We are frequently called upon to issue zoning endorsements to policies insuring commercial property. There are two standard zoning endorsements most commonly used in North Carolina, the ALTA 3 and the ALTA 3.1. This article will explain the insuring provisions of these endorsements and what is required from the certifying attorney in order to issue them.

The ALTA 3 can be issued on vacant or improved land and requires the least documentation from the attorney. The relevant insuring provisions are as follows.

The Company insures the insured against loss or damage sustained by reason of any incorrectness in the assurance that, at Date of Policy:

1. According to applicable zoning ordinances and amendments thereto, the land is classified Zone __________.

2. The following use or uses are allowed under that classification subject to compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments thereto, including but not limited to the securing of necessary consents or authorizations as a prerequisite to the use or uses:

 

There shall be no liability under this endorsement based on the invalidity of the ordinances and amendments thereto until after a final decree of a court of competent jurisdiction adjudicating the invalidity, the effect of which is to prohibit the use or uses.

Loss or damage as to the matters insured against by this endorsement shall not include loss or damage sustained or incurred by reason of the refusal of any person to purchase, lease or lend money on the estate or interest covered by this policy.

The basic assurance of the endorsement is that the property is zoned in a particular classification and that the classification permits the listed uses. An opinion of counsel based upon a review of the zoning ordinance and map of the governmental entity having jurisdiction is the preferred procedure for issuing this endorsement. We recognize that this is not always practical and will consider a satisfactory certification by the appropriate zoning official instead. Note that there are limitations on the coverage that are significant. The endorsement does not provide for losses arising out of the refusal of a buyer to purchase, or lender to make a loan.

The ALTA 3.1 can be issued only on improved land after all construction is complete and requires more documentation from the attorney. The relevant insuring provisions are as follows.

1. The Company insures the insured against loss or damage sustained by reason of any incorrectness in the assurance that, at Date of Policy:

(a) According to applicable zoning ordinances and amendments thereto, the land is classified Zone __________.

(b) The following use or uses are allowed under that classification subject to compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments thereto, including but not limited to the securing of necessary consents or authorizations as a prerequisite to the use or uses:

2. The Company further insures against loss or damage arising from a final decree of a court of competent jurisdiction

(a) prohibiting the use of the land, with any structure presently located thereon, as specified in paragraph 1(b); or

(b) requiring the removal or alteration of the structure on the basis that, at Date of Policy, the ordinances and amendments thereto have been violated with respect to any of the following matters:

(i) Area, width or depth of the land as a building site for the structure;

(ii) Floor space area of the structure;

(iii) Setback of the structure from the property lines of the land; or

(iv) Height of the structure.

There shall be no liability under this endorsement based on the invalidity of the ordinances and amendments thereto until after a final decree of a court of competent jurisdiction adjudicating the invalidity, the effect of which is to prohibit the use or uses.

Loss or damage as to the matters insured against by this endorsement shall not include loss or damage sustained or incurred by reason of the refusal of any person to purchase, lease or lend money on the estate or interest covered by this policy.

The assurances contained in this endorsement include those provided in the ALTA 3. However they go further in that they protect against losses form removal or alteration of the structure on the property because the requirements for; the size of the site, the square footage of the structure, the setbacks or the height of the structure have been violated. In order for this endorsement to be issued a current as-built survey showing all improvements will be required. Usually a review of the certificate of occupancy is required if the improvements were recently constructed. Also required is a certification from the applicable zoning department or agency as to the zoning classification and authorized uses and as to compliance of existing improvements with applicable zoning ordinances. In most zoning jurisdictions there is a significant fee for the certification. If the improvements were recently constructed, the title insurance agent may wish to review the zoning maps. You should verify that the actual use is not based upon a variance, non-conforming use, or exception. If such allowed use exists, consult with our underwriting personnel. They may then require an attorney’s opinion (paid by the borrower) by counsel competent in zoning matters. Most insurers prefer that this endorsement refer, in the second paragraph, to the "following use or uses" by excerpting language from the zoning ordinance and not by stating the use. If possible, request that the survey certify the zoning classification and compliance with applicable zoning ordinances. If you are requested to insure compliance with parking requirements, consult with your underwriting personnel. It is preferable for the title company (i) to receive a certification from the zoning authority as to compliance with parking requirements, (ii) that the survey state the number of parking spaces and certify compliance, and (iii) that you review the zoning ordinance to confirm compliance. Then it may be agreeable to add "number of parking spaces" or "required parking".

There is also an additional premium for issuing zoning endorsements. Because of the cost of the survey, certification and premium zoning endorsements are seldom required except on large transactions. The limitations on the ALTA 3.1 endorsement are the same as in the ALTA 3.

One of the most difficult requests for this endorsement comes in the context of the permanent construction loan. Often a lender in a very large loan of this type will provide the attorney with loan instructions that require the provision of an ALTA 3.1. As noted above the endorsement is designed to provide assurances that certain zoning problems do not exist. Attempting to do this in the construction phase of the loan, is in effect, providing surety insurance for the performance of the building contractor. In most cases the lender is satisfied with the provision of an ALTA 3 along with a commitment to provide the ALTA 3.1 upon receipt of satisfactory assurances after the completion of all construction. In the event that such a commitment is unacceptable a modified ALTA 3.1 including the following provisions may be agreed upon.

1. The Company hereby insures that, as of the Date of Policy:

(a) According to applicable zoning ordinances and amendments thereto, the land is classified [insert zoning classification].

(b) The following use or uses are allowed under that classification subject to compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments thereto, including but not limited to the securing of necessary consents or authorizations as a prerequisite to the use or uses:

[insert all permitted uses].

2. The Company hereby further insures against loss or damage arising from a final decree of a court of competent jurisdiction:

(a) prohibiting the use of the land, with any structure presently located thereon or hereafter erected thereon in accordance with plans (describe), (such present and future improvements are herein called the "structure"), as specified in paragraph 1(b); or

(b) requiring the removal or alteration of the structure on the basis that, at Date of Policy, the ordinances and amendments thereto have been violated with respect to any of the following matters:

(i) Area, width or depth of the land as a building site for the structure.

(ii) Floor space area of the structure.

(iii) Setback of the structure from the property lines of the land.

(iv) Height of the structure.

(v) Required parking (Note: This provision does not appear in standard 3.1).

Upon completion of the improvements to be constructed upon the land in accordance with said plans, the Company will issue ALTA Zoning Endorsement - From 3.1 without modification and without additional premium.

Loss or damage as to the matters insured against by this Endorsement shall not include loss or damage sustained or incurred by reason of the refusal of any person to purchase, lease or lend money on the estate or interest covered hereby in the land described in Schedule A.

In addition to the usual requirements a company may generally require an attorney’s opinion (paid by the borrower) by counsel competent in zoning matters (who should consider those matters referred to in the underwriting requirements for the ALTA Form 3. The opinion should refer to the specific plans to be incorporated in the endorsement.

The letter from the applicable zoning department or agency as to the zoning classification and authorized use should state that the proposed plans comply with applicable zoning ordinances. Request a copy of any issued building permit. If possible, request that the survey, if any, certify the zoning classification and compliance of the proposed improvements with applicable zoning ordinances. If you are requested to insure compliance of the plans with parking requirements the attorney’s opinion or zoning letter must certify compliance of the plans with such requirements.