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Title Insurance Treatment Of
Zoning-Related Regulations And The ALTA Zoning Endorsement
By Beverly J. Quail, Esq.
and Gwendolyn C. Allen, Esq.
Ballard
Spahr Andrews & Ingersoll, LLP
1225 17th Street, Suite 2300
Denver,
Colorado 80202
Introduction
Risks
relating to zoning and other land use regulations are
generally not considered encumbrances or defects on
title and thus are not within the risks covered by title
insurance. Further, the current standard American Land
Title Association ("ALTA") Title Insurance
Policy, the form of policy generally utilized in Colorado,
expressly excludes coverage for loss caused by laws,
ordinances, or governmental regulations affecting land
use. Despite this exclusion, an insured may obtain some
degree of protection by purchasing the standard zoning
endorsement for either raw or improved land, ALTA Form
3 and ALTA Form 3.1 respectively, copies of which are
attached at Addendum A. However, this expensive endorsement,
at a cost in Colorado of approximately twenty-five percent
of the schedule or basic rate, may not afford the protection
most purchasers of such endorsements may expect. This
article outlines some of the basic problems inherent
in the title insurance treatment of zoning and related
matters, including problems with the standard zoning
endorsement.
Zoning
Matters Fall Outside The Scope Of Coverage
Courts
considering the issue generally hold that zoning and
related matters are not risks within the coverage afforded
by title insurance. This is true even in the absence
of an express exclusion for losses relating to such
matters. Title companies argue, and courts generally
agree that zoning and land use regulations do not create
encumbrances on or defects in title and thus do not
come within the risks covered by title insurance. Courts
often point to the distinction between restrictions
on title, which affect marketability of title and are
covered by title insurance, and restrictions on use
of the land, which affect economic marketability and
are not covered. The key distinction appears to be whether
the restriction relates to defects affecting the legally
recognized rights and incidents of ownership or merely
relates to conditions affecting the use of the land.
Simply put, courts do not consider land use regulations
to be title matters and an owner or lender insured by
an ALTA Title Policy generally has no right to coverage
relating to the value of the property, the manner in
which it can be used, permit requirements, zoning compliance,
or other land use matters.
Zoning
Matters Are Excluded From Coverage
Out
of concern that insureds were making claims against
title companies based on zoning matters, an express
exclusion was developed and added to the ALTA policies
to make it clear that such matters are not covered.
Thus, even if it is determined that the land use matter
complained of is a risk that should generally be covered
by title insurance, the insured faces a broadly worded
and consistently enforced exclusion. The standard title
insurance policy excludes all loss or damage arising
by reason of:
1(a) Any
law, ordinance or governmental regulation (including
but not limited to building and zoning laws, ordinances,
or regulations) restricting, regulating, prohibiting
or relating to (i) the occupancy, use, or enjoyment
of the land; (ii) the character, dimensions or location
of any improvement now or hereafter erected on the
land; (iii) a separation in ownership or a change
in the dimensions or area of the land or any parcel
of which the land is or was a part; or (iv) environmental
protection, or the effect of any violation of these
laws, ordinances or governmental regulations, except
to the extent that a notice of the enforcement thereof
or a notice of a defect, lien or encumbrance resulting
from a violation or alleged violation affecting
the land has been recorded in the public records
at Date of Policy.
1(b) Any
governmental police power not excluded by (a) above,
except to the extent that a notice of the exercise
thereof or a notice of a defect, lien, or encumbrance
resulting from a violation or alleged violation
affecting the land has been recorded in the public
records at Date of Policy.
Although
case law interpreting this exclusion is limited, several
cases have applied the referenced zoning or police powers
exclusion. For example, unrecorded setback requirements
fall within the exclusion and title insurers will not
be held liable for damages resulting therefrom. Instead,
the law imposes the burden on buyers to investigate
and comply with local ordinances and land use resolutions
affecting the purchased property. Likewise, an unrecorded
notice of housing code violations falls within the exclusion.
Violations of subdivision regulations are also excluded
from coverage, as are certificate of occupancy violations,
denial of permits, location within a flood plain zone,
existence of a special district, violation of local
improvement ordinances or other municipal ordinances,
and effects of environmental laws and ordinances.
Ironically,
the current printed zoning or police powers exclusion
may actually provide more coverage under the policy
than was available according to case law prior to the
development of the exclusion. The exclusion allows coverage
where notice of enforcement or of a lien, defect or
encumbrance resulting from a violation or alleged violation
of the laws, ordinances, or governmental regulations
otherwise excluded from coverage has been recorded in
the public records. However, under the standard ALTA
Policy, this exception to the exclusion only operates
to provide coverage where such notice is recorded in
those records established by statute as imparting constructive
notice of matters relating to real property.
Zoning
Endorsement Protection is Limited
Due
to complaints and criticism of the results discussed
above, the zoning endorsements set forth in Addendum
A were developed to provide some limited protection
for insureds. By the terms of the applicable standard
zoning endorsement, the insured is protected if (a)
the zoning classification is other than as set forth
on the endorsement, (b) the uses expressly listed as
permitted are prohibited, unless such prohibition is
the result of some lack of compliance by the insured,
or (c) the alteration or removal of existing structures
is required as a result of zoning matters.
Only
violations of zoning classifications and permitted uses
are covered by the endorsements. Other potential problems
associated with government requirements or restrictions,
such as violations of subdivision regulations, environmental
ordinances, and similar regulations or the need for
special permits as discussed above, remain excluded.
Land use controls, which have effects similar to zoning,
are nonetheless excluded if not technically considered
zoning.
In
addition, the endorsement offers protection only as
to the zoning and permitted uses as of the date of the
policy. Restrictions affecting buildings or other improvements
added after the date of the policy, such as setback,
height, or area restrictions or the right to continue
nonconforming uses are not covered. Title companies
simply do not insure effects of future zoning or other
land use regulations. Further, even if the zoning ordinances
in place as of the policy date are subsequently invalidated,
thereby prohibiting uses which are listed in the endorsement
as permitted, the insured will be protected only if
a court enters a "final decree" as to the invalidity,
meaning all administrative remedies must be exhausted.
Sellers
Are Not Covered
Not
only is the coverage provided by the zoning endorsement
limited as discussed above, in most jurisdictions, no
protection is afforded the seller of the insured property
by the title policy or the endorsement. Although the
seller often pays for the title policy, the seller is
generally neither an insured nor a third party beneficiary
of such policy. Thus, the seller cannot rely on the
completeness of the title policy's listed exceptions
or on any endorsements regarding zoning. Instead, the
Seller must undertake an independent investigation to
ensure the accuracy of any representations or warranties
given to the purchaser relating to land use issues in
its contract or deed.
Illustration
The
following example illustrates many of the problems discussed
herein. In a recent case in Colorado that was settled
before any decision on the legal issues could be rendered,
a title company failed to list in the owner's title
policy a recorded agreement between the city
and the seller regarding the obligation to convey water
rights before additional development could occur. Following
the closing, the city required the owner to convey certain
water rights to it. The owner sued the seller for misrepresentations
allegedly made in the purchase agreement regarding the
existence of agreements or restrictions concerning the
property. The seller joined the title company, asserting
that the title policy covered any damages associated
with the water rights agreement and that the title company
had been negligent in failing to disclose the agreement.
The title company argued, among other things, that (a)
the seller had no standing to assert claims under the
title policy as it was neither an insured nor a third
party beneficiary; (b) the restriction was part of the
general land development regulations and was therefore
not an encumbrance on title or title defect subject
to coverage; (c) the restrictions were excluded from
coverage as government regulations; (d) even to the
extent the restrictions could be deemed a covered encumbrance,
the water charges were imposed subsequent to the date
of the policy and therefore no coverage could be afforded;
and (e) that it could not be held liable in negligence
as it had no duty to find or disclose the terms of the
city's water policy or any particular restrictions regarding
water rights. Based on the limited case law in this
area as discussed above, any or all of these arguments
might have protected the title company from liability.
On the other hand, if the restriction arose from a recorded
agreement between the city and the landowner, rather
than from an ordinance, regulation, or city policy,
it should likely have been a covered encumbrance. In
this particular case there was a zoning endorsement,
but it provided no protection because it only insured
that the land was zoned for office use.
Conclusion
Given
the courts’ position that zoning matters fall outside
the types of risks meant to be covered by title insurance,
the express exclusion dictating that such risks in fact
are not covered, and the limited yet expensive protection
afforded by a zoning endorsement, buyers and lenders
alike would be wise to look beyond title insurance for
protection. At the very least, a buyer should seek representations
from its seller regarding compliance with zoning matters
and should insist on disclosure of any unrecorded restrictions
relating to the property. In certain circumstances purchasers
and lenders should also obtain a survey with a certification
regarding zoning matters and, where available, a letter
from local zoning authorities addressing not just zoning
classifications, but any restrictions on development.
Unfortunately, several local development authorities
in Colorado consistently refuse requests for zoning
letters. Buyers’ or lenders’ counsel may be well served
to undertake a due diligence review of the ordinances,
regulations and agreements on record before advising
their clients as to the status of zoning matters. Although
the zoning endorsements generally provide scant protection,
where use and zoning issues in effect at the time of
the policy are uncertain or the planning authority’s
records are in disarray, obtaining an endorsement is
probably worth the price. In any event, practitioners
should ensure that their clients understand the limited
nature of the protection afforded and that the protection,
such as it is, will only cover compliance with certain
regulations in effect as of the policy date and will
not protect against subsequent changes to those restrictions.
Addendum
A
ENDORSEMENT
(ALTA
Endorsement – Form 3 (Zoning) (10/17/98))
Attached
To Policy No. ___
Issued
By ___________________
The
Company insures the insured against loss or damage sustained
in the event that, at Date of Policy:
- According
to applicable zoning ordinances and amendment thereto,
the land is now classified Zone ____________________________.
- The
following use or uses are now allowed under that classification:
There
shall be no liability under this endorsement based on:
- Lack
of compliance with any conditions, restrictions or
requirements contained in the zoning ordinances and
amendments thereto mentioned above, including but
not limited to the failure to secure necessary consents
or authorizations as a prerequisite to the use of
uses.
- The
invalidity of the ordinances and amendments thereto
mentioned above until after a final decree of a court
of competent jurisdiction adjudicating the invalidity,
the effect of which is to prohibit the use or uses.
- The
refusal of any person to purchase, lease or lend money
on the estate or interest covered by this policy.
This
endorsement is made a part of the policy and is subject
to all of the terms and provisions thereof and of any
prior endorsements thereto. Except to the extent expressly
stated, it neither modifies any of the terms and provisions
of the policy and any prior endorsements, nor does it
extend the effective date of the policy and any prior
endorsements, nor does it increase the fact amount thereof.
IN
WITNESS WHEREOF, the Company has caused its corporate
name and seal to be affixed hereto by its duly authorized
officers.
By:
ENDORSEMENT
(ALTA
Endorsement – Form 3.1 (Zoning – completed structure)
(10/17/98))
Attached
To Policy No. ___
Issued
By ___________________
- The
Company insures the insured against loss or damage
sustained in the event that, at Date of Policy:
- According
to applicable zoning ordinances and amendments thereto,
the land is now classified Zone ______.
- The
following use or uses are now allowed under that
classification:
and
there shall be no liability under this paragraph
1(b) if the use or uses are not allowed as a
result of any lack of compliance with any conditions,
restrictions, or requirements contained in the
zoning ordinances and amendments thereto mentioned
above, including but not limited to the failure
to secure necessary consents or authorizations
as a prerequisite to the use or uses.
- The
Company further insures the insured against loss or
damage arising from a final decree of a court of competent
jurisdiction
- prohibiting
the use of the land, with any structure presently
located thereon, as insured in paragraph 1(b); or
- requiring
the removal or alteration of the structure
on
the basis that, at Date of Policy, the ordinances
and amendments thereto have been violated with
respect to any of the following matters:
- Area,
width or depth of the land as a building
site for the structure;
- Floor
space area of the structure;
- Setback
of the structure from the property lines
of the land;
- Height
of the structure; or
- Number
of parking spaces.
There
shall be no liability under this endorsement based on:
- The
invalidity of the ordinances and amendments thereto
mentioned above until after a final decree of a
court of competent jurisdiction adjudicating the
invalidity, the effect of which is to prohibit the
use or uses.
- The
refusal of any person to purchase, lease or lend
money on the estate or interest covered by this
policy.
This
endorsement is made a part of the policy and is subject
to all of the terms and provisions thereof and of any
prior endorsements thereto. Except to the extent expressly
stated, it neither modifies any of the terms and provisions
of the policy and any prior endorsements, nor does it
extend the effective date of the policy and any prior
endorsements, nor does is increase the face amount thereof.
IN
WITNESS WHEREOF, the Company has caused its corporate
name and seal to be affixed hereto by its duly authorized
officers.
By:
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