THE
NEXT STAGE OF THE VESTED RIGHTS DEBATE:
THE VIRGINIA SUPREME COURT VALIDATES THE GENERAL ASSEMBLY'S CODIFICATION - AND
MORE - IN SUFFOLK BZA V. CITY OF SUFFOLK
by Marc B. Bergoffen*
INTRODUCTION
Virginia has witnessed record growth over the past decade, both in terms of
economic development and population increases. This upsurge creates a demand
for additional housing and associated development, and real estate developers
attempt to respond to this need. The influx of new residents into a city or
county also causes a heightened demand for local government services, such as
utilities, schools, police, and fire departments.
Localities address the pressure on their services in several ways. In the land use context, the most powerful - but not necessarily the most effective - means by which a locality may attempt to address the burden on its services, is through a legislative downzoning. A downzoning reduces the permissible development density of real property. Although a downzoning diminishes the pressure on government services by restricting growth, it does so at the expense of that real property's value. (1) If a downzoning occurs while a real estate development project is in its early stages, it may preclude the landowner from completing the project.
Can the locality legally prevent the continuation of the project? The answer, as with any area of the law, is "it depends." The VIRGINIA CONSTITUTION protects against the deprivation or impairment of individual property rights, and local governments may not rezone property or impose land use regulations which limit these property rights. At the same time, however, a basic premise in land use law states that a landowner has no right to the continued zoning of his property, and a locality may legitimately rezone property pursuant to its police powers. This begs the question: When is an interest in property a protected property right, and when is it merely an expectation? It is only when a landowner's rights are said to be "vested" that a landowner may continue to develop his property despite a change in the zoning.
Based on the theory of due process, a landowner obtains a vested right to use his property when he relies in good faith and in diligent pursuit of a governmental approval directed to his land. Once a landowner has obtained a vested right and pursues development of his property, a later rezoning will not affect the landowner's right to continue the development already begun. If the landowner does not diligently pursue completion of the project, he is subject to losing this right.
Balancing the respective interests of local governments and private landowners
in the context of vested rights had, for many years, been the role of the courts.
The principal issue these vested rights cases addressed was: At what point in
the development process did a right become vested, such that subsequent governmental
action could not impair it? Over the course of years, however, the loose body
of caselaw on the topic did not provide certainty, and, in turn, landowners
and developers often were reluctant to invest substantial sums of money into
development projects when faced with the possibility of a zoning change by the
locality. This was even more apparent in the urban jurisdictions where the development
processes were detailed, prolonged, and expensive.
In 1998, the General Assembly responded to the need for certainty by enacting a statute, and this past June, the Supreme Court of Virginia was afforded its first opportunity to speak to this statute. In City of Suffolk v. Suffolk Board of Zoning Appeals, 266 Va. 137, 580 S.E.2d 796 (2003), the Court confirmed that the statute created a per se test identifying when vesting occurs, and also gave wider latitude to permit courts and local zoning administrators to interpret various governmental acts as sufficient to vest development rights based on the particular circumstances. A brief overview of the early caselaw in Virginia and the statute is necessary prior to a discussion of the City of Suffolk decision.
BRIEF OVERVIEW OF VESTED RIGHTS IN VIRGINIA
Vested rights were originally part of the common law derived from zoning and
land use cases. In McClung v. County of Henrico(2),
the Virginia Supreme Court first recognized that a landowner obtained a vested
right to continue a building project despite a change in zoning. The Court stated
that the developer obtained a vested right once he had obtained a building permit
and incurred expenses in pursuit of that permit. In a pair of cases thirteen
years later, the Court suggested that the filing of the site plan was the point
in the development process at which rights had vested.(3)
Several years later, the Court changed its position again, stating that vesting
did not occur upon the filing of the site plan or other particular application,
but rather only after the locality granted significant action or permission.(4)
Without specifically identifying which governmental acts were sufficient to
establish such a benchmark, later courts and zoning administrators were forced
to determine a landowner's vested status on a case-by-case basis. This patchwork
of decisions did not specifically identify the stage in the development process
at which a landowner's rights had definitively vested. This provided no legal
guidance to landowners who sought to develop their property, and did so only
at the risk of a zoning change.
THE GENERAL ASSEMBLY PROVIDES CLARITY
In 1998, the General Assembly sought to provide clarity to the issue by passing
Senate Bill 570, which amended Section 15.2-2307 of the CODE
OF VIRGINIA. Incorporating factors
from the prior Virginia cases into a three-part test, the statute provided:
Without limiting the time when rights might otherwise vest, a landowner's rights shall be deemed vested in a land use and such vesting shall not be affected by a subsequent amendment to a zoning ordinance when the landowner (i) obtains or is the beneficiary of a significant affirmative governmental act which remains in effect allowing development of a specific project, (ii) relies in good faith on the significant affirmative governmental act, and (iii) incurs extensive obligations or substantial expenses in diligent pursuit of the specific project in reliance on the significant affirmative governmental act.
The statute further provided examples of certain affirmative governmental acts that it deemed sufficient to satisfy the first prong of the tripartite test. It read:
For purposes of this section and without limitation, the following are deemed to be significant affirmative governmental acts allowing development of a specific project:
(i) the governing body has accepted proffers or proffered conditions which specify use related to a zoning amendment;
(ii) the governing body has approved an application for a rezoning for a specific use or density;
(iii) the governing body or board of zoning appeals has granted a special exception or use permit with conditions;
(iv) the board of zoning appeals has approved a variance;
(v) the governing body or its designated agent has approved a preliminary subdivision plat, site plan or plan of development for the landowner's property and the applicant diligently pursues approval of the final plat or plan within a reasonable period of time under the circumstances; or
(vi) the governing body or its designated agent has approved a final subdivision plat, site plan or plan of development for the landowner's property.
This codification of the common law rule explained and broadened the instances when a landowner had obtained a vested right to develop a specific project not otherwise allowed by a subsequent zoning amendment. The statute also included elements of reliance, diligent pursuit, and expense pursuant to that reliance. These elements were put to the test in the City of Suffolk decision.
THE OPINION AND ITS RAMIFICATIONS
The City of Suffolk case concerned the efforts of the Etheridge Manor Corporation ("Etheridge") to develop property it owned within the City of Suffolk. In 1985, Etheridge purchased a 164-acre parcel of land to develop, in conjunction with an adjoining owner's 146-acre tract, a planned development of mixed use and mixed density residential and associated commercial uses, to be called King's Landing. In 1988, the Suffolk City Council granted Etheridge and the adjoining landowner's request to rezone their collective 310 acres from Rural Residential to Planned Development Housing (PD-H) and approved Etheridge=s Master Land Use Plan of development.
Following the rezoning, the real estate industry fell victim to the recession of the late 1980s and early 1990s. As such, market conditions forced the adjoining landowner to withdraw from the King's Landing project. In 1994, proceeding alone, Etheridge sought to rezone 10 acres of its property from the previously rezoned PD-H district to "General Business" and revised its Master Land Use Plan accordingly. It also sought to reduce the permitted residential density of the remaining 154-acres. The City Council then approved the rezoning and the Amended Master Land Use Plan. Although its Amended Master Land Use Plan did not show the exact location of lots, utilities, or streets, it did fix the total number of proposed units as well as the general location of primary roads, recreation areas, waterways, and entrances to state highways.
In 1995, the City approved Etheridge's preliminary recreation plan and traffic impact analysis, which were based on full residential development of the property. Additionally, the Suffolk Planning Commission approved a preliminary subdivision plat for part of the remaining 154 acres, which was to be known as Planter's Station, and gave Etheridge until 1998 to file a final site plan. Etheridge then completed further engineering of the site in pursuit of a final site plan for King's Landing.
In 1998, Etheridge timely filed its final site plan with the City. The City did not take any action to approve the final site plan application, however, prior to enacting an amendment to its zoning regulations that drastically changed the zoning classifications throughout Suffolk. This Uniform Development Ordinance ("UDO") reclassified all but 10 acres of the Etheridge property, rezoning the 154 acres from PD-H to Commerce Park and Office Institutional.
Recognizing that the UDO conflicted with its Master Land Use Plan for King's Landing, Etheridge sought a determination from the City's zoning administrator as to whether its right to develop King's Landing according to its Master Land Use Plan had vested. The zoning administrator ruled that Etheridge obtained a vested right to develop only the Planter's Station section of the property, but that the remaining portion of the 154 acres were subject to the UDO. Etheridge appealed this determination to the City's Board of Zoning Appeals ("BZA"). The BZA reversed, finding that Etheridge had indeed obtained a vested right to the PD-H zoning. The City then unsuccessfully appealed the BZA decision to the circuit court. In finding for Etheridge, the circuit court held that the elements of Section 15.2-2307 had been met: The 1988 rezoning of the Etheridge property to PD-H constituted a significant affirmative governmental act; Etheridge had expended substantial funds in diligent pursuit of the project; and the expenditures were for the development of the entire King's Landing project.
On appeal to the Supreme Court of Virginia, the City of Suffolk argued that the requirements of the statute had not been met. The City asserted that Etheridge had not obtained a significant affirmative governmental act allowing development of a specific project and had not incurred substantial expenses in diligent pursuit of that specific project; therefore, it was not entitled to develop its property under the pre-UDO regulations.
In its first opportunity to review the 1998 vested rights statute, the Supreme Court held that Etheridge had obtained a vested right to the 1988 rezoning under the vested rights statute. The Court confirmed that 1) Etheridge was indeed the recipient of a significant affirmative governmental act; and 2) Etheridge had expended substantial expenses in diligent pursuit of the King's Landing project.
The Court rejected the City's argument that, although the statute made clear that a rezoning was deemed a significant affirmative governmental act, the statute required that this governmental act be in furtherance of a "specific project." The City contended that because Etheridge had only a general development plan, it could not satisfy the statute. The Court, however, was unaffected by this argument and refused to give such a limited interpretation to the statute. The Court noted that neither the statute nor the previous cases involving vested rights had specifically defined the term "specific project." It reasoned that in those prior instances, the determinative factor was not the lack of a specific development plan, but rather the absence of a significant governmental act that permitted a project to go forward that otherwise had not been allowed. Because the King's Landing project was restricted to PD-H zoning, infrastructure for the entire property had begun to be developed, and, most importantly, the rezoning limited the permitted number of residential units (whereby the development density was fixed), the Court found that the project was sufficiently specific to satisfy the requirements of the statute.
The Court also held that Etheridge had expended substantial sums in the diligent pursuit of completion of the project. Although Etheridge had waited five years to commence development of the property, the Court recognized that Etheridge acted in good faith and in a reasonably diligent manner to complete development of the entire property. (5) Finally, the Court found that the expenditures made by Etheridge on the project were not limited merely to the Planter's Station section, but to the entire property. Concluding that the 1988 rezoning constituted a significant affirmative governmental act and that Etheridge incurred significant expenditures in diligent pursuit of the King's Landing project, the Court affirmed the decision of the circuit court and held that Etheridge had obtained a vested right to develop King's Landing under the prior zoning ordinance.
In a dissenting opinion, three justices disagreed with the majority's conclusions, stating that Etheridge had not in fact satisfied the statute. The dissent agreed with the City's position that the 1988 rezoning did not allow development of a "specific project." The dissent believed that no detailed plan of development was approved prior to the passage of the UDO and the five-year lag between that date of approval and action on the rezoning was not sufficiently diligent pursuit.
Upon examining the intent of the statute, however, as well as the realities of the context in which it is to be applied, it becomes clear that the dissent reads the provisions of the statute too narrowly. Conversely, the majority opinion provides a pragmatic interpretation to the statute, understanding the realities of real estate development, especially in rapidly growing areas of the Commonwealth.
In its discussion of whether the Etheridge rezoning was aimed at a specific project, the majority noted, as previously stated, that the term "specific project" was defined neither by the statute nor by the prior caselaw. A review of the legislative history also shows that the term "specific project" was not elaborated upon in any version of Senate Bill 570 prior to its passage. (6) In finding that the 1988 rezoning was directed to a specific project, the Court found significant that the overall density was fixed pursuant to the Master Land Use Plan, which itself was a plan of development. Although this plan did not specify exactly where every element in King's Landing would be located, the Court found, nevertheless, that it was sufficiently detailed to satisfy the statute. The improvements made by Etheridge in furtherance of its Master Land Use Plan, such as roadways, recreation areas, water, sewer, and stormwater management systems, would benefit the property as a whole. It was therefore reasonable to assume that if there is a development plan that affects the use of the entire property and the density is fixed to a specific number of units, then the right to develop is vested as to the entire property, even if built in phases. This is a logical notion given that most large-scale development projects are built in phases.
In rejecting the City's argument, the majority suggested that adherence to the City's position would run counter to the plain language of the statute. The level of specificity required to satisfy the City=s attributed definition of "specific project," the majority reasoned, might rise to the level of detail found on a site plan. Such an interpretation would revert back to the common law rule in Medical Structures and Cities Service of the 1970s and directly conflicts with several of the enumerated acts deemed under the statute to grant vested status. Accordingly, the majority properly gave a reasonable interpretation of the statute.
The holding of the case stands for the position that when a landowner obtains one of the six enumerated approvals listed in the statute, he is vested. But perhaps more significant than what the Court stated explicitly is what it implied regarding what constituted a significant affirmative governmental act.
The Suffolk Court read the statute to allow a more expansive definition of what constituted a significant affirmative governmental act and a "specific project" than the caselaw had previously found. In ruling that the actions taken by Etheridge satisfied the "specific project" requirement of the statute, the Court recognized that the legislature intended to move back the stage of the development process at which vested rights accrued, compared with the prior caselaw.
McClung, the original vested rights case, stated that a right did not vest until a developer expended sums in reliance on a building permit. The later cases moved the benchmark back to the filing of the site plan. The majority in Suffolk reasoned that given the complexity and duration of the application approval process, and in an effort to balance the respective interests of landowner and locality, the legislature found it necessary to move the point of vesting to an even earlier point in the process. As a matter of policy, waiting until the final stages, when a building permit or even a site plan is to be approved, would be too late. Given the flexibility that the Court gave Etheridge to comply with the statute to account for market conditions, it is reasonable to assume that courts could and should interpret the statute to permit certain governmental approvals, which on their face may not seem to satisfy the first element of the statute, to indeed be significant affirmative governmental acts.
A hypothetical example may highlight this point. A landowner wishes to complete a by-right subdivision of his property. The local jurisdiction requires that certain conditions be satisfied prior to the filing of a preliminary subdivision application. One of the required items is a certification from the director of the county health department that the property is suitable for residential development. To obtain health department approval, the landowner is required to conduct a field survey of the property, perform various soil percolation tests, and dig multiple wells - all at significant expense. Only after the landowner expends significant time and money to obtain pre-application approval from the health department may he even file a preliminary subdivision application. After receiving the health department approval, the landowner completes other work on the property pursuant to this endorsement and in furtherance of the application requirements. Once all of the application items are met, the landowner files the preliminary subdivision application to the county for ministerial review.(7)
If the county approves the preliminary subdivision application, the landowner's right to complete the development is clearly vested. But what happens if the locality rezones the landowner's property after he files the application but prior to its approval? What effect is given to the time and expense devoted to obtaining pre-application approval and preparation of the application? Under the caselaw prior to the statute, the landowner would have no right to complete the project and would be unable able to recoup its investment made into the property. (8)
Under the new statute, however, as interpreted by the Court in the City of Suffolk case, it is a much closer question as to whether the landowner has obtained a vested right. This is especially true since the only step remaining in the process is a ministerial approval. Recognizing that the statute does not specifically limit significant affirmative governmental acts to those enumerated therein, a court, following City of Suffolk, may be able to determine that the pre-application health department approval qualifies as a significant affirmative governmental act, sufficient to vest the landowner's rights.
Depending upon the weight attributed to such pre-application approvals, and whether the court determines that such approvals are integral to permitting an application to go forward, it may find that they are indeed sufficient to meet the first prong of the statute. A court may draw this conclusion if it finds that these pre-application approvals are required, whereby its receipt demonstrates that the course of development has proceeded to such a stage that the locality's interests in rezoning the property are now outweighed by the landowner's investment backed expectations in the specific project.
Whether a court would read such a broad interpretation as to satisfy the first prong of the statute is not definitively clear, but appears reasonable given the direction taken by the Court in City of Suffolk. We may not know for sure until a court has another opportunity to review this issue.
CONCLUSION
The City of Suffolk opinion confirms that once a landowner obtains a
significant governmental approval and thereafter proceeds diligently to complete
the development, subsequent action by the locality will have no effect. In addition
to the specific items illustrated in VA. CODE
§15.2-2307, the case suggests that a significant affirmative governmental
act may arise from local government approvals which are necessary to permit
an application to go forward in the development process. This pragmatic decision
promotes equity, prevents the locality from overloading the regulatory scheme
for development on the front end, and gives certainty to landowners that their
development expectations may be realized. Such flexibility helps strike the
appropriate balance between the competing interests of localities and property
owners, and gives certainty as to the rights of all parties involved. In doing
so, the private real estate development industry may better meet the demands
that increased population brings to a given locality.
*Marc B. Bergoffen is an associate in the Alexandria office of LeClair Ryan. He is a member of the firm's Real Estate Practice Group where he specializes in land use and zoning matters, as well as related real estate transactions.
End Notes
1 All
things being equal, a property's zoning is the single most significant factor
affecting its value.
2 108 S.E.2d 513 (Va. 1959)
3 Board of Supervisors v. Medical Structures Inc.,
213 Va. 355, 192 S.E. 2d 799 (1972)(the Court in Medical Structures also found
significant that there was a special use permit granted); Board of Supervisors
v. Cities Service Oil Co., 213 Va. 359, 193 S.E.2d 1 (1972).
4 Notestein v. Board of Supervisors, 240 Va. 146,
393 S.E.2d 205 (1990)
5 The real estate recession had ended by 1993.
6 See legislative history for S.B. 570, Va. Gen. Assem. (1998).
7 By-right subdivisions are subject only to ministerial approval,
meaning that the county has no discretion and must approve the application if
all application items are present.
8 See Town of Stephens City v. Russell, 399 S.E.2d
814 (Va. 1991).