In the course of representing real estate investors, particularly those just entering into the business, some completely avoidable title and zoning problems consistently arise, usually as a result of the investors' desire to minimize acquisition closing costs.  Depending upon the exact nature of the problem, solutions - IF feasible - can take months or thousands of dollars to cure and have the potential for significant financial loss.

I.          COMMON TITLE, ZONING, AND BUILDING CODE PROBLEMS:  Among the most frequent problems arising are the following:

1.   Unanticipated encroachments, including discoveries in older neighborhoods with narrow lots that the principal dwelling encroaches onto the adjoining lot.

2.  Unreleased deeds of trust, judgment liens or outstanding ownership interests.

3.   Non-conforming lots, especially in older neighborhoods subdivided prior to the 1950 that do not meet the current minimum lot size requirements of the current Zoning Ordinance.

4.  Unanticipated rehab/repair costs due to current building code and fire code requirements (e.g., nonconforming stairways, exterior wall fire blocking; fire retardant siding and window placement). 

II.        WHAT PREVENTIVE AND/OR CORRECTIVE MEASURES ARE AVAILABLE?  The majority of the above described problems can be avoided through proper due diligence. In the worse case, if a problem is not avoided there can often be solutions, albeit it sometimes costly and/or time consuming.

A.        ENCROACHMENTS.

1.         Best Solution: Obtain a physical survey. The easiest way to avoid acquiring a property that either contains improvements that encroach onto an adjoining lot or that have problematic encroachments from adjacent properties is to obtain a physical survey prior to closing which will disclose any encroachment issues which then become a title defect to be resolved by the seller.  If the problem is significant and cannot be resolved, then the investor will be in a position to terminate the purchase contract and receive a refund of the earnest money deposit.  The cost of a typical residential lot survey is between $250 and $300.

2          Post Closing Solutions.  If a survey is not obtained at the time the investor's purchase, the problem typically arises when the rehab is complete and purchaser of the rehabbed property obtains a survey prior to closing of the out sale.  If the survey shows an encroachment problem, there are several possible solutions:

                               (A)              Removal of the Encroachment.  This may or may not be feasible.  If the encroachment involves a house or other significant structure encroaching onto a neighboring lot or parcel, moving the problem structure is most likely not feasible.

                        (B)       Negotiation of an Encroachment Easement.   This will involve negotiations with the adjacent landowner to try to reach an acceptable agreement that will allow the encroaching structure to remain in place with the permission and agreement of adjacent landowner.   Typically this cure also involves attorney fees for document preparation and, more importantly, payment of some type of fee to the adjoining landowner if the investor owned improvements encroach on to the adjoining lot.  Obviously, the cost of a physical survey would have been far less expensive in most instances.

                        (C)       A Suit to Quiet Title Based on Adverse Possession.    Provided the encroachment has existed for at least fifteen (15) years, the last recourse is to bring a suit to quiet title based adverse possession.  This is the worse case scenario and is generally used only if (1) the dwelling or other major improvement on investor's property encroaches onto an adjacent property, and (2) the investor and previous owners of the investor property can meet the statutorily required 15 year period of exclusive, actual, continued possession, under a colorable claim of title. 

                        In a recent Virginia Supreme Court decision, Quatannens, et al v. Tyrrell. (Record No. 032562 - September 24, 2004), involving a residence and improvements in Alexandria, Virginia that encroached onto the adjacent lot a distance of 100 feet along the lot line varying in width from 8 to 20 inches, the Court found that the owners of the encroaching property met this standard and had acquired title to the land under the encroaching improvements.  The strip of land contained a small portion of a room of the Quatannens' house, part of a brick walkway, part of a paved parking area, and one side of a brick arch over the walkway at the front of the Quatannens' house, all of which have existed since at least 1976.  Needless to say the costs and extended period of time involved in litigation made the cost of a physical survey look minute.

 B.       UNRELEASED DEEDS OF TRUST, JUDGMENT LIENS OR OUTSTANDING OWNERSHIP INTERESTS

1.         Best Solution: Obtain a title commitment from an experienced and reputable title insurance company AND purchase owner's title insurance.  It is ALWAYS crucial that a title exam be conducted to identify (A) all mortgages that attach to the property, (B) any state or federal tax liens that may attach to the property, and (C) any other judgment liens that may attach to the property.  This latter category of judgments can relate to unpaid medical bills, defaulted credit card accounts, unpaid utility bills, or even delinquent child support payments.  If an investor closes on a purchase without making sure that all previously attaching liens and judgments have been satisfied or confirmed to not apply to the property, they will be a title defect at the time the rehabbed property is sold.

If owner's title insurance is purchased, subsequently identified liens and title defects that arose prior to the policy date but that were not listed as exceptions on Schedule B to the policy will be covered by the policy and the insuring title insurance company will cure the defect or, in the case of total title failure, pay the investor up to the face amount of the policy. 

In addition, if a purchaser of a rehabbed property utilizes a different title insurer for their purchase, an investor who bought an owner's policy can get an indemnification from his title insurer so that the defect can be insured over by the new title insurance company.  Without an owners policy, such indemnification is NOT available.

2          Post Closing Solutions.  Often old unreleased deeds of trust have in fact been paid off; however, tracking down the mortgage lender or its successor in interest to secure a certificate of satisfaction can be challenging and will involve cost and expense.   If an investor is faced with this situation, it is best to have legal counsel try to secure a release, particularly if documentation can be secured that shows a pay off payment was set out at some previous closing, but no release was subsequently recorded.

(A) Judgment Affidavits.  If the title defect involves an old unreleased judgment (judgments remain a lien on real property in the jurisdiction where docketed for 20 years), sometimes the matter can be resolved by use of a judgment affidavit that documents the "John Doe" in the chain of title is, in fact, not the individual named in the judgment.  Such affidavits rely on different social security numbers, different addresses from the property address and other facts that distinguish the party in the chain of title from the judgment debtor.

(B) Settlement Agent Releases. If an unreleased deed of trust was in fact paid, and is (1) of more recent vintage and (2) the settlement agent that made the payoff can be identified, with proper statutory notice to the lender in question, said settlement agent can file a certificate of release.  The applicable provision of Section 55-66.3, Code of Virginia of 1950, as amended,  for settlement agent releases is attached as Exhibit A.

(C) Negotiated Discounted Payoffs.  If, in fact the old judgment has not been paid, frequently a discounted payoff figure can be negotiated.  Generally, the older the judgment, the more likely a creditor will accept a significantly reduced payoff since it is like "found money" from the creditor perspective.

(D) Very Old Unreleased Deeds of Trust.   By statute, after the passage of 20 years from the last payment date specified in a deed of trust has elapsed, the deed of trust is presumed paid and is unenforceable.  Where only a short period remains until this 20 year time period will be reached, it may be possible to either escrow funds or provide an indemnity to the title insurance company to induce the title insurer to insure over the old deed of trust.

C.        ZONING  AND BUILDING CODE ISSUES

A number of local cities have seen a trend in more and more rehabilitation and flipping of homes in older, often lower priced, neighborhoods that were subdivided shortly after 1900 to 1920.  The neighborhoods frequently contain long narrow lots, often only 25 or 30 feet in width.  Because of various revisions to the Comprehensive Zoning Ordinances and a trend of requiring larger lot sizes under the various residential zoning classifications in most cities, an increasing number of investors run the risk of discovering that they have purchased a property only to be prohibited from rehabbing and reselling the property as planned.  Similarly, homes built in this time period frequently do not meet current day building code requirements and, depending upon the magnitude of the intended rehab project, may have to be brought up to current code standards.  Obviously, this has the potential to be a very expensive proposition.

1.         Best Solution.  Utilize a Purchase Contract that affords the purchaser numerous rights to conduct a due diligence investigation within a prescribed period and the right to terminate the contract if the due diligence investigation proves unsatisfactory.  The goal is not to make an "AS IS" seller do repairs, but rather to give the purchaser a way out of the contract if the property has structural and/or zoning and building code problems.  If a seller will not agree to this type of provision, the investor should be forewarned that the seller may know that the property has major problems.

For zoning and permitted use issues, investors buying property in one of these older, narrow lot neighborhoods, the due diligence investigation should ALWAYS include verifying that the property is a properly grandfathered non-conforming lot AND that the magnitude of the proposed rehab work will not trigger a prohibition against the restoration of the property. 

The best means of doing satisfying the first phase of this test is to obtain a determination letter from the Zoning Department of the applicable city confirming that the property is either (1) a permitted conforming lot/use, or (2) a permitted non-conforming lot/use.  A sample letter to the zoning administrator is attached as Exhibit B.

Even if the property is a permitted nonconforming lot/or use, the investor needs to go on to the second step of inquiry, namely will the magnitude of the proposed rehab work trigger a restriction against such work on a nonconforming property.  At a minimum, the investor should calculate the realistic cost of the proposed work and then compare that figure to the current assessed value of the property.  If the cost of the work exceeds 50% of the assessed value of the property - 30% in the case of Portsmouth - the investor may not be able to secure a building permit for the proposed changes without, at minimum, being required to bring the structure up to current building code requirements.   This requirement, obviously, could greatly increase the cost of rehabbing the property.

By way of example, the City of Norfolk defines a non-conforming lot and a nonconforming use as follows:

Lot, nonconforming.  A lot which lawfully existed prior to the adoption, revision, or amendment of this ordinance, but which fails by reason of such adoption, revision, or amendment to conform to the lot regulations of the district in which it is located. 

Nonconforming use.  A use lawfully established prior to and being conducted on the effective date of these regulations or any amendment hereto which renders the use nonconforming, which does not conform to the requirements of these regulations for the Zoning District in which it is located. 

The City of Norfolk Zoning Ordinance also provides as follows concerning alterations and improvements to nonconforming structures (most other area cities have similar definitions and provisions on nonconforming lots and uses):

12-3 Structural alterations prohibited; exceptions.

A nonconforming structure may not be enlarged or structurally altered in a manner which increases the nonconforming condition, unless such alteration or enlargement conforms to the following provisions:

(a)   The total structure as enlarged or altered does not exceed the maximum density or intensity limit for the applicable district; and

(b)   The use of the structure is conforming; and

(c)   The property owner or developer applies as provided in section 12-5.1 below and obtains a determination of "no adverse impact" based on the following:

(1)   The proposed uses are compatible, and

(2)   The intensity of development on the site of the proposed expansion will not increase more than ten percent after the proposed expansion; and

(3)   The expansion will not result in the reduction below acceptable levels in the lot coverage ratio, off-street parking, landscaping, or the increase in signs above acceptable levels.

(d)   Structural alteration for structures located in the Historical and Cultural Conservation Districts shall be as allowed in Article II, Chapter 9, Section 9-0.8.

 12-4 Expansion of nonconforming uses.

 Nonconforming uses may be expanded only if approved as special exceptions pursuant to the standards and procedures set forth in Article V, Chapter 25. No application for a special exception to expand a nonconforming use shall be approved unless the applicant can demonstrate that there will be no adverse impact within the Zoning District in accordance with the requirements of section 12-5 below.

12-5 Determination of impact of expansion of nonconforming structures and uses.

12-5.1Applications for "no adverse impact" status.  Applicants seeking to apply for "no adverse impact" status must submit to the division of land use regulation a plan, drawn to scale, detailing the following information: 

(a)   All existing and proposed uses on and adjacent to the site on which the nonconforming use or structure is located.

(b)   All existing and proposed structures, yards, utility easements, rights-of-way, water bodies, floodplains and wooded areas on and adjacent to the site.

(c)   The number of square feet of all buildings and structures on the site of the proposed expansion, before and after the proposed expansion.

(d)   The density (in terms of dwelling units per acre) and the intensity (in terms of floor area ratio or gross square footage) before and after the proposed expansion.

(e)   The building coverage ratio before and after the proposed expansion.

(f)   The number of parking spaces, total square feet of signs on the site, and square feet of landscaping or buffers, before and after the proposed expansion.

12-5.2Finding of "no adverse impact"; approval of expansion.  The city council, after review of the recommendation of the city planning commission, may make a finding of "no adverse impact" and approve the expansion of a nonconforming use or structure based on the general standards and considerations for special exceptions found in section 25-7. 

12-6 Change of use.

A nonconforming use may be changed as follows:

(a)   A nonconforming use may be changed to a permitted use or special exception use for the Zoning District in which the property is located. If the change of use is to a special exception use, a special exception approval shall be required pursuant to Article V, Chapter 25.

(b)   A nonconforming use may also be changed to another nonconforming use found only in the same category of Zoning Districts (e.g., residential, office/business, commercial, industrial) and only if approved as a special exception pursuant to the standards and procedures set forth in Article V, Chapter 25.

12-7 Ordinary repair and maintenance of nonconforming structures permitted.

Ordinary repairs and maintenance may be made to a nonconforming structure. The building official shall determine what constitutes "ordinary repairs and maintenance" in accordance with the Uniform Statewide Building Code.

12-8 Restoration or removal of damaged nonconforming structures.

12-8.1Restoration.  If a nonconforming structure is destroyed or damaged by a fire, flood, hurricane, vandalism, or similar abnormal and identifiable event, and the cost of restoring the structure to its condition immediately prior to the event does not exceed 50 percent of the current assessed value of the entire structure, then the structure may be restored to its original nonconforming condition, provided that a building permit is secured, reconstruction is started within 180 days from the date of the damage, and such reconstruction is diligently prosecuted to completion. The building official shall determine the cost of restoration. 

12-8.2Removal.  If a nonconforming structure is destroyed or damaged by a fire, flood, hurricane, vandalism, or similar abnormal and identifiable event, and the cost of restoring the structure to its condition immediately prior to the event exceeds 50 percent of the current assessed value of the entire structure, then the structure shall be removed unless the restored structure, and the use thereof, would conform to all requirements of the Zoning District in which it is located. 

12-8.3State of emergency declaration.  In the event that a state of emergency is declared by the President of the United States or the Governor of the Commonwealth of Virginia, nonconforming structures damaged to an extent that the cost of restoring the structure to its condition immediately prior to the event exceeds 50 percent of the current assessed value of the entire structure may be restored to its original condition without conforming to current regulations on yards, height limitations or parking regulations. In no case shall the degree of nonconformity existing at the time of the state of emergency be increased. All other zoning regulations including but not limited to, use restrictions, density provisions and flood plain regulations shall apply. 

12-9 Discontinuation of nonconforming uses.

If a nonconforming use is discontinued for a period of two years, then that use shall not be renewed or reestablished and any subsequent use of the lot or structure shall conform to the use regulations of the Zoning District in which it is located. (Emphasis added)

The only exception to the foregoing restrictions is pursuant to a newly enacted amendment to Section 15.2-2307, Code of Virginia of 1950, as amended, which became effective on July 1, 2006.  Under this statutory provision, if the damage or destruction of a nonconforming property is due to natural disaster or an act of God, regardless of the cost, the owner my restore the structure to its original nonconforming condition within two (2) years of the date of damage or destruction, PROVIDED, the repair, rebuilding, and replacement work must comply with the then current building code requirements. A copy of this statue is attached is attached as Exhibit C.

2.         Post Closing Solutions.  If an investor finds after closing that his/her newly acquired property is located on a non-conforming lot and/or may be a nonconforming use, the situation is not necessarily hopeless.  One should ALWAYS meet in person with the Zoning and Building Code officials of the applicable city.  Before doing so, the investor should verify (1) when the nonconforming lot was subdivided, (2) when did the use first begin and did it predate the adoption of the Zoning Ordinance or the amendment thereto changing the zoning district or lot size requirements for the district in which the lot is located, (3) was there ever common ownership of an adjoining lot on which the original structure has been removed, and (4) was there a cessation of the use for more than two (2) years.  The City's position will be that the burden of proof on these issues is on the property owner, but (A) pleading hardship and (B) documenting that the rehab work will be first class can have an influence on the City's willingness to work with the investor.  City official can be decidedly more helpful when convinced that an investor did not have notice of a nonconformity problem and that the investor is not a "coat of paint and cheap carpet replacement" rehabber.

The first question is easily met by confirming the date the subdivision plat creating the lot was recorded.  In the older, historic neighborhoods, these subdivisions virtually always predate the Zoning Ordinance.  The second question can often be answered through city tax assessment records which generally show the date a structure was built. If this does not work, generally the building codes offices will have information on when the structure was built.   The third question is one that often is not easily answered without doing some investigative work and/or additional title work, but can be very important. The last question likewise is usually more difficult to establish, but one point to begin is with water and electric billing histories.

III.       CONCLUSION.  While many of the above described pitfalls can be cured post closing, the best approach is to avoid them from the outset by proper due diligence, spending some extra money for surveys and owners title insurance, and by working with experienced legal counsel.