code in suburban areas; monitoring student housing, which is prone to overcrowding and ad hoc renovation; and policing for repairs and remodeling by unlicensed contractors that may create safety hazards for home owners and their guests and, in an emergency, first responders.
TOS ordinances were often worded as a condition precedent to a sale. The ordinances, however, typically do not explain whether failure to comply with the ordinance would void a potential sale or expose the buyer to other penalties. That the property was sold “as is” or that the buyer wanted to fix a problem after closing and negotiated a credit against the purchase price are not usually defenses to municipal repair orders or citations. Other sellers, such as personal representatives of estates, might simply not be capable under state law of granting warranties on the sale.2 A tension undoubtedly exists between the mechanics of the home sale process and TOS requirements; the magnitude of the tension, however, varies by locale.
In addition, some homeowners and their real estate agents noticed that ordinance enforcement seemed to be based on unwritten policies and the practices of local municipal employees. For example, in one situation a seller was required to replace light switch covers that had cracked from the switch plate screws being turned too tightly. At least anecdotally, then, enforcement has become effectively arbitrary and unpredictable; even worse, unpredictable enforcement might make compliance difficult or even impossible if an inspector orders large-scale repairs shortly before closing.
These ordinances may therefore bring the entire home-sale process to a halt, giving a reluctant buyer an escape hatch from the obligation to close the purchase and coercing a seller to make home improvements to avoid losing the sale. In any case, most home sales today already are conditioned on a private home inspection, rendering municipal inspections duplicative. Many sellers and real estate industry participants thus perceive that TOS ordinances now go far beyond the purpose of code compliance, which is protecting the safety of the housing stock within the municipality.
New Wis. Stat. section 706.22 therefore reflects the concern of realtors and buyers that municipal-code-compliance requirements can be a significant but unnecessary hurdle to the sale of a residential property. Prohibitions on TOS requirements, however, do not apply outside the sale or transfer contexts, so inspections pursuant to a building or remodeling permit are not affected.
How Offers to Purchase and Closing Requirements Incorporate These Requirements
Real estate brokers are obligated under Wisconsin law and broker licensing requirements to use the mandated offer to purchase forms promulgated by regulators. Only lawyers can modify those standard forms. Addendum A to the WB-11 Residential Offer to Purchase contains a provision, in lines 102-105, in which the seller agrees to provide any certificate of code compliance or similar governmental documentation before closing, unless the parties agree otherwise.
When the budget bill’s prohibitions on TOS requirements became effective, confusion ensued over whether the contractual provisions in contracts executed before the effective date were still in force for closings after the effective date, notwithstanding that the municipal ordinance had been rendered unenforceable. And as to contracts executed after each new law’s effective date, to the extent municipalities still have these ordinances officially on their books, there is risk that executing the standard contract creates a contractual obligation, despite the enforceability of the local ordinance itself.
In addition, although each standard offer to purchase for different types of real estate contains slightly different warranties, located in different areas of the forms, most contain some type of warranty and representation as to the following: that the seller has no notice or knowledge of “federal, state or local regulations requiring repairs, alterations or corrections of an existing condition.” Technically, if these unenforceable ordinances remain on the books, they still require inspection and repairs, so such a warranty may be violated.
As a result, real estate closing companies, whose employees are used to a system that does not require lawyers’ involvement in every transaction, are now advising buyers and sellers to obtain counsel for each transaction, so the closing companies will not be required to interpret the applicability of the new law.
Effect on Commercial Real Estate
By their terms, the prohibitions on TOS requirements apply to transfers of both residential and commercial real estate. Commercial properties therefore no longer need to pass a comprehensive building-code inspection before sale.
But new Wis. Stat. section 706.22 does not expressly apply to the leasing of commercial real estate or apartment rentals. Inspection ordinances, like TOS requirements, have also become widespread and typically apply when there is a change in occupancy. The city of Milwaukee, for example, requires an inspection and certificate of compliance for the leasing of rental units in specified neighborhoods in which the city has deemed the concentration or quality of the rental housing stock to be in need of monitoring.3 A certificate of compliance is valid for up to four years unless the initial inspection reveals code violations, in which case the city may require a recertification yearly.
Act 176 changed Wisconsin law concerning the inspection of rental units. It provides in part as follows: “No city, village, town, or county may enact an ordinance that does any of the following: … [r]equires that a rental property or rental unit be inspected except upon a complaint by any person, as part of a program of regularly scheduled inspections conducted in compliance with s. 66.0119, as applicable or as required by state or federal law.” Act 176, which took effect on March 2, 2016, thus now requires that rental unit inspection programs comply with the administrative warrant statute, Wis. Stat. section 66.0119.
Tensions Between Conflicting Interests Remain
Continued enforcement of TOS requirements despite enactment of Wis. Stat. section 706.22 and the enforcement of ordinances that apply to rental units raise constitutional questions. The language of most TOS ordinances requires compliance inspections before closing even without any cause or suspicion to believe that a particular property might not be in compliance with building codes or otherwise unsafe. Inspections conducted under the authority of ordinances that require municipal inspections, without a reason to believe a property is not in compliance, or programs that are not “reasonable area-wide” rental-inspection programs, may be subject to a constitutional challenge as warrantless administrative searches.
In Camara v. Municipal Court of City & County of San Francisco, the U.S. Supreme Court held unconstitutional an ordinance that authorized housing officials to inspect apartment buildings “at least once a year and as often thereafter as may be deemed necessary.”4 The plaintiff in Camara was a tenant who was arrested for refusing to allow a lawful inspection.5 The tenant argued that the ordinance violated the Fourth and Fourteenth Amendments.6
The Supreme Court struck down the ordinance and held that warrantless searches of residential property by municipal inspectors violated the Fourth Amendment protection against unreasonable searches and seizures.7 The Court ruled that warrantless administrative searches cannot be justified on the grounds that they make minimal demands on occupants; that warrants in such cases are unfeasible; or that area inspection programs could not function under reasonable search-warrant requirements.8
The Court wrote further that, “administrative searches of the kind at issue here are significant intrusions upon the interest protected by the Fourth Amendment, that such searches when authorized and conducted without a warrant procedure lack the traditional safeguards which the Fourth Amendment guarantees to the individual.”9 The Court noted, however, that probable cause to inspect may be based on known code violations or a reasonable appraisal of conditions in an area as a whole.10
A more recent case from the U.S. Supreme Court reaffirmed the rule that local ordinances that require government inspections without cause to believe a violation of law occurred might be unconstitutional without adequate due-process protections. In City of Los Angeles v. Patel, the Court considered the constitutionality of a Los Angeles ordinance that required hotel operators to record and keep specific information about their guests for 90 days and to make those records available to “any officer of the Los Angeles Police Department for inspection” on demand.11
The Court held that the ordinance was facially unconstitutional because it failed to provide the operators with an opportunity for pre-compliance review.12 The Court held that “a hotel owner must be afforded an opportunity to have a neutral decisionmaker review an officer’s demand to search the registry before he or she faces penalties for failing to comply.”13 Applying the holdings of Camara and Patel here, it may very well be unconstitutional for municipalities to require inspections, at least without some reason to believe there is a code-compliance violation or without an appeal mechanism that would allow a homeowner to challenge the inspection requirement.
Wisconsin recognizes one of multiple exceptions to the warrant requirement. In Lundeen v. Department of Agriculture, Trade & Consumer Protection,14 the Wisconsin Court of Appeals held that a statute allowing a warrantless search of dairy farms was constitutional. The court reasoned that dairy producers in a heavily regulated industry should expect unannounced inspections. That rationale is consistent with the heavily-regulated-industry exception to the Fourth Amendment warrant requirement. Applied to home sales and rental units, a reasonable area inspection plan may substitute for cause required by the Fourth Amendment, but will vary with the municipal plan being enforced.15
Some Practice Suggestions
Real estate professionals should encourage municipalities to remove unenforceable ordinances from their books so there is a clear understanding of what obligations pertain to the sale, purchase, and occupancy of real estate. Until conflicting ordinances are repealed, or the state-mandated offer to purchase forms are revised, a lawyer could advise that clients insert something similar to the following into each offer to purchase:
“Notwithstanding anything to the contrary contained herein, Seller shall not have an obligation to secure any inspection of the Property, or to make any improvements, corrections or changes to the Property, to comply with any building code, obtain occupancy permits, Certificate of Compliance or comply with a similar local ordinance, and Seller makes no warranty or representation about the existence or enforceability of any similar ordinance, or the compliance of the Property with any such ordinance.”
Whether and how municipal inspection ordinances or TOS requirements will be enforced in municipalities throughout the state in light of Wis. Stat. section 706.22 and 2015 Wisconsin Act 176 will be an issue that most lawyers will face, whether they practice real estate law or not. Lawyers handling home sales for clients or buying or selling their own homes will be confronted by this issue as will lawyers representing brokers, title companies, closing departments, lenders, and municipalities. Thus, it would be helpful for all such parties if the variations in the individual ordinances could be reconciled, and if unenforceable ordinances could be taken off the books, to avoid both arbitrary enforcement and assumption by parties to a sale of unintended contractual obligations.
1 Wis. Stat. § 706.22.
2 See, e.g., Wis. Stat. § 860.07.
3 Milwaukee’s Residential Rental Inspection Program took effect Jan. 1, 2010. See Milwaukee Code of Ordinances (MCO) 200-53 (Dec. 2009). It was expanded on Jan. 1, 2015, and further may be applied to “nuisance” or “chronic nuisance” properties. For a detailed explanation of the Milwaukee ordinance, seeMemorandum, from Zoning & Development Committee, Milwaukee Common Council, to Art Dahlberg, Department of Neighborhood Services (Sept. 24, 2014) (the “Memorandum”).
4 387 U.S. 523, 526 (1967); see also Dearmore v. City of Garland, 400 F. Supp. 2d 894 (N.D. Tex. 2005).
5 Camara,387 U.S. at 526.
6 Id. at 527.
7 Id. at 528.
8 Id. at 531-33.
9 Id. at 534.
10 Id. at 537-39.
11 135 S. Ct. 2443 (2015); but see Float-Rite Park v. Village of Somerset, 2001 WI App 113, 244 Wis. 2d 34, 629 N.W.2d 818 (holding ordinance allowing law enforcement officers to enter licensed inner-tube business was constitutional).
12 Patel, 135 S. Ct. 2443.
13 Id. at 2453.
14 189 Wis. 2d 255, 525 N.W.2d 758 (Ct. App. 1994).
15 See Camara, 387 U.S. at 528-29 (standards “may be based on the passage of time, the nature of the building (e.g., a multifamily apartment house), or the condition of the entire area …”).