Land Use Regulation & Title Insurance

Title insurance generally does not cover any matters relating to zoning or land use.  There is an exclusion in the standard title policy with respect to not covering loss relating to laws, ordinances, permits or regulations relating to use, occupancy, dimensions, subdivision, and environmental protection.  Effectively this excludes coverage for zoning, planning and land use matters.  However, there is a way to get some coverage.

Title insurance underwriting involves a review of the County land records, as maintained in accordance with the Recording Act.  It also involves a review of certain records maintained in the Superior Court, Bankruptcy Court, Tax Collectors’ Offices and other public records.  However, the laws, ordinances, permits and regulations that impact a property with respect to zoning, planning and land use are not as uniform and simple to address as the County land record matters.  It is hard to imagine what title insurance underwriting would look like if a title company had to search every government agency, law, statute and ordinance, and determine how it impacted the property, if there was a violation or if there was a potential issue.

Even with the layers of complexities, there has been an evolution of the title insurance product which includes two ways to obtain limited insurance coverage with respect to these types of issues.  Both options include additional cost.  One of the options requires additional proofs, which can also add additional costs to obtain.

Residential Properties – The Enhanced Policy

 In the residential environment, certain limited coverages with deductibles and maximums are available with the Enhanced Policy. It has a higher premium than the standard policy and includes certain standard lender’s endorsements; however, it is only available for 1-4 family owner-occupied residences. Additional covered risk items referenced on an Enhanced Policy include violation of existing zoning law, building permit violations and subdivision law violation.  In some cases, the maximum loss payment is capped at $10,000 or $25,000, depending on the type of claim.  This may not seem like a huge benefit for the Enhanced Policy, but these coverages are only some of the dozens of additional covered risks provided, most of which are not similarly capped.

While standard underwriting does not require obtaining proofs regarding these additional covered risks, it might be prudent for a title agent to make further inquiry if the property use obviously does not match the surrounding area or if other red flags are noticeable. To optimize the coverages available in the enhanced policy, a survey is highly recommended or else all the additional covered risks are subject to the general survey exception.

Residential & Commercial Properties - Endorsements

 In the commercial environment, additional coverages regarding these matters are sometimes requested in the form of the following endorsements: Zoning ALTA 3 series, Tax Parcel ALTA 18 series and Subdivision ALTA 26.

The Zoning ALTA 3 series includes 4 separate options: Zoning; Zoning – Completed Structures; Zoning – Land Under Development; and Zoning – Completed Improvement – Non-Conforming Use.  For Zoning Endorsements, the title insurance underwriter often requires the review to include a standard Zoning Report, including, but not limited to PZR Reports often obtained by the lender, or other form of Zoning Letter from the municipality.

 Although our office cannot be held to this expectation on every transaction, there have been a few transactions we were able to issue Zoning Endorsements without any proofs.  In one case it was a car dealership that pre-dated the municipal code.  We were able to obtain historical aerial photographs from the client that were included in a newspaper article and displayed in the dealership.  Combined with other historical information found online, the title insurance underwriter accepted that the dealership’s land use predated the municipal code and was willing to issue the endorsement without any confirmation from the municipality.

In another case, a Zoning Endorsement was requested on the eve of a refinance closing for a large commercial building The lender did not previously require a Zoning Report or Zoning Letter; however, due to Paula’s experience on a Board of Adjustment, she was familiar with navigating municipal code.  By presenting the municipal Zoning Map and code to the title insurance underwriter in a formal memorandum, we were able to get authorization to issue the Zoning Endorsement without further proofs.  This prevented a closing delay and saved the borrower thousands of dollars.  Although some title companies have the capacity and expertise to assist in working around a requirement for proofs regarding zoning as a part of issuing the endorsement, it is not always the case.

The ALTA 18 series include references to Single or Multiple Tax Parcel options and coverages. Until we saw a transaction where this endorsement was relevant, we did not perceive much use for this series of endorsements.  In a commercial refinance for several million dollars, the lender reviewed the property for its current use as a truck yard with a related owner-occupied business on it.  Years prior, the owner subdivided the property into 12 residential lots and had a proper filed map recorded, which dedicated a portion of the property to the municipality as a street.  This meant the property could only be considered as the 12 filed map lots and excludes the area that was dedicated as a street; however, the municipality never assessed the lots separately.  The municipality advised that they didn’t separately assess the lots, because a required sewer utility installation was not started for the subdivision.  This posed more issues than just not being able to issue an ALTA 18 Single Tax Parcel for the loan policy. The lender never actually asked for this endorsement; however, this transaction brought to light its value.

The ALTA 26 Subdivision Endorsement contains the following language:  The Company insures against loss or damage sustained by the Insured by reason of the entry of a final and non-appealable judgment or order by a court of competent jurisdiction setting aside or invalidating the Title because the Land does not constitute a lawfully-created parcel according to the subdivision statutes and local subdivision ordinances applicable to the Land.

If the Subdivision Endorsement is to be issued, the title agent must review the public records and make sure a subdivision deed or map was properly filed and signed, or that other evidence of a proper subdivision is satisfactory.  A municipality can request the Court to void a deed that violates subdivision law after the deed is recorded.  Without specific additional title coverages through the Endorsement or Enhanced Policy, this risk of loss would not be covered by title insurance.

Zoning and planning are not only interesting but also important for understanding how a property may be affected by specific land use regulations and municipal ordinances. While title insurance generally does not cover any matters relating to zoning or land use, there are other ways to get coverage for both residential and commercial properties. Working with a title company that is competent and knowledgeable on land use regulation topics is key for navigating title coverages in this area.