Law Journal: It's time to simplify vested rights

Clearer land-use rules will encourage needed development

by Chad Essick

Chad Essick, a partner with Poyner & Spruill LLP in Raleigh, primarily represents landowners, developers and local governments in state and federal courts in a myriad of land-use, zoning and real-estate issues. He also represents landowners and developers before local boards of adjustment, planning commissions, city council and county commissioners on matters related to zoning, permitting, variances, annexations, special-use permits, site plans, subdivisions and road closings. He may be reached at 919-783-2896 or cessick@poyners.com.

Ask any real-estate developer what he or she wants most in the development-approval process and, undoubtedly, you will hear certainty, fairness, predictability and consistency. These terms are what drive the legal doctrine of vested rights, which protect those who have relied in good faith on existing land-use regulations in preparing for and beginning development. The doctrine is intended to keep local governments from taking legislative or other actions that substantially impair or even prohibit development projects that are well into the review and approval process. Recent North Carolina appellate decisions, however, have muddied the waters of vested rights. It’s time to simplify vested rights and provide landowners, developers, lenders and investors the certainty they need to make sound business decisions.

Vested rights created by statute
There are two methods by which vested rights may be obtained in North Carolina. The first is by complying with one of several statutes that automatically create a vested right. Once a building permit is issued, for example, the owner has a vested right to develop the property consistent with that permit so long as it remains valid. Vested rights also can be obtained, with certain limitations, once a site-specific or phased-development plan is approved or through a development agreement with a local government. 

As land-use regulation has become more complex and the approval process longer, these statutory vested rights no longer provide adequate protection. For example, in 1985, when the legislature granted building permits statutory vested rights, the process for obtaining a building permit was significantly different than it is today. In fact, 30 years ago, some jurisdictions would have issued a building permit based on a hand-drawn sketch on a napkin the same day it was submitted. Today, local land-use regulation is sophisticated. Receiving approval for a project requires numerous steps, submitting various plans and lengthy proceedings. A building permit can take months or years to obtain, and it typically is the last permit a developer receives before construction. The same also can be said about the approval of site-specific development plans. At that point, depending on the project, the developer already has thousands of dollars invested in, among other things, site acquisition, interest, due diligence, design work, plan preparation and consulting fees. Therefore, while vested rights should be governed by statute, the line in the sand needs to be drawn early to provide more certainty.

Common law vested rights
The other way to obtain vested rights is by meeting the judicially created requirements for common law vested rights. In order to obtain common law vested rights, a party must show that she reasonably relied on a valid governmental approval in good faith, made substantial expenditures in reliance upon the approval and would suffer harm without it. The key to establishing common law vested rights is determining what constitutes a valid governmental approval. Courts have held that the absence of zoning, for example, constitutes a valid “approval” by which a developer can rely upon in good faith in making expenditures. Similarly, our courts have said obtaining a special-use permit allowing a particular use in a zoning district constitutes an approval that can be relied upon. In fact, special-use permits are now entitled to statutory vested rights. 

In 2010, however, the North Carolina Court of Appeals held in MLC Automotive LLC v. Town of Southern Pines that a landowner could not rely upon numerous letters issued by a local government confirming the owner’s proposed use was permitted “by right” in a zoning district. The facts of MLC Automotive are worthy of discussion.

In MLC Automotive, the plaintiff spent $1.5 million on a 20-acre parcel to develop an auto dealership. On several occasions, before and after closing, the plaintiff obtained written zoning compliance letters from the Town confirming the property was zoned General Business, which allowed “by right,” an auto dealership. This zoning had been in place for more than 20 years. After acquiring the property, the plaintiff began the process of obtaining an initial franchise agreement, conducting site work, preparing plans and discussing the project with planning staff. The plaintiff was informed it would need an architectural permit prior to obtaining any other approvals — none of which governed whether the use was allowed. The plaintiff submitted an initial application, but the decision-making body delayed the application over several months. In the meantime, nearby residents, who were opposed to the project, filed a petition to rezone the property to Office Services, which did not allow automobile dealerships. Ultimately, the Town succumbed to political pressure and rezoned the property. As a result, the plaintiff could no longer develop its auto dealership and lost the franchise agreement. The value of the property was significantly reduced and, at the time of the rezoning, the plaintiff had spent more than $500,000 preparing the property for development. Despite the fact that zoning compliance letters were the only approvals the plaintiff could have obtained regarding the use (because auto dealerships were permitted by right), the higher court in MLC Automotive reversed the trial court’s decision that the plaintiff was entitled to common law vested rights on the grounds that the plaintiff could not rely upon the existing zoning or the zoning-compliance letters in making substantial expenditures.   

The facts and outcome of MLC Automotive demonstrate one of the many problems with current case law governing common law vested rights. On one hand, courts have ruled that the absence of zoning or a special-use permit are enough to constitute a valid governmental approval, but on the other hand, zoning compliance letters indicating a use is permitted by right is insufficient.  This is a distinction without a difference. Indeed, a landowner who has obtained a special-use permit to allow a particular use in a zoning district is in the exact same position, from a use perspective, as a landowner who is entitled to develop a use by right. Why should a landowner be allowed to rely upon no zoning or a special-use permit but not upon zoning-compliance letters? Another, perhaps secondary, lesson learned from MLC Automotive is that disgruntled neighbors or other third parties should not have the power to file rezoning petitions for property they have no legal interest in. To allow it defies both common sense and basic property rights.

Simplifying vested rights
In light of the limited protections now afforded by the statutes granting vested rights and the conflicting case law governing common law vested rights, North Carolina should codify the vested rights doctrine into a simpler statutory framework. At a minimum, applicants should become vested against changes in land-use ordinances or zoning-map amendments at the time they submit their initial application. This approach would be consistent with current case law that requires applications to be reviewed under the rules in effect at the time of submittal. It would further clarify that the applicant is vested in the proposed use and against subsequent amendments. In other words, once an application is submitted, whether it be a site plan, preliminary subdivision plat, building permit, special-use permit or, as in the case of MLC Automotive, an architectural-permit application, the applicant should become vested in the proposed use and the land-use regulations governing that use. Significant investments have already been made at the time an application is filed. During the development-review process, owners and developers should not be subject to the whims of political pressure or a constantly moving target. This simple approach to vested rights could be consistently applied so that the date of vesting is evident to all parties involved. 

Without clear vesting rules, developers will continue to face the uncertainty of doing business when additional investment is desperately needed. Simplification of the vested rights laws would provide certainty to developers, landowners, lenders, investors and companies and would protect their investments against fluctuating land-use policies that are often hastily adopted in response to political pressure. Fortunately, the General Assembly has established a committee to study the issue of property-owner protections and rights, including vested rights. Hopefully, a common-sense approach to vested rights, as outlined above, will be recommended.

 

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