WHAT IS A ZONING CONTINGENCY?
A zoning contingency is a provision in a real estate contract that conditions the obligations of one party (usually the buyer) upon successful modification to the property’s zoning designation.
Zoning contingencies are frequently used when the buyer desires to use the property in a way that is not permitted under the existing zoning designation.
Zoning contingencies are an important tool in real estate negotiations, because they allow buyers to mitigate risk in those circumstances where their proposed use of property might not be permitted by applicable governmental authorities.
EXAMPLES OF CIRCUMSTANCES IN WHICH A ZONING CONTINGENCY MAY BE APPROPRIATE
For example, if a real estate developer desires to purchase a large tract of farm land in order to develop a residential subdivision, the developer may want to condition their obligations upon obtaining approval of the city/county to change the land use.
Under these circumstances, the buyer-developer may include a Zoning Contingency in the purchase offer. The contingency would permit the developer to terminate the contract if the zoning cannot be changed to allow for development of the subdivision.
A zoning contingency would also be appropriate where the buyer of a residential property desires to convert the house into a restaurant, retail store or mechanic’s garage. Since none of these uses are permitted in properties with residential zoning designations, the buyer’s ability to legally operate one of these businesses would require a zoning change.
IMPORTANT COMPONENTS OF ZONING CONTINGENCIES
Poorly drafted Zoning Contingencies can have far reaching negative implications for the parties. Unless the contingency is written in a way that clearly articulates the respective obligations, rights and responsibilities of the parties — and a clear timeline for action — they can create more problems than they solve.
A well-drafted Zoning Contingency should cover at least the following topics:
- Which party is responsible for filing the application for zoning change with the appropriate governmental entity?
- Which party is responsible for the costs of the application, including any application fees and costs or engineers, architects, surveyors, attorneys or other necessary professionals?
- What is the deadline by which the responsible party is required to apply for and obtain the zoning change?
- What are the responsibilities of the party that is not charged with seeking the change? Are they required to participate in meetings, hearings, etc? Are they required to furnish materials and sign documents?
- How is success defined? What does a successful zoning change entail? It is really important to establish specific criteria for the approvals.
- What are the parties’ options and rights if the zoning change is not timely secured?
Addressing each of these issues in the contingency will facilitate better performance and enhance the parties’ understanding of their respective obligations and objectives.
WHO SHOULD DRAFT THE ZONING CONTINGENCY?
Zoning contingencies are complex legal documents. They vary greatly depending upon the parties and property involved in a real estate transaction.
Like all non-standard agreements involving real estate, attorneys — not real estate agents — should draft Zoning Contingencies.
