United States: Developer Rights in Illinois – the "Vested Right" Doctrine

It is not surprising that local governments react to unpopular development trends, as well as unpopular developments, by re-thinking and re-writing existing zoning controls. When a municipality’s object is to stop or significantly alter a proposed development, it often resorts to blunt tools, such as re-zoning or "down-zoning" the property, so that the proposed development is no longer permitted under the revised zoning.

"Vested rights" is legal shorthand for the idea that, sometimes, a municipality’s attempted intervention to stop a project comes too late, and the owner/developer has the right to proceed with the project as planned despite a late-coming change in the law. In Illinois, the doctrine of vested rights provides a narrow, but viable window for owners/developers to lock in their project and lock out opposition.

Two recent cases provide real life examples of how Illinois courts interpret and apply the vested rights doctrine. This article examines the doctrine and its recent application.

Illinois courts have consistently commented that "generally, there is no vested right in the continuation of a zoning classification." In other words, the general rule is that the zoning classification attached to a property at the time of purchase is provisional, and even if a proposed project is within the limits of what was allowed at the time of purchase, that initial classification is not a guarantee or a promise that the owner/developer will be entitled to zoning approval.

The exception to the general rule is known as the vested rights doctrine, a concept whose standards and contours vary from state to state. Illinois law provides that an owner/developer is entitled to proceed in accordance with the prior zoning provision "where there has been a substantial change of position, expenditures or incurrence of obligations made in good faith by an innocent party under a building permit or in reliance upon the probability of its issuance." Below, we break down and discuss the elements necessary to obtain a "vested right."

When is zoning approval "probable"? Illinois courts have taken a narrow view of when approval is probable." Courts have held that, to gain a vested right, an owner/developer must be in full and complete compliance with the pre-amendment zoning that it desires to invoke.

From both the owner/developer’s perspective and the municipality’s perspective, the municipality’s zoning code establishes the upper limits of what can be built on any given parcel in the city or town. To trigger a vested right to development, the owner/developer must demonstrate that its proposal could be built "as of right" under the classification that existed before the change in zoning.

The need for absolute conformity with existing zoning was recently reconfirmed. In one recent case, the Illinois appellate court held that the developer’s need to obtain a county-issued "conditional use permit" to construct a wastewater treatment facility deprived him of a vested right, even though the proposed project was properly zoned. Significantly, the court focused on the very need for the permit and did not inquire as to the likelihood that the county would have approved the conditional use permit, nor whether the county’s denial of the permit would have been reasonable. The case offers a bright line rule that makes a vested right claim virtually impossible when the project requires a special use permit, a variance, or administrative relief.

For developers, however, the good news is that, if the project can be built as of right, zoning approval is considered probable and no additional assurances are necessary. In other words, to secure a vested right, it is sufficient for the developer to embark on a project that was unquestionably permitted under the then-existing provisions of the zoning code.

Illinois courts, most recently the appellate court in Furniture L.L.C. v. City of Chicago, 818 N.E.2d 839 (1^st Dist. 2004), have rejected the argument – often made by municipalities – that a developer must obtain "affirmative assurances" from the municipality or municipal officials before the developer obtains a vested right. Sensibly, decisions like Furniture L.L.C. reject this argument which, if accepted, would make zoning maps and codes purely advisory and would allow virtually all development to be blocked by a last-minute change to the zoning code.

A project may be as of right for some period of time, but at what point in time does the issuance of a building permit becomes less than probable because, for example, a zoning amendment has been proposed? This date is an extremely important piece of the vested rights puzzle because expenditures made when the issuance of permit is not probable cannot secure a vested right.

There are several dates on which, one could argue, the prospect of a zoning change makes the issuance of a building permit less than probable. At one end of the spectrum is the date on which the zoning amendment formally passes. Other plausible dates include the date on which the proposed ordinance is introduced or the date on which the developer or its agent receives notice that the ordinance has been introduced. At the other end of the spectrum, municipalities have argued that generalized neighborhood opposition to a particular type of development is enough to make reliance unreasonable, even if the text of the code permits the project in question.

Illinois has addressed this issue and determined that expenditures become unreasonable when the developer has "knowledge that an amendatory ordinance is likely to be introduced in the near future." In 1350 Lake Shore Associates v. Mazur-Berg, 791 N.E.2d 60 (1^st Dist. 2003), the Illinois appellate court held that there is no probability of a permit and, therefore, expenditures became unreasonable once a local elected official (in this case, a city alderman) informs the developer (in this case, the developer’s attorney) that the official will likely introduce a re-zoning ordinance.

As matter of abstract legislative procedure, it would be dubious to assert that the introduction of an ordinance (let alone discussions regarding the introduction of an ordinance) makes it likely that a law will ultimately be changed. However, as a real world reflection on the power of local municipal officials to effect zoning changes, it is accurate to say that an alderman’s decision to introduce a re-zoning ordinance makes the ultimate passage of that proposed ordinance highly probable. This is particularly the case in jurisdictions such as Chicago, where custom and practice allows for significant deference (sometimes known as prerogative) to be afforded to the alderman of the ward in which the subject zoning action is to take place.

This rule is, no doubt, advantageous to municipalities in that it excludes expenditures made by the developer after informal action on the part of a municipal legislator. The rule may be justified as preventing a developer from "buying a vested right" (i.e., expending funds purely in the hope of acquiring a vested right) in the time period between informal discussions regarding the possibility of down-zoning and formal introduction of an ordinance.

However, the rule undermines the traditional idea that developers should work closely with local zoning officials (and sometime neighboring land owners) in fashioning a project. Rather, the rule provides developers with a strong legal incentive not to share their concepts and ideas with local officials and neighbors when it is clear that the project can be built as of right. Indeed, the relevant Illinois cases, such as the Furniture L.L.C. case, advise that developers are wise to expend money in reliance on the existing zoning classification well before any local officials or neighbors are made aware of the project.

As discussed above, in the absence of warnings to the contrary, expenditures made in reliance on the existing zoning classification count toward securing a vested right to develop in accord with that classification. The question becomes what types of expenditures count and how much money must be spent to signify a "substantial" change in position.

Certain types of expenditures made in reliance on the existing zoning have been recognized as legitimate expenditures necessary to secure a vested right. These expenses include out-of-pocket architect, engineering, environmental, demolition and surveyor fees.

Expenses that were "incurred," but not yet paid, are included, but conditional expenditures are not. For example, if an architectural firm agrees to do work on a contingency basis, only to be paid if the project is approved, the expenses are not considered because the developer does not bear them if zoning approval is denied, and internal developer expenses, such as salaries, are generally not considered project-specific expenses and do not count as a change in position.

Whether or not land costs count as expenditures must be determined on a case-by-case basis. If the would-be developer’s purchase of the land is contingent upon ultimate zoning approval, the prospective land costs are not counted as a change in position. Likewise, land acquisition expenses incurred well before an attempt at development do not count as a change in position. For example, if the property in question was acquired many years ago, only recent expenditures, not the initial purchase, will count toward a vested right.

However, where land is purchased in specific reliance on existing zoning classification and the developer moves from purchase to other phases of development in rapid succession, the developer’s land costs will count as a change in position.

"How much" in expenditures does it take to secure a vested right? Under Illinois law, the answer to this crucial question is, unfortunately, muddled. Developers seeking a vested right often point to a series of cases in which the specific dollar amounts were found to be a sufficient "change in position." Because these raw dollar amounts suggest a low threshold for obtaining a vested right, municipalities counter that courts should not look at dollar amounts in a vacuum, but must compare the dollars spent to some other figure, such as total expected costs.

Many other states use some variant of this test. However, one Illinois court has declared that it is "the rule in Illinois that substantiality is determined without regard to any proportional test." It is unclear whether this statement means that courts must, as a matter of evidence, refuse to take the total expected cost of a project into account, or just that any "proportional test" would not be wholly determinative. At least one recent decision seems to suggest the latter and discussed the plaintiff’s expenditures "in relation to the property’s value of more than $1 million."

It would be a mistake to disregard the expected costs of a project and it is not advisable to attempt to establish a set dollar amount as the threshold for determining whether expenditures are substantial. Even if certain large amounts might always be considered "substantial," there are other situations in which the amount expended will not lead to an obvious conclusion. In these scenarios, the amount expended should not be viewed in absolute terms, but in some type of context, such as the total cost of the project, the developer’s expected return, or the economic wherewithal of the developer.

Holland & Knight attorneys represented the winning parties in both the Furniture L.L.C. case and the 1350 Lake Shore Associates case. We will continue to closely monitor these "vested rights" cases, so as to better advise their private and municipal clients as to risks and benefits of various legislative and development strategies.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.