January 1, 1900

Anne L.H. Studholme

If you buy a partially-completed development, can you proceed under the old laws, or will newly adopted laws apply? Are your approvals still good when you resume construction on a multi-stage project that has been mothballed for financial reasons? The precise answer depends on the facts of your case, but what often gets overlooked is an important piece of the puzzle called "vested rights."

What Are Vested Rights?

In New Jersey, the term "vested rights" has come to be used for three very different things: First, the Municipal Land Use Law (MLUL) insulates projects from zoning changes for up to five years after preliminary and final site plan approval. Most builders and their lawyers know about this kind of "vested rights." In general, these protections are good for builders, but towns also sometimes seek to benefit by claiming that approvals "automatically" expire after the protected period. This is incorrect. The approvals do not automatically expire on their own, although the protection from intervening zoning changes does. However, towns are now permitted to write ordinances that limit the validity of approvals to the time periods in the MLUL, in which case the approvals may indeed expire.

Second, in earlier days, litigants used to be able to claim that some particular statutory provision applicable to their case had given them "vested rights" either to sue under the law as it existed at a particular time, or, in general, not to be subject to retroactive changes in the law. The New Jersey Supreme Court has largely repudiated that doctrine, finding it based upon a logical circularity. In its place, courts in this state now look to issues of policy and fairness in determining whether or not changes in statutes will apply retroactively to any particular case. A leading case, Nobrega v. Edison Glen Associates, happened to involve condominium developers who were being sued for failing to disclose nearby Superfund sites. However, notwithstanding the Nobrega defendants' line of work, that case does not usually apply to the question of what builders' rights survive changes in zoning law, because development applications may be subject to retroactive imposition of new zoning ordinances anyway, under the notorious "time of decision" rule.

Finally, the term "vested rights" is also used in describing a particular kind of exception to the time of decision rule. This third usage is the one that will be discussed here.

Under the time of decision rule, the zoning in place at the date of the last ruling on an application governs, even if the application has been denied and the denial has been reversed on appeal. The town is usually permitted to change the rules to suit itself, and to justify a denial, at any stage in the proceedings. However, New Jersey courts have recognized that, if construction under valid permits has already begun, there is a limit on when and to what degree the town can amend the zoning on a project midstream.

The Gruber Estoppel Analysis

For example, if a residential development is platted and laid out, and construction on the infrastructure- roads, sewers, etc.-progresses, but development halts before many of the houses are complete, then the developer, or even a subsequent purchaser, may well be permitted to complete the development under the original zoning. Cases such as Gruber v.Mayor & Twp. Committee of Raritan hold that substantial economic reliance by a developer on approvals issued prior to the amendment of a zoning ordinance will defeat the retroactive application of the new ordinance, even if that reliance was by a predecessor in title. In other words, the government may be held "estopped" from applying the law retroactively.

The Gruber case, a New Jersey Supreme Court opinion that is binding precedent on the lower courts of this state, uses the phrase "vested rights." It has been law since 1962. Subsequent decisions, such as Urban Farms, Inc. v. Borough of Franklin Lakes, have consistently applied the Gruber test. Nevertheless, a crucial part of Gruber has slipped from sight. While the test itself is an equitable test-balancing the town's interest in updating its zoning against the actual money expended or construction undertaken by the developer -once this test has been met, the developer thereby acquires rights which are vested and will pass to a successor. In addition, Gruber recognizes that some delay in completing construction does not void the vested rights; they are retained as long as the progress is "consistent," even if it is "halting and with interruptions."

Later cases have focused on the balancing test, which can lead litigants into the incorrect assumption that in order to invoke vested rights a developer must himself have undertaken substantial construction or expenditures. As Gruber showed, this is not necessarily so. In addition, if there has been a delay but the developer has pressed forward as much as possible, and has not abandoned the project, there is no reason to presume that the court necessarily would find against him.

Further, language in Nobrega disparaging the "vested rights" analysis as circular may well have scared people off from asserting these rights. But Nobrega was talking about an entirely different issue. Interestingly, one of the substitute tests in Nobrega -"manifest injustice"-can be seen as a sort of proxy for the equitable balancing required by the Gruber line of cases. Manifest injustice analysis, according to the Court in Nobrega, is a nonconstitutional, equitable doctrine designed to prevent unfair results that do not necessarily violate any constitutional provision. As in the Gruber test, reliance on the pre-existing regulations is a critical element of the manifest injustice analysis.

Substantial Reliance Required

This does not diminish the fact that, whether it is called "substantial reliance" or "manifest injustice," there has been no change to the balance struck by Gruber: Was the money spent on the development in reliance on the prior zoning and approvals so large an amount as to outweigh the town's normally paramount interest in directing and controlling its development? If the town encouraged the expenditures and then changed tack (which is almost always what prompts this sort of case), the courts are even more likely to find that it would be unfair to apply the later zoning to the project. The town's interest is not insubstantial, and the courts will not lightly find it outweighed. But a reasonable number of cases, both in and out of state, illustrate the sorts of facts and level of expense that must be proved in order for the developer to meet the test.

Some Pitfalls to Avoid

The following pitfall lurks for the unwary: Two cases discussing the first type of "vested rights&-those granted by the MLUL-are D.L. v. Point Pleasant Beach and Palatine I. v. Montville. Both cases are important, but neither case is a reliable guide on "vested rights" obtained upon meeting the Gruber test of balancing equities. Further, Gruber has been described as an instance of the then-novel application of "equitable estoppel" against municipal defendants. That is not incorrect, but that formula may lead people to forget that a predecessor's reliance can suffice to insulate a project against a change in regulations. This can be crucial to builders buying or engaging in multi-stage projects, and is not always well-discussed in the more recent cases. As usual, knowledgeable legal counsel is the best guide in confronting a challenge to retroactive changes in the law. Page 15

Anne L. H. Studholme is an associates of the firm and member of the Land Use Division. She concentrate her practice in diverse land use matters.