Firm Articles

The New Vested Rights Laws
A Legal Analysis

by
Terry D. Morgan

A. Introduction

The Texas Municipal League recently declared itself the winner of the 2005 Legislature in its final update of the session with the headline “Cities Dodge the Biggest Bullets, Suffer Only Minor Wounds.”   While the hurrahs are being counted, I would present a different viewpoint.  In my opinion, the real estate industry lobby has successfully eviscerated virtually all municipal strategies for avoiding premature vesting of development proposals, as well as termination strategies for stale projects, with the enactment of SB 848 and SB 574.  (Not to mention the ban on commercial moratoria, rough proportionality bill, guns in the city limits bill and the landowner re-write of the CCN process.)  While the provision that got the most attention from cities was the removal of most zoning exemptions from Chapter 245, the new application and expiration rules will negatively affect the development review process in every city in Texas.

B. SB 848

Summary:   This bill amends TLGC section 245.002 pertaining to uniformity of requirements for permits by identifying the precise time that vesting occurs during the application process and by prescribing the procedure that must be used by local governments to reject an application.   Specifically, vesting now occurs at the time that the original application for a permit is filed “for review for any purpose, including review for administrative completeness” or when a “plan of development of real property” or plat application is filed.   Vesting occurs at the time the applicant gives the local government “fair notice of the project and the nature of the permit sought.”   The date of vesting is established either by delivering the application or plan to the local government, or depositing it “with the United States Postal Service by certified mail.”  Sec. 245.002(a-1).

The bill also provides that the application “expires” 45 days after filing if (1) “the documents or other information necessary to comply with the [local government’s] technical requirements relating to the form and content of the permit applications” are not provided with the application; (2) the local government provides the applicant written notice of the documents or information needed to complete the application “not later than the 10th business day after the date the application is filed”; and (3) the applicant fails to provide the documents or information within the time specified in the notice.  Sec. 245.002(e).   These procedures do not apply unless the local government “provides” for such rules, presumably by ordinance, order or resolution.  Id.

SB 848 allows local governments to require “compliance with technical requirements relating to the form and content of an application in effect at the time the application was filed, even though the application is filed after the date an applicant accrues rights” under the law.  Sec. 245.002(f).  The Act does not apply to any project commenced before its effective date, April 28, 2005.  Id. at subsec. (g).

The bill also amends the definition of the term “permit,” which now includes a “contract or other agreement for construction related to, or provision of, service from a water or wastewater utility owned, operated or controlled by a regulatory agency.”  Section 245.001(1). 

Context.   Many cities have enacted “complete application” requirements in response to the ever changing and more liberal vesting rules promulgated by the Legislature.  Typically, such provisions require that no application will be accepted for filing by the city unless the application is accompanied by all documents that must be submitted with the application under the ordinance governing the permit.  If an application for a permit is determined to be incomplete, it is returned to the applicant.  Many ordinances and codes also provide that the filing fee will not be cashed until the application is complete and that any acceptance of the application by an employee in contravention of the rules constitutes grounds for denial of the permit itself.

This type of regulation prevents the kind of premature vesting against new regulations now allowed by SB 848.  (Cities have used such provisions with greater frequency since the Legislature prohibited “planning” moratoria for residential developments with the enactment of TLGC ch. 212, subch. E by the 77th Legislature.)  Complete application requirements allow cities (1) to enact new regulations that apply to the incomplete application and (2) meet statutory deadlines for decisions on plat or other development applications pursuant to TLGC sec. 212.009 [30-day rule on plats] or city charter or ordinance.

Impacts.   SB 848 enables virtually any property owner to vest a project against proposed new regulations before those regulations take effect.   Moratoria, including those on commercial development as a result of HB 3461, are virtually impossible to use effectively to prevent vesting of projects.  By force of SB 574 -- also enacted by the 79th Legislature (see below) -- most useful exemptions from vesting under ch. 245 also have been deleted.  Now the super-early vesting date allowed by this legislation ensures that every new enactment will apply only to stupid landowners.

A couple examples illustrate the effect.   A city is contemplating new plat regulations that increase standards and dimensions for thoroughfares, require enhanced studies for drainage improvements, and require a showing of available capacity of water and wastewater facilities.  A public hearing before the governing body is required to enact new subdivision standards under TLGC sec. 212.002.  Word spreads among the development community of the changes before the hearing is held.   Several landowners ask their engineers to prepare a sketch of a preliminary plat or master plat showing the maximum number of lots allowed, and ask the engineers to mail the application by certified mail, return receipt requested.  Others, not wishing to spend design dollars just yet, draw a plat of their property showing the number of lots on an 8.5 x 11 sheet of paper and make an appointment with their cooperative city planner to discuss the “project” just conceived.  The sheet is labeled “development plan.”  In either case, the municipality arguably has received “fair notice” of the type of permit requested.  If the city has not enacted processing regulations authorized under SB 848, the game is over at the time the “applications” or “development plans” are submitted.  The new regulations will not apply to such a  “project” unless the plat application subsequently is denied on the basis of rules already in effect.

For a second example, consider a city that is contemplating zoning text amendments for all non-residential districts removing some inappropriate uses from the list of authorized uses and classifying still other uses as requiring special use permits.  The City also is contemplating new landscape standards for commercial uses fronting on certain thoroughfares.  Two hearings usually are necessary before the changes take effect, one before the Planning and Zoning Commission, and one before the City Council.  Again, affected landowners get wind of the changes and busy themselves with or employ consultants to prepare simple “site plans” or (better yet) preliminary plats for their property marked with the uses or range of uses they may wish to develop in the future.  Again, the “fair notice rule” is invoked for such “projects” by depositing the site plan or plat in the mail, or having a pre-application conference with the local planner, and the date of vesting against new zoning standards has been established.  This could be accomplished for every landowner potentially affected by the changes to the use or landscape regulations at close to no cost.

Other negative impacts arise from the ambiguities introduced by the legislation.  SB 848 clearly addresses the “filing” of an application for a permit.  Do the events that determine what is filed for purposes of chapter 245 also determine filing for statutory deadlines, such as the 30-day rule for deciding plat applications under TLGC sec. 212.009?   If so, a municipality will find itself having to act on the plat application to avoid the 30-day “deemed approved” rule in the subdivision law before it has received documents and information needed to complete the application under section 245.003(a-1), which allows the application to stay in effect for 45 days after “filing.” 

Perhaps the biggest ambiguity in the new law arises from the term “plan for development.”  This term stands in clear contrast to “application for a permit” and “plat application.”  The law expressly allows filing of a plan that will vest rights and yet falls short of an application for a permit.  How short?  The plan for development need only give “fair notice of the project and the nature of the permit sought.”  But must the plan for development progress to an actual application for the “permit sought”? The provisions allowing a municipality to give notice to the applicant that an “application” is incomplete under subsection (e) do not appear to apply to a “plan for development” submitted pursuant to subsection (a-1).  This raises the specter that a plan for development may define the “project” and establish the vesting date, yet not be subject to completeness rules until a formal application is filed sometime in the future. 

The addition to the definition of “permit” to include construction contracts for water and wastewater facilities has potentially far reaching implications for those city-owned utilities that habitually discuss provision of services with developers well before the formal process for development has commenced.   It is important to recall that it is not the agreement itself that vests the “project,” it is the “application” for services or simply a presentation of a plan for development that operates as the vesting event.   Vesting thus may start in the utility department as well as in the planning department.   This is particularly a problem in cities where there is no formal coordination between utility and planning or building departments until a plat application or similar proposal is filed and circulated.

Responses.    Cities that care to minimize the effects of SB 848 (which is already in effect) must amend development review procedures to anticipate the new law.  If rules for accepting applications are not amended, incomplete applications will not “expire” until action is taken on the application itself.  Specifically, if cities don’t give written notice to applicants within 10 days of the filing event under the statute, they lose the ability to terminate the application for incompleteness.  

There will be those that say it matters little, because section 245.003(f) allows cities to require “compliance with technical requirements relating to the form and content of the application” that were in effect when the application was filed.  Does this mean an application can be denied for incompleteness, however, without notice previously having been given as to the nature of the incompleteness?   It’s an argument, but one subject to rebuttal on grounds that such an interpretation undermines the benefits of requiring procedures for determining completeness in the first place.  The better interpretation is that the application can be rejected on pre-existing completeness grounds, but only if the notice procedure in subsection (a-1) is followed (or perhaps where the city fails to act within the 10-day notice period, but still apprises the applicant that the incompleteness of the application jeopardizes its approval).

The first thing to keep in mind is that the statute applies only to those applications made for a project commenced on or after the effective date of the Act.  Thus only “new” projects receive the benefit of the new complete application rules.  Permits that have been filed prior to April 28, 2005 establish a project; consequently, such applications or subsequent applications in series with the original application can still be rejected for incompleteness under existing rules after the effective date of SB 848.  (This may create a problem in itself, since there now will be two classes of applicants.) 

For projects commenced on or after April 28, 2005, existing development regulations that allow city officials to reject applications that are incomplete must be conformed to the procedures in section 245.003(a-1) regarding written notice of deficiencies.  To this end, planning departments should prepare a checklist of submission requirements that can be quickly evaluated and returned to the applicant along with a form letter announcing the time that the completed information should be returned.   The same exercise should be undertaken by public works or utility departments that are responsible for reviewing service applications for proposed developments.   Departmental procedures for processing mailed applications or plans for development should be promulgated.

Cities should also consider eliminating as many early vesting opportunities as possible by examining existing protocol for informal review of a property owner’s “plan” for development of his land.  One tact is to eliminate entirely the “pre-application conference” which is now standard practice in most communities, allowing staff contact or discussion with the applicant only after an application has been “filed” and a completeness checklist is mailed to the applicant.  This strategy is best effected by excising references to pre-application review from the city’s development regulations altogether. 

Another important technique is to specify the sequence of applications that can be made during the development process.  The objective is to prevent presentation of a development plan to the utility department, say, in conjunction with a preliminary water service request, when in fact the city’s planning or engineering department has not seen the plans.  This could be enforced by expressly providing in the development regulations that no application for service or agreement for construction can be processed unless a preliminary plat application, e.g., has been presented to the planning department, as evidenced by the official signature of the responsible official of the department.  If this rule is violated, the utility department should send the written notice of incompleteness required by the statute.  The applicant will be unable to complete the application with the utility department until an application has been filed with the planning department.

Finally, cities must decide whether the filing date for purposes of vesting under ch. 245 also constitutes the filing date triggering the 30-day rule for action on a plat application or other review deadlines incorporated in the city’s development regulations.   The better view is that any deadline imposed by statute or ordinance does not commence to run until a complete application is on file with the city.  The alternative course is to include a statement in the 10-day notice letter to the effect that the applicant’s failure to provide a waiver of the impending review deadline will result in denial of the application for incompleteness. 

C. SB 574

Summary.  SB 574 removes or further conditions some exemptions to chapter 245 that allow new regulations to be applied to pre-filed development applications.  The exemption most widely used by cities is that in section 245.004(2) for municipal zoning regulations.    SB 574 for all practical purposes eliminates the exemption by adding to the list of regulations that are subject to ch. 245 those that affect “landscaping or tree preservation, open space or park dedication” and “property classification.”   The statute also makes annexation and public safety regulations that affect landscaping, tree preservation, open space or park dedication subject to ch. 245 vesting rules.  See subsections (7) and (11) of section 245.004.    Although the effective date of the Act is September 1, 2005, the changes to the exemptions apply “to a permit where a person files a permit application and demonstrates progress towards completion of a project before, on, or after September 1, 2005.”  Act, Section 2(b).  This provision thus is retroactive, but presumably cannot be asserted until after September 1, 2005.   See Act, section 3.

SB 574 also amends the present (and largely useless) “dormant project” provision of ch. 245 now contained in section 245.005 by adding stringent requirements for expiration of permits and projects.   For a permit application filed on or after September 1, 2005, a city may not “enact”  an expiration date shorter than two years.  The expiration date is effective only if “no progress has been made towards completion of the project.”  Section 245.005(b).   Further, the city may not place an expiration date on a project earlier than “the first anniversary date of the date the first permit application was filed for a project.” Id.  Again, the expiration date is effective only if no progress has been made toward completion of the project.  

The events that constitute “progress toward completion of the project” remain the same as in the present law, except the language has been clarified to assure that only one such event suffices.  The events are: (1) an application for a final plat or plan is submitted; (2) a “good faith attempt is made to file ... an application for a permit necessary to begin or continue towards completion of the project”; (3) costs are incurred for development the project ... “in the aggregate amount of five percent of the most recent appraised market value of the real property on which the project is located,” discounting land acquisition costs; (4) fiscal security is posted; or (5) utility connection fees or impact fees have been paid.   Section 245.005(c).

Finally, effective September 1, 2005, the law waives sovereign immunity (to the extent it was not impliedly waived by the original enactment) for any action under ch. 245.  Section 245.006(b).

Context.  Many cities have relied upon the “zoning exemption” in section 245.004(2) to apply new use regulations or landscaping and open space standards to pending development applications or subsequent applications in series with an approved application.   Some communities in fact have inserted landscaping or tree preservation standards in their zoning ordinances rather than include the regulations in the City Code in order to take advantage of the exemption.   The exclusions from the zoning exemption added by SB 574, however, remove such options once and for all. 

The land use and development regulations of most cities contain expiration dates for approved permits.  Typically, a permit expires when the property owner fails to submit or obtain approval for the next development application needed for his or her project within the prescribed time period.  For example, under the subdivision regulations of many cities, a developer has a year from the date of preliminary plat approval to obtain a final plat for a portion or all of the land subject to the preliminary plat.   If the developer fails to perform, most regulations allow for extension or reinstatement, usually limited to one extension for the same duration as that applicable to the original preliminary plat.   Some regulations go farther to provide that, once a deadline is missed, all prior approvals in the series are terminated.    (This effectively terminates the project.)   SB 574 prescribe rules for the manner in which permits may be terminated that may be interpreted to supersede existing expiration or lapse regulations, and that certainly apply to newly enacted or amended expiration provisions.

Impacts.   SB 574 closes most of the “loopholes” by which cities can apply new regulations to existing development projects.  The impacts will be felt most in the realm of zoning practice.   Under the existing statute, even if a landowner was able to beat a zoning amendment by filing some form of application, changes to use regulations and landscaping standards inter alia could still be applied to the project.  The only non-procedural, generally applicable standards to which the zoning exemption applies in the wake of changes enacted by SB 574 are those pertaining to signage, and perhaps parking and loading standards.   The operative word in the exceptions to the exemption, however, is “affect,” which will likely be construed broadly .  (Thus increased parking standards probably affect open space for a project.)

Most of the remaining exemptions for regulations under ch. 245 are of little utility to most  cities, having been already emasculated by prior acts.  A case in point is the exemption for “regulations to prevent the imminent destruction of property or injury to persons” in section 245.005(11), to which provisos were added last session excepting regulations that affect lot size, lot dimensions, lot coverage, building size, residential or commercial density, or the timing of a project.  If this exemption had not already expired, it is dead on arrival today, for the list now includes “landscaping or tree preservation, open space or park dedication.”

Equally disturbing is the fact that the amendments appear to apply retroactively to regulations that already have been applied to projects under the existing ch. 245 exemptions.  Thus, if a city has required new commercial developments within preferred corridors to incorporate enhanced landscaping or tree preservation into the project design pursuant to zoning amendments enacted after the date an initial application was filed for the project, the SB 574 amendments may allow the developer to ignore such standards for the next permit it seeks, if it can demonstrate that progress was made toward completion of the project “before, on or after September 1, 2005.”   This shouldn’t be too difficult, since submission of another application in the series itself qualifies as “progress.” 

The expiration provisions added to section 245.005 by SB 574 affect all cities that utilize expiration dates in their development regulations.   This section, the so-called dormant project provision, was enacted to allow a city to terminate a project that had no expiration date, but the project could only be terminated 5 years after the effective date of the re-enactment of ch. 245 after its inadvertent repeal in 1997.  The earliest date that a new expiration provision could be imposed was May 11, 2004.  Further, any of five events constituting “progress toward completion of the project” could defeat expiration of the project.

The additions to section 245.005 are not limited by the terms of SB 574 at least to imposition of initial or even amended expiration dates; rather the minimum expiration period of two years applies to any “individual” permit, the application for which was filed on or after September 1, 2005 (under lax “filing” rules, as discussed for SB 848).   The ambiguity remaining is whether this provision supersedes existing (and shorter) expiration dates.   The language of subsection (b) is framed as an enabling provision for local legislation establishing expiration periods enacted after the effective date of the Act.  Consequently, it can be argued that, as long as cities do not amend existing expiration provisions, they may continue to apply them to applications free of the constraints imposed by the bill.  The language is certainly broad enough, however, to apply to amendments to expiration provisions enacted after the effective date of SB 574 that shorten the expiration period under existing regulations. 

Where the statute applies, the law fails to address the question of what happens if (or how) a developer demonstrates that it is making compliance toward completion of the project, thus defeating the expiration date.  Does the permit live on forever after?  Or does the period of expiration “roll” to two years beyond the event constituting substantial “progress”?  For example, if a final plat on the second phase of a subdivision is due in two years, but during such time the developer pays any impact fees, say for building permits in phase 1, what happens to the expiration date of the preliminary plat for the second phase of the subdivision?

The amendments to the dormant project provisions clearly distinguish between the expiration of individual permits and that of the project.  A project expiration date cannot be “enacted” earlier than five years from the date of application for the first permit in the series establishing the project.   Thus, for those projects subject to SB 574 changes, the expiration of an individual permit will not automatically terminate the project, as it would under the existing regulations of some cities.   This allows the developer time to submit another application (or a good-faith attempt) before the five-year date runs, thus reviving progress toward completion of the project.   Under these rules, it will be very difficult to terminate any project to which existing expiration provisions cannot be applied.

Responses.    As noted in the preceding section, there are very few exemptions to chapter 245 that will be of continuing utility after the effective date of SB 574.  Worse yet, some new regulations that already have been applied to prior permits under the existing exemptions in section 245.004 apparently may be evaded upon filing of the next application in the series.  Given the scope of the limitations on exemptions to ch. 245, any regulation that is proposed for application to an existing project should be carefully justified under one of the few remaining exemptions.   Cities also should consider establishing a vested rights appellate procedure that enables the City upon petition to determine whether standards applied to pre-existing projects prior to the effective date of SB 574 and which were not in effect at the time the original application for the project was filed can be sustained under the newly crafted limitations on exemptions under the Act. 

Cities should decide how to interpret the new expiration provisions of section 245.005(b) before the Act take effect on September 1, 2005.   For home rule cities, at least, the Legislature did not provide with unmistakable clarity that the new expiration provisions supersede conflicting expiration periods in existing development regulations.   With the understanding that some landowners will argue that the 2-year expiration period for individual permits and the 5-year expiration period for projects apply by operation of law to any application for a permit filed after September 1, cities should retain and apply existing expiration standards to new permit applications and to dormant projects after such date.  This works if existing provisions are adequate.  If not, then cities have the option of enacting new (or shorter) expiration periods and dormant project regulations before the effective date of SB 574, albeit at some risk.

D. Cumulative Responses

The 2005 Legislature has enacted even more draconian measures to limit the powers of cities to regulate in the public interest.  Most property owners may now evade the effect of new regulations under the super-early vesting rules established under SB 848.  Further, the limitations on the exemptions to chapter 245 for zoning regulations and public safety standards imposed by SB 574 assure that most new regulations will be subject to assertion of vested property rights.   New limitations on expiration of permits and projects under SB 574 will negatively affect some cities that do not have adequate lapse provisions in their existing development regulations.    The uncertainty introduced by many of the new provisions in itself will create problems for many cities, exposing them to risk from misapprehension of the Legislature’s “intent.”

While there are tailored responses that counter some of the new rules, a larger question looms: are more global responses needed by cities in order to convey the message that things have gone too far?  When regulation in the public interest is effectively limited to what’s on the books on September 1, 2005, then perhaps new regulations should not be enacted at all, including in particular zoning amendments urged on by landowners that benefit from the “upzoning” of their lands.   Perhaps September 1, 2005 should be the watershed date for property owners as well as cities: what you may do with your property on that date is what you may do with your property from now on.  This in fact would be quid pro quo.  Since abutting landowners no longer are eligible for the protection that comes from new legislation in the public interest, perhaps it is only fair that neighbors not be visited with negative impacts resulting from changes in regulations that benefit the landowner seeking to develop its land.   Land now zoned for agricultural use can stay that way until chapter 245 is repealed.

A less nuclear but still effective reaction would be to eliminate the opportunity for most vesting events in a city’s development regulations.   Already discussed was the strategy of eliminating “pre-application conferences,” which now are mere invitations to early vesting under SB 848.   A better response would be to eliminate preliminary applications altogether.  Nothing in chapter 212, for example, requires cities to approve “preliminary plats” or “master plats” or “land studies” as a step in the process of dividing land.  By repealing all provisions relating to such applications, the onus is placed on the development community to get it right the first time, or as many incomplete applications letters later that are necessary before the final (and only) application for subdivision approval is correctly prepared.

In any event, all cities that have an interest in enacting any new regulations should consider enacting vested rights petition procedures, structured to give the governing body at least the opportunity to consider the interpretation of the new rules before the developer seeks approval of his project from the district court, and attorney’s fees too.