Stick to the Plan

The Vested Property Rights Act of 2014 Creates More Certainty for Developers

As the Great Recession fades, there is construction everywhere. New subdivisions are sprouting in the suburbs. Infill development is a growing phenomenon in established areas of municipalities. Commercial development is struggling to keep up with the new and expanding businesses and their space needs.

The pace of such development poses challenges for municipal and county officials charged with ensuring that each development is safe, environmentally sound and compatible with the surrounding neighborhood. Enforcement of zoning, building and environmental rules often brings municipal and county officials into conflict with developers.

Development of property requires planning and financing. Developers base their plans on the cost of compliance with existing zoning, building and environmental rules. When any of these rules is changed while a project is underway, the change can add significant cost to the project, rendering some projects impossible to implement or to complete as planned.

Developers are faced with a broad array of rules with which they must comply. While such compliance is a part of doing business, it is especially frustrating for developers when the rules change while a project is underway.

Several recently enacted municipal ordinances regulate, in minute detail, features such as the size and street orientation of homes and garages, the façade materials required in the portions of the home visible from the street, the size of porches and windows, the materials used in fences and walls, and the location of off-street parking at a home. Because large subdivisions are usually built over a period of several years, the implementation of such new requirements can dramatically change the cost and design of projects “midstream” despite previous approval by a local government.

The plans for residential and commercial developments are subject to review and approval by local government officials. For large projects, a concept plan is usually approved first, followed by the later approval of preliminary and final plans for various stages of the project. Building permits are later issued allowing the construction of individual homes and commercial buildings.

In this complex environment, conflicts between developers and local officials usually center on the imposition of unanticipated requirements on a particular development. Developers contend that, at some point in the approval process, the requirements applicable to that development must become final and not subject to change. The challenge is to determine the point in time at which the developer’s rights become “vested.”

For almost 75 years Tennessee courts have struggled, without much guidance from the General Assembly, to determine when a developer’s rights become vested. After three years of thoughtful deliberation and extensive discussion among legislators and interested parties, the legislature has provided the missing guidance by adopting Public Chapter 686, known as the Vested Property Rights Act of 2014.

This article traces the development of Tennessee’s common law governing vested rights, then summarizes the key provisions of Chapter 686, which becomes effective on Jan. 1, 2015.

Common Law Principles Governing ‘Vested Rights’

Beginning in 1940, the Tennessee Supreme Court has addressed the subject of “vested rights” in a series of decisions that established common law principles that have been applied by the lower courts whenever a developer claimed to have a “vested right.”

The first case to tackle the subject of “vested rights” was Howe Realty Co. v. City of Nashville,[1] in which a contractor obtained a permit to build a filling station on West End Avenue in a largely residential neighborhood. Within two hours of the issuance of the permit a controversy erupted and the city cancelled the permit. In the next two weeks the City Council passed an ordinance changing the zoning classification of the property from commercial to residential. A lawsuit ensued.

The Tennessee Supreme Court held that the city had the authority to cancel the permit because Shell Oil Company had not “expended any money, incurred any obligations, or done any work on this property after the permit was issued.”[2] The court concluded that “the status of the parties was not changed as a result of the issuance of the permit.”[3]

The term “vested right” was first used by the Supreme Court in Howe. The court said “that a building permit has none of the elements of a contract and may be changed or revoked any time before the party to whom it was issued has acquired a vested right thereunder.”[4]

Twenty-five years later, in Schneider v. Lazarov,[5] the Supreme Court confronted a similar issue, this time in Shelby County. A developer obtained permission from the county to build a high-rise apartment building on property located in an area of the county (outside the city of Memphis) that was zoned “Agricultural.” Before construction began, the City of Memphis annexed the area in which the property was located and zoned the area “R-1, single family.”

The Supreme Court reaffirmed the principles of law established in Howe, holding: “Where the landowner has done nothing subsequent to obtaining a permit, he is usually held to be bound by any change in the zoning ordinance, even if its effect is to nullify the permit.”[6]

Seventeen years after Schneider, in State ex rel. SCA Chemical Waste Services Inc. v. Konigsberg,[7] a hazardous waste management company applied for a grading and building permit that would allow the construction of a chemical waste treatment plant on property in Shelby County zoned “Heavy Industrial.” Before the application was acted upon, Memphis and Shelby County (acting jointly) adopted a comprehensive new zoning ordinance that would require a special permit for “refuse processing, treatment and storage” facilities and would take effect less than three months after the application was submitted. The Shelby County Board of Commissioners passed a resolution directing the chief building officer of Shelby County not to issue a grading and building permit to SCA Chemical Waste Services until the new ordinance took effect.

Before the new ordinance took effect, the company filed suit, seeking to force the county to issue the grading and building permit under the existing ordinance. The Supreme Court observed that the company “was engaged in a race to avoid the more stringent zoning and permit requirements for the operation of hazardous waste treatment plants” and that the county “had authority to suspend the issuance of permits for such construction pending the effective date of its new joint ordinance resolution”[8] because it is “well settled that rights under an existing ordinance do not vest until substantial construction or substantial liabilities are incurred relating directly to construction.”[9]

Twenty-five years after its decision in Konigsberg, in Harding Academy v. Metropolitan Government of Nashville and Davidson County,[10] the Supreme Court reaffirmed the principles of law set forth in Howe, Schneider and Konigsberg, but reached a different result than the court had reached in those cases. The Metropolitan Government issued nine demolition permits to a private school (Harding Academy), which sought to expand its campus by acquiring and demolishing homes near the campus for use as athletic fields. Two days after the permits were issued, the city revoked the permits because an application proposing a zoning change had been filed with the Metropolitan Planning Commission. The only action that had been taken on the application was to schedule and publicize a hearing before the Historic Zoning Commission.

The Supreme Court examined the propriety of Nashville’s revocation of the demolition permits, which the city defended as proper under the “pending ordinance” doctrine. The court noted that this doctrine was the basis of its decision in Konigsberg. The court then distinguished its holding in Konigsberg because in Harding Academy the proposed ordinance had not been referred by the Planning Commission or the Historic Zoning Commission to the legislative body (Metropolitan Council) before the demolition permits were issued to the school. Thus, the proposed ordinance was not “sufficiently pending” to justify use of the “pending ordinance” doctrine as a justification for the revocation of the permits.

The court noted that Harding Academy had not acquired any vested rights in the demolition permits because they were revoked before the school had spent “a substantial sum of money in reliance on the permits.”[11] But the court then observed that “Metro’s unlawful revocation of the demolition permits prevented Harding from acquiring vested rights.”[12] The court then held “that Harding must be given a reasonable opportunity to demolish the structures when Metro reissues the permits.”[13]

In 2012, in CK Development LLC v. Town of Nolensville,[14] the Tennessee Court of Appeals undertook to explain the doctrine of “vested rights” in more detail than the Supreme Court had done in any of its decisions. The facts of CK Development are quite different from most of the “vested rights” cases decided previously by the Supreme Court and the Court of Appeals in that CK Development involved a change in road standards, not a change in zoning.

In 2003 CK Development submitted a Concept Plan for a Planned Unit Development (PUD) in Nolensville. The Concept Plan noted that the roads to be built in the PUD would meet the road standards adopted by the Town of Nolensville in 2003. The homes in the PUD were to be built in phases. Each phase of the PUD had to be approved by the Planning Commission. The town’s road standards were upgraded in 2007 by requiring thicker coats of asphaltic concrete.

In 2009 CK Development submitted to the Planning Commission its final plan for Phase 7 of the PUD. The Planning Commission approved this plan, with the condition that the roads in Phase 7 had to be built to the 2007 road standards. Because compliance with the 2007 road standards would add about $25,000 to the cost of these roads, CK Development objected to this condition, arguing that it had a vested right to construct the roads in accordance with the 2003 road standards, which were referenced in its originally approved Concept Plan.

The trial court ruled in favor of CK Development, holding that the company “had vested rights significant enough to rely upon the original PUD plan approval [and] that a change in the roads would jeopardize the project financially.” On appeal, though, the Court of Appeals reached a different conclusion.[15]

The Court of Appeals observed that, like the majority of states, Tennessee requires “issuance of a building permit, plus substantial construction and/or expenditures, before a right to develop vests.” The court noted that most states also “require a showing of reliance by the landowner on prior zoning or government action,” which the court said usually takes the form of “a building permit or other final approval.”[16]

The court framed the issue in this case as follows:

The determinative question in this appeal is whether CK Development acquired a vested right in the road standards (2003 standards) that were in effect when the Concept Plan was approved in 2004 so that the city could not (in 2009) require CK to build roads in the unconstructed phases of the development in conformance with the new standards (2007 standards).

The court held that CK Development did not have a vested right to build the roads in Phase 7 in accordance with the 2003 road standards for the following reasons:

  1. The Planning Commission’s 2003 approval of the Concept Plan for the PUD was conditional, subject to modifications, and required additional approval of specific plats. CK Development had not received final approval of Phase 7 prior to the Town’s adoption of the 2007 road standards.
  2. CK Development did not reasonably rely on any final government approval establishing road standards that was not subject to modification for unbuilt phases of the PUD.
  3. CK Development had not made substantial expenditures or incurred substantial liabilities directly related to construction in Phase 7 at the time of the Planning Commission’s action in 2009.
  4. Lost profitability or the potential of decreased profits does not qualify as a substantial expenditure or liability related to construction.
  5. The company’s expenditures in prior phases of the development do not qualify as significant expenditures related to the construction of Phase 7. The court rejected the company’s argument that the PUD should be treated as a “single project” and that once it started developing the first portion of the PUD, it would have a vested right as to all matters addressed in the original Concept Plan.

In footnote 4 of its opinion, the court stated that “some states provide by statute that a developer has vested rights for a certain number of years against changes in zoning once it receives preliminary approval for its development,” citing New Jersey and Michigan statutes, and then noted that “Tennessee has not adopted such a statute.” Two years after the court’s decision in CK Development the General Assembly filled this gap by the adoption of Chapter 686, the Vested Property Rights Act of 2014.

The Vested Property Rights Act of 2014 (VPRA)

Developers want fixed rules and protection from changes in these rules, while local governments want flexibility to alter rules as they think appropriate. These conflicting concerns were debated and discussed at length by interested parties during the last three legislative sessions. The members of the Tennessee General Assembly listened to this debate and then made the ultimate decision concerning the language of the new statute.

The challenge was to craft a statute that offers landowners and developers some certainty when engaged in development projects, while retaining local government authority to protect the public interest. The task sounded simple, especially if the laws of other states could serve as a guide. However, the “devil is always in the details,” and the task consumed three years before a bill was finally passed. A vested rights law had to recognize and address the concerns of both developers and local governments as they work toward their shared goal of economic development.

The result of the parties’ efforts is a new Tennessee vested rights statute that provides clarity and certainty to both developers and local governments. In general, the new law adopts certain rules that developers and local governments must follow during the development process. Specifically, the new law details the “trigger” that determines when rights become vested, the length of the vesting period, the rules that become vested after the trigger, the occurrences that may terminate vesting, and the way in which various changes surrounding the project may impact vesting.

The VPRA has two sections with almost identical language. The first section amends Tenn. Code Ann. §13-3-413, which governs the power of regional planning commissions to adopt various types of development regulations. The second section amends Tenn. Code Ann. §13-4-310, which governs the power of municipal planning commissions to adopt various types of development regulations.

Trigger and Vesting Period

Under the new law, the vesting of a developer’s rights is triggered by the local government’s approval of a “preliminary development plan.” The specific makeup of a preliminary development plan may be determined by the local government, but it must be consistent with the definition of a “preliminary development plan” in Tenn. Code Ann. §13-3-413(k)(6) and Tenn. Code Ann. §13-4-310(k)(6). If a preliminary development plan is not required for a particular development, then vesting is triggered by the local government’s approval of the building permit or the final development plan.

After a developer’s rights have become vested, the developer has three years to obtain final approval of the project, secure the required permits, and commence site preparation. If all of these conditions are met, the developer has an additional two years to commence construction. Once the developer begins construction, the development standards for a single-phase project are vested until project completion or for a maximum period of 10 years, so long as the developer maintains all required permits.[17]

Due in part to the rapid growth some cities and counties are experiencing, developers are planning larger projects with multiple phases to meet the increased demand. These large-scale projects can take years to complete. For that reason, a multi-phase project is treated slightly different than a single-phase project. Multi-phase projects will have a separate vesting period for each phase (three  years to meet the requirements and two years to commence construction). However, the development standards that vest under the initial approval of the first phase will remain the development standards throughout the additional phases. Regardless of the number of phases, the total vesting period for a multi-phase project shall not exceed 15 years and the developer must maintain all required permits.[18]

Rules That Vest

Under the VPRA, local development standards that are in place at the time of preliminary plan approval will be vested (or frozen) during the vesting period. These development standards include all locally adopted (or enforced) rules, standards, regulations or guidelines applicable to the development of the property. Some examples are local storm water requirements, project layout and design, and local construction standards for buildings, streets, curbs and sidewalks. Any off-site improvements that are to be made during the project, such as improvements to public or private infrastructure, will also vest with the project. It is important to note, however, that vesting does not apply to building construction and safety standards that are required by federal or state law.[19]

After the local standards become vested, the developer is not completely insulated from the exercise of certain police powers by the local government, from changes in state and federal law or from circumstances where the public welfare must be protected by changing the standards that have become vested. However, in order to change a development standard that has become vested, the burden is on the local government to show that there is a “serious threat to the public health, safety or welfare” that cannot be mitigated through changes by the developer within the developer’s vested rights.[20]

The new law does not preclude a local government from exercising its eminent domain powers during the vesting period or from instituting a moratorium on development (if allowed by law), but the developer’s vesting period is tolled during a moratorium.[21] A local government maintains the authority to enforce laws as required by the state or federal government and to undertake actions necessary to comply with new state and federal laws or rules enacted during the vesting period.[22]

Changes in zoning ordinances and questions of zoning authority are often a source of controversy between the developer and the local government. Under the VPRA, the local government retains the authority to exercise its overall zoning power. However, where the effect of a change in zoning would have a negative impact on a vested project, the new law precludes the zoning change during the vesting period. If the project is vested at the time of a change in the zoning ordinance, the project is governed by the applicable provisions of the zoning ordinance that were in effect at the time of preliminary plan approval.[23]

Tennessee Court of Appeals Decisions Applying ‘Vested Rights’ Principles of Law

  • Moore v. Memphis Stone & Gravel Co., 339 S.W.2d 29 (Tenn.App.1959).
  • Jones v. City of Milan Board of Zoning Appeals, 1985 WL 4309 (Tenn.App.1985).
  • Chickering Ventures Inc. v. Metropolitan Government of Nashville and Davidson County, 1988 WL 133527 (Tenn.App.1988).
  • PEP Properties v. Town of Farragut, 1991 WL 50211 (Tenn.App.1991).
  • State ex rel. First American National Bank v. City of Franklin Municipal Planning Comm’n, 1996 WL 122182 (Tenn.App.1996).
  • Far Tower Sites LLC v. Knox County, 126 S.W.3d 52 (Tenn.App.2003).
  • Rutherford v. Murray, 2004 WL 1870066 (Tenn.App.2004).
  • Westchester Company LLC v. Metropolitan Government of Nashville and Davidson County, 2005 WL 3487804 (Tenn.App.2005).
  • Smith County Regional Planning Comm’n v. Hiwassee Village Mobile Home Park LLC, 2008 WL 3343001 (Tenn.App.2008).
  • Capps v. Metropolitan Government of Nashville and Davidson County, 2008 WL 5427972 (Tenn. App. 2008).
  • Cheatham County v. Cheatham County Board of Zoning Appeals, 2012 WL 5993757 (Tenn.App.2012).
  • Blevins v. City of Belle Meade, 2013 WL 6200183 (Tenn.App.2013).

Changes in the Development Plan

During the course of a project, unforeseen changes to the project may occur. The new law addresses the effect they will have on the vested property rights of the developer.
If there is a change in property owner or developer, local development standards in which the initial developer obtained a vested right will “run with” the property until project completion or the end of the vesting period. This provision will be helpful in instances where a developer loses funding or is unable to complete a project. It allows for the purchase of the project “as is” and does not require the new developer to start over in the approval process, thus avoiding further delays in project completion.[24]

Prior to project completion, the developer and the local government may be required to respond to changed circumstances. To adapt to the changed circumstances and allow the project to proceed, a development plan may need to be amended. Any amendments to the development plan must be approved by the local government. The local government may deny an amendment if it alters the proposed use of the project, increases the overall area of the project, or alters the size of any nonresidential structures that were included in the approved development plan. If the amendment request is denied by the local government, the developer has two options. The developer may proceed under the approved plan and thus retain the vested property rights for the project. Or the developer may terminate the existing vested rights for the project and submit a new application.[25]

Termination of Vested Rights

To discourage any bad faith actions by developers and to protect the public interest, there are triggers in the VPRA that terminate a developer’s vested rights. Once a project has been approved and the development standards have become vested, if a developer does not progress toward project completion and maintain all necessary permits, then the vested rights for that project will terminate. If the developer violates any of the terms and conditions laid out in the approved development plan or makes any material misrepresentations to gain project approval, the developer’s vested rights are terminated. However, prior to termination in this instance, the developer is given 90 days to address the problem and cure the violation. If the local government determines that there is a hazard or a compelling public interest related to the vested project that seriously threatens public health, safety or welfare, vested rights may be terminated if the threat cannot be mitigated in a reasonable period of time.[26]

Conclusion

Recent years have witnessed rapidly accelerating economic growth in many parts of Tennessee, creating demand for new subdivisions and new commercial space to accommodate expanding businesses and their employees. The rapid pace of this new development has exacerbated the conflicts between local governments and developers over local development standards and the power of the local government to change those standards before project completion.

Prior to the passage of the VPRA, developers and local governments have been forced to resolve these conflicts through lengthy and costly litigation. The courts were forced to examine the facts of each case and determine whether the developer had made “substantial expenditures” or incurred “substantial liabilities” on the project sufficient to give the developer “vested rights.”

Beginning Jan. 1, 2015, the VPRA will give landowners and developers the assurance that the local development standards in effect at the time of approval of their preliminary development plan will remain the standards to which they must adhere during the completion of their project, while still preserving for local governments the authority needed to protect the public interest.

Notes

  1. 176 Tenn. 405, 141 S.W.2d 904 (1940).
  2. 141 S.W.2d at 906.
  3. Id.
  4. Id.
  5. 216 Tenn. 1, 390 S.W.2d 197 (1965).
  6. 390 S.W.2d at 201.
  7. 636 S.W.2d 430 (Tenn. 1982).
  8. 636 S.W.2d at 436-437.
  9. 636 S.W.2d at 437.
  10. 222 S.W.3d 359 (Tenn. 2007).
  11. Id.
  12. Id.
  13. Id. at 368.
  14. 2012 WL 38287 (Tenn.App. 2012).
  15. Before stating its holding in CK Development, the Court of Appeals set forth the principles of law constituting the “vested rights” doctrine. The court called the “vested rights principle” a “Constitution-based limitation on government actions that interfere with a landowner’s use of his or her land.” The court then quoted the following passage from a 2006 article published in the Indiana Law Review, which gives an excellent overview of the competing considerations inherent in applying the “vested rights” doctrine:

    A vested right is defined as a right which the law recognizes as having accrued to an individual by virtue of certain circumstances and that as a matter of constitutional law cannot be arbitrarily taken away from that individual. The law of vested rights balances, on one side, the competing interests of the individual’s desire for lower development costs and certainty for investment purposes. On the other side rests the public’s interest in controlling land-use and land-use planning [as exercised through the government’s police power]. Vested rights is really a mechanism which draws a line between legislative flexibility and the power to regulate land use and a landowner’s right to use, enjoy, and develop his property in a way that maximizes its value. In determining on what side of this line a development will be placed, the law of vested rights focuses upon the acquisition of real property rights which are sufficient to continue with development without interference from subsequently enacted regulations.

    The vested rights doctrine attempts to provide certainty as to when a developer will be protected from any new government regulation. Courts have concluded that, at some point during development, a level of commitment is reached at which time it would be unfair to halt any further development. The doctrine developed from the law of nonconforming uses. The doctrine makes guarantees that developers may proceed with a project unaffected by government interference after a certain point in the development process. Of course property rights are not absolute, and a municipality must be able to enact new ordinances that affect landowners so as not to preclude development and fix a city forever in its primitive conditions. However, at some point it is necessary to give the developer assurance that the proposed project can continue without retroactive application of new zoning laws.

    Kalachnik, Tyhler J., “Try to Vest, Try to Vest, Be our Guest: The Vested Rights Conflict in Indiana Creates a Unique Solution for All,” 39 Indiana Law Review, 417, 421 (2006) (internal quotations and citations omitted).
  16. In Ready Mix USA LLC v. Jefferson County, 380 S.W.3d 52, 65n.18 (Tenn. 2012), the Supreme Court quoted with approval Judge Cottrell’s opinion in CK Development, stating: “In sum, reliance on the vested rights doctrine requires ‘issuance of a building permit, plus substantial construction and/or expenditures.’” The Supreme Court’s holding in Ready Mix was based on the pre-existing, non-conforming use statute, so its comments about “vested rights” are dicta in the context of that case.
  17. Tenn. Code Ann. §13-3-413(d)(1) and (2); Tenn. Code Ann. §13-4-310(d)(1) and (2)
  18. Tenn. Code Ann. §13-3-413(d)(3); Tenn. Code Ann. §13-4-310(d)(3).
  19. Tenn. Code Ann. §13-3-413(k)(4); Tenn. Code Ann. §13-4-310(k)(4).
  20. Tenn. Code Ann. §13-3-413(g)(1); Tenn. Code Ann. §13-4-310(g)(1).
  21. Tenn. Code Ann. §13-3-413(g)(2) and (4); Tenn. Code Ann. §13-4-310(g)(2) and (4).
  22. Tenn. Code Ann. §13-3-413(g)(1); Tenn. Code Ann. §13-4-310(g)(1).
  23. Tenn. Code Ann. §13-3-413(g)(3); Tenn. Code Ann. §13-4-310(g)(3).
  24. Tenn. Code Ann. §13-3-413(j); Tenn. Code Ann. §13-4-310(j).
  25. Tenn. Code Ann. §13-3-413(h); Tenn. Code Ann. §13-4-310(h).
  26. Tenn. Code Ann. §13-3-413(f); Tenn. Code Ann. §13-4-310(f).

JENNIFER J. LACEY is a 2004 graduate of the University of Tennessee College of Law. She is currently Of Counsel with Farris Bobango PLC, where she concentrates her practice in government affairs and public policy. Her law firm represents the Home Builders Association of Tennessee.

JOHN P. WILLIAMS is a member of the Nashville law firm Tune, Entrekin & White, P.C., which represents the Home Builders Association of Middle Tennessee. He is a 1972 graduate of Vanderbilt University Law School.

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