When To Use A Land Use Contingency

Many first time homebuyers that I represent commonly comment about how stressful the process of purchasing a home is. And with the status of the lending industry, one could hardly blame them for feeling that way. However, this writer shutters to think of how this homebuyer would react to the process of purchasing anything more than a single family home. Whether it is a shopping center, restaurant, industrial warehouse or apartment complex, a host of unique issues need to be discussed before even finalizing a contract. One such contractual term is commonly referred to as a “land use contingency”.
Many times a potential purchaser only wants a property if they can alter what currently exists. This can be as simple as a change in the use or as complex as a redevelopment of the site. Either way, making such changes may require approvals from an array of governmental agencies. Aland use contingency conditions the purchaser’s obligation to complete the transaction on obtaining those approvals. Below are some helpful tips in implementing a land use contingency that protects a purchaser’s interests.

An “approval” is not necessarily an approval. One of the simplest mistakes in a land use contingency can also be the most costly. Many times a contract simply says that the contract is conditioned on a particular “approval”. However, this creates more questions than answers. What is an approval? With regard to a municipal land use board, is it upon the vote approving the application? How about after the adoption of the board’s resolution memorializing the approval? If it is either of these scenarios, what happens if an objector appeals the approval and it is overturned? Would you still need to purchase the property because you technically obtained an “approval”? To avoid this situation, and the lengthy litigation which will ensue, the contingency must state that any approvals be “final and non-appealable”. In essence, you are not required to move forward until any approval you receive can no longer be overturned.

What needs to be approved? While the contract does not need to include every minute detail of the proposed development, there are certain essential components which should be mentioned in the contingency. For example, there may be a certain number of seats you need for a proposed restaurant to be successful. Many banks, pharmacies and fast-food establishments require a drive-thru. Or a certain number of dwelling units for an apartment complex or condominium must be approved to make it a financially viable project. Issues like these should be addressed in your contingency.

What approvals do you need? The most basic approval is that of a municipal land use board. However, approval from the County might also be required if, for example, the property is located on a county road. Wetlands located on the property might require an application to the New Jersey Department of Environmental Protection. Child day care facilities or schools may require approvals from various state agencies. Certain uses may even require approvals from certain Federal government agencies. For these reasons, it is essential that a purchaser, their attorney and all of their development professionals communicate so that all necessary approvals are set forth in the contract.

It is going to take time. Let us assume that a project only requires municipal planning board approval. Once the contract is signed, it will take approximately 30 days for your professionals to finalize the plans and an application to be submitted. It will then take approximately 45-60 days for the board to deem your application complete and for it to be placed on the agenda. Assuming you are approved in one hearing (which is not always the case) a resolution needs to be adopted by the board which usually happens at the next board meeting (another 30 days). Finally, as discussed above, there is a 45 day appeal period which needs to expire to ensure that the approval is final. When you add this up, you are looking at a minimum of 150 days or 5 months. Therefore, for a “basic” land use contingency this writer, at a minimum, wants 180 days with a reasonable extension period if proceeding in good faith (90 days).
As you can see, there is a lot to consider in just this clause. However, it is not uncommon in the world of real estate development. The best way to address these issues is to have a team of competent development professionals who can assist you in the process and answer any of the questions you might have. If you have that, you are definitely moving in the right direction.

Andrew S. Kohut is an Associatek Attorney at WJ&L who works actively in our Land Use practice.

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