As anyone involved in real estate can attest to, understanding zoning as it relates to the acquisition of any type of property, is of the utmost importance. This posting is meant to provide a brief overview of zoning and how nonconforming use can affect the property and what remedies exist in order to prevent a situation that is summarized at the conclusion of this essay.
Zoning is the mechanism municipal jurisdictions use to control desired growth and development, while trying to eliminate or at least minimize problems of crowding and land use conflicts. Zoning tells property owners what and how they can and cannot build on their land. Decades of court cases have shown that cities and towns have both a responsibility and a constitutional right to protect the public welfare by placing limits on the uses of private property.2
The history of zoning dates back many years. As cities grew larger and more complex in the late 19th and early 20th centuries, governments became increasingly involved in providing municipal services, promoting the development of public infrastructure, and regulating private real estate development. Also in the latter part of the 19th century, cities began to limit to certain areas within the city those hazardous but necessary business and industrial activities that might cause fires or expose people to disease, harm or noxious odors. Selective prohibition of these uses by geographic location was an early form of land use zoning. Overall, the private sector-not just community groups but also many real estate entrepreneurs-strongly favored the growing number of public laws and codes regulating urban development and land use. They supported zoning restrictions to stabilize real estate markets, increase property values, and encourage new investment because the understood that the restriction enabled them to build or buy property with less risk of unfavorable change on the adjoining lots and the surrounding neighborhoods.2
In order to first understand zoning as it relates to real property transactions the following is a brief overview of permitting, use classifications, and items that need to be collected to perform the necessary due diligence before an acquisition:
Use of property is permitted four ways:
· Permitted by right
· Permitted by conditional/special use permits
· Permitted by variance
· Permitted as an accessory use (manager’s residence within a mini-warehouse)
Generally there are five major types of use classifications:
· Commercial
o Retail, Restaurants, Personal service, Hotels, Office
· Agricultural
· Residential
o Multi-Family, Nursing Homes, Student Housing, Single Family
· Industrial
o Manufacturing, Warehouse, Research & Development
· Planned Development/Special Use
o A use that would not be appropriate generally, or without restriction throughout a zoning district or classification, but, which is controlled as to number, area, location or relation to the neighborhood in which it is proposed. Examples would include nursing homes, restaurants with patios and/or drive thru windows, communication towers, and gas stations
In a transaction, a list of necessary due diligence items should be reviewed:
1. The specific zoning designation of the site, as established by the current municipal code, as well as any prior designations
2. The uses allowed under the zoning designation established by the zoning ordinance and whether the present use of the subject site is legally permitted
3. The minimum yard or setback requirements, and a review of the survey for compliance
4. The building height requirement, whether by number of stories or actual height above ground level, and a review of the survey for compliance
5. The bulk or density restrictions of the property. The relationship of the square footage of the land area versus the square footage of existing buildings would be checked for proper ratio. Specific density per acre requirements based upon number of units, and floor area ratios based upon the total square footage of multistory buildings, would also be considered
6. The formula for determining the minimum parking requirement and the “mix” of existing units on the site. When calculated, comparisons of the required parking count to the actual site count, as shown on the survey. Handicap and compact spaces would also be addressed.
7. Special circumstances to be considered would include legal non-compliance of any of the above factors, the issuance of zoning compliance letters from the municipalities, the existence of variances, council minutes, certificates of occupancy, building inspections, the effect of site plan approvals, airport zoning districts, and businesses serving alcohol, just to name a few.
The variety of types and definitions can be overwhelming, even for professionals. That is why it is most important to pay attention to definitions. Much of the law of zoning is in the definition, in other words, how you can and cannot use the land.
To give an idea, of how definitions can rule the day, consider the movement to zone away fast food chain restaurants. Some towns, in the belief that this is not a good use, have simply banned all formula restaurants, generally defined as restaurants with a set architecture and set menus that have more than a small number of outlets. A developer could have paid big money for a great site at a prime intersection for a national franchise fast food restaurant and then have the zoning rug yanked out from under them with the adoption of a prohibition on formula restaurants.1
Zoning laws are constantly changing but are not enforced retroactively.1 A building in existence at the time a new zoning law is adopted is said to be “grandfathered” or “legally nonconforming” and cannot be declared illegally nonconforming. But if the legally nonconforming structure is destroyed beyond the threshold set forth in the Code, the owner may be allowed to rebuild only in accordance with present zoning laws. There are three zoning conformance status of the site: legal conforming, legal nonconforming, and nonconforming:
In legal conforming, the project meets all zoning district use, area, setback, height, density, and parking requirements according to the most recent zoning ordinance or land use requirements in your jurisdiction. The (legal) nonconforming rebuildability clause will not apply because your project is legal and has 100% right to rebuild in the event of any percentage of destruction.
In legal nonconforming, the project was conforming at the time of construction but due to changes in the zoning ordinance, the governing jurisdiction, or zoning designation, the project is no longer conforming. Jurisdictions have different rules governing legal nonconforming projects. Some allow 100% rebuild in the event of destruction while other require planning commission approval to rebuild, regardless of the percentage of destruction. All are subject to the nonconforming rebuildability clause of the zoning ordinance as they have been granted certain legal protections for rebuild. The following are a few causes constituting legally nonconforming:
· Built prior to the establishment of the zoning code
· Changes in the zoning code over time
· Annexation from one jurisdiction to another
· Subdivision of the property
· Condemnation proceedings (often affects building and parking setbacks)
· Rezoning of the property
The following are examples:
· Legal nonconforming buffer yards- A Florida café that has enjoyed patio seating for years, but current Code now requires a buffer between the property line and any improvements. If the patio area were to be destroyed by storm or fire, it would not be allowed to be rebuilt.
· Legal nonconforming setbacks and parking-An Arizona hospital that was built in the county and later annexed in the city. Differences in code requirements between the two jurisdictions caused setback and parking deficiencies.
· Legal nonconforming to height-A multi-family complex that was built prior to changes in the zoning code, which lowered the allowable building height from three stories to two stories.
In nonconforming status, the project does not conform to current zoning requirements, and did not conform to the requirements in place at the time of construction. In the event of destruction of any percentage or value, the project will require to be reconstructed according to the requirements of the current zoning ordinance. The nonconforming rebuildability clause of the zoning ordinance will not apply to a nonconforming project because the site does not have a legal status. Situations that could possibly lead to a property becoming nonconforming include:
· A change of use (retail to restaurant) done without approvals, which requires additional parking
· Illegal use (retail in residence)
· Re-striping of the parking lot which causes spaces to be lost
· Removal of landscaping to accommodate additional parking or structures
· Conversion of apartment, hotel or nursing home units that exceed the total number approved at the time of construction
· A structure built closer to the property line than what was originally approved
· Construction error
Examples of nonconforming uses include the following:
· Nonconforming to parking-A resort hotel in Michigan was approved with parking to be constructed on an adjoining lot also owned by the owner, the parking spaces were never built, the city never noticed, a certificate of occupancy was issued, and then the owner sold the land
· Nonconforming to density-An assisted living center in Arizona was approved for 85 beds, the certificate of occupancy was issued for 85 beds, and it now has 95 beds by converting other space in the building which was never applied for or approved in the zoning process
· Nonconforming to density and open space-A multi-family site in Georgia was approved and developed on 30 acres, the owner sold 10 acres of unimproved land which caused density, open space, and landscaping problems, which are not easily cured
There are gambles with a nonconforming use: (1) local zoning authorities can change their minds and take steps to gradually cancel the nonconforming use over time; (2) you can lose the right if you substantially change the existing use of the business (i.e., a garage becomes a Blockbuster video franchise), your building is damaged or destroyed (i.e., your garage has to be rebuilt because of a fire), you shut down operations for several months (the length of time varies with local law), you discontinue operations entirely, or you significantly expand your business operations (i.e., your garage now includes an auto parts store)
The following are remedies if the project is nonconforming:
· Fix the problem (example: stripe more spaces, move the encroaching accessory building)
· Apply for a variance or special use permit
· Draw up a reciprocal parking agreement with the adjoiner
· Purchase land from the adjoiner
· Apply for a change in the zoning district
Variances
Variances are a discretionary relaxation from the strict application of certain zoning requirements granted by the Board of Adjustment to alleviate conditions peculiar to a particular property which places an undue burden upon the individual landowner.2 In more simplified terms, a variance is a zoning approval granted by a zoning board of appeals to do something that is otherwise illegal. It is for this reason that in most communities there is real tension between the zoning board of appeals and the separate zoning authority, which may be a planning board, zoning board, or local legislative body. Variances, like special permits, run with the land and attaches to the property and is generally about the use and not the land.1
There are many examples of zoning violations: Overflowing dumpsters, proper landscaping not provided, dumpsters located on parking spaces, illegal banners and signs, loss of striped parking, tenants parking on neighboring property, criminal activity by tenants, i.e. prostitution/drug dealing, graffiti, etc., taking place on the premises with landowner disregard, abandoned vehicles, etc.
Building Violations can include: Building permits not being final, certificates of occupancy not issued usually due to lack of final inspection, elevator violations, tenant complaints for structural problems, such as leaking roofs, cracked walls, faulty plumbing, etc.
Some requests for a variance – such as the same request that everyone else nearby has already obtained -- are a simple matter that can be handled alone. However, if the variance is important, or time is important, and the person does not want to risk getting turned down, or the matter is sort of unique, they may need the assistance of an attorney familiar with local zoning laws and practices. In fact it may also be necessary to obtain an architect or other expert to assist the attorney.
Special Use Permits
In most jurisdictions, special permits are an administrative, not legislative type like variances are. Special permits command that great middle ground between the largely discretionary zoning amendment and the process with little or no discretion which includes not only the zoning enforcement review but other administrative approvals such as subdivision and site plan review.
Protection
When negotiating a contract there is language in the document that will protect the buyer and the seller. This language in the contracts is found under “Representations and Warranties” in order prevent the previous case from happening, assuming both parties are honest:
A. Knowledge
Sellers have become increasingly wary of making any meaningful representations and warranties, and any that are given are likely to be qualified by some degree of knowledge -- "to the best of Seller's knowledge", "to the best of Seller's current actual knowledge without inquiry" and statements that "Seller is aware of no..." are a few examples of the lengths Sellers will go to say very little. Most Purchasers are not looking to set the Seller up for a breach of warranty or misrepresentation suit; they just want to elicit information that is not readily available from other sources. The Purchaser would like to know if there are any lawsuits, condemnations, violations (environmental, building code, etc.), and other pertinent facts about the property, but the Seller is cautious to go on the line for any of these things. The courts interpret actual knowledge to refer to those things of which the one sought to be charged has express information and those things which a reasonably diligent inquiry and exercise of the means of information at hand would have disclosed.4
Therefore, to make a statement to one’s “actual knowledge” implies a duty of inquiry. One common solution that may satisfy both the Seller and the Purchaser is to define “knowledge” and identify a person or persons within the Seller's operations who knows about the Property and its operations. The Seller is then not in a position of having to conduct internal due diligence of its many employees to determine who might have knowledge, and the Purchaser has the person who is most familiar with the Property actually telling something about it.
B. Disclaimer – “AS IS, WHERE IS”
In 1995, the Texas Supreme Court determined that the agreement to sell and purchase commercial property "as is" effectively negates any cause of action for DTPA violation, fraud and negligence, because the disclaimer defeats the element of causation.5 This reasoning has been extended to residential contracts as well.6 To be successful in relying on an “as is” disclaimer, the Seller should verify that all of the following apply:
• The Seller must disclose all known defects to prevent the Purchaser from claiming it was induced to buy, due to Seller’s fraud, misrepresentation or concealment of information.
• The Seller cannot obstruct the purchaser's ability to inspect the property.
• The "as is" clause must be an important basis of the bargain. It cannot be an incidental provision or a part of the "boiler plate" of the provision.
• The Purchaser and Seller must have relatively equal bargaining positions.
C. Disclosures
Regardless of what representations and warranties are made and what amount of disclaimers are required by the Seller to give its concerns, the Seller needs to disclose to the Purchaser any known defects, violations or conditions pertaining to the property (especially environmental or building code violations). A Seller of real estate is under a duty of disclosing material facts which would not be discoverable by the exercise of ordinary care and diligence on the part of the Purchaser, or which a reasonable investigation and inquiry would not uncover.7 The duty to disclose arises when one party knows that the other party is ignorant of the true facts and does not have an equal opportunity to discover the truth.7 However, a Seller has no duty to disclose facts it does not know.8 And a Seller is charged only with disclosing such material facts as to put a Purchaser exercising reasonable diligence on notice of the condition of the property.9 The Seller has no duty to disclose the legal status of the Property (e.g. zoning) to the Purchaser.10
In Conclusion, it is essential that a Seller knows all of the facts about the Property that may be of concern to the Purchaser, and thus should be disclosed in writing to the Purchaser. This is particularly true with respect to environmental conditions of the Property, all of which should be thoroughly and carefully disclosed to the Purchaser. The simplest way to do this is in the Contract itself, or in an addendum attached there. Many lawsuits as well as additional money spent by the developer to remedy the situation can be avoided if the proper and necessary steps are taken by both the Purchaser and the Seller.
Posted by Josh Smith-REAE 5311 Student
References
1 Merriman, Dwight. The Complete Guide To Zoning. New York City: Mcgraw-Hill, 2004.
2 Miles, Mike PHD, et. Al. Real Estate Development: Principles and Process. Third edition. New York City: Urban Land Institute, 2003.
3 Prudential Insurance Company of America v. Jefferson Associates Ltd., 896 S.W.2d 156 (Tex. 1995).
4 Erwin v. Smiley, 975 S.W.2d 335 (Tex. App. – Eastland 1998, pet. denied); Larsen v.Carlene Langford & Associates, Inc., 41 S.W.3d 245 (Tex. App. – Waco 2001, pet.denied); Cole v. Johnson, 157 S.W.3d 856 (Tex. App. – Fort Worth 2005, no writ)
5 Oat Note, Inc., v. Ampro Equities, Inc., et al, 141 S.W.3d. 274, 280 (Tex. App. –Austin 2004, no writ).
6 Smith v. National Resort Communities, Inc., 585 S.W.2d 655, 658 (Tex. 1979)
7 Coldwell Banker Whiteside Associates v. Ryan Equity Partners, Ltd., Cause No.01571-CV (Tex. App. – Dallas 2006, no writ).
8 Robinson v. Preston Chrysler-Plymouth, Inc., 633 S.W.2d 500, 502 (Tex.1982); Prudential, supra at162 (Tex. 1995)
9 Cole v. Johnson, supra at 860 (Tex. App.-Fort Worth 2005). (Refers to a seller of a house)
10 Coldwell Banker, supra.
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