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WINTER 2008 • Vol. XLVII
- Understanding the Costs When Your
Insurance Company Pays For Your Legal Defense
- The Importance of Zoning Due Diligence
- Identity Theft Protection - The
Things You Should Know
- The Firm Highlights
- The Firm News, Appearances and
Articles
The Importance of Zoning Due Diligence
By Andrea Tsoukalas
Contracts for the sale of commercial or vacant
residential property often include a zoning “due diligence”
provision. Such a provision entitles a prospective purchaser,
for a specified time period, to investigate whether the
property and its current or proposed use complies with existing
land use and zoning regulations. If the investigation reveals
that the property is not in compliance with such regulations,
the contract is cancelled and the purchaser’s down
payment is refunded. A purchaser is usually granted this
right so that the seller is relieved of the obligation to
make certain representations about present or future zoning
compliance. As such, due diligence is not only a purchaser’s
right, it is also its obligation. Once the investigation
has been completed and the contract is no longer contingent
on zoning, any mistakes about the property’s status
under land use regulations become the purchaser’s
responsibility.
The relevant question then becomes what level of research
and analysis is appropriate to understand a property’s
legal status. While the nature and extent of such investigation
must necessarily vary from property to property, one thing
is constant– the purchaser who relies solely on the
advice of a public official or on a certificate of occupancy
should tread carefully. The key is looking beyond the obvious
legal status to independently verify that the property complies
with land use and zoning regulations. This investigation
must include a site inspection of the property, a comparison
of the property and the buildings and structures on it to
an updated survey and the latest approved plans on file
in the local building department, the review of current
zoning regulations and zoning maps, any proposed land use
and zoning legislation, and any prior approvals issued by
the various municipal boards. Zoning due diligence does
not include the typical Phase I-Phase II environmental review
for contamination. There are, however, certain environmental
laws, such as wetlands regulations, that do affect the ability
to develop property and these would be included within a
zoning investigation. These are vital steps in determining
a property’s legal status because there are numerous
regulations that can affect the ability to develop property
that can not be discovered from an examination of the building
department file alone.
This heightened level of due diligence is necessary because
in New York there is no “municipal estoppel”.
This means that a municipality may not be prevented from
revoking an improperly issued building permit or certificate
of occupancy or repudiating the advice of a public official
and, therefore, a developer’s reliance on an improperly
issued document is not a defense to its revocation. In the
seminal case, Parkview Associates v. New York, the Court
of Appeals held that New York City’s Building Commissioner
could not be stopped from revoking an improperly issued
building permit for the construction of a high-rise building
on Park Avenue. The permit was issued for a thirty-one story
building when the zoning regulations allowed for only nineteen
stories. Even though the Building Commissioner issued the
stop work order after construction was substantially completed,
no vested rights were conferred upon the owner because the
permit was issued based on an incorrect interpretation of
New York City’s zoning regulations. Parkview confirms
the importance of zoning due diligence and that a developer
cannot uncritically rely upon an assumption of the correctness
of a municipal action.
Property owners are not the only ones who may suffer economically
from this type of misplaced reliance. A lending institution’s
reliance on an incorrect assumption of the development potential
of a property may impair the value of its security interest
and its ability to recover the full amount of the loan in
the event of a foreclosure. For this reason, lending institutions
frequently require a borrower to provide an opinion of counsel
to independently verify the property’s zoning and
that the various governmental approvals were properly issued
and no longer subject to legal challenge.
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