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Bianchi v. Lorenz (95-224); 166 Vt. 555; 701 A.2d 1037
[Filed 11-Jul-1997]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
No. 95-224
Anthony and Nancy Bianchi Supreme Court
On Appeal from
v. Chittenden Superior Court
Michael and Karen Lorenz January Term, 1996
Linda Levitt, J.
Vincent A. Paradis and Daniel P. O'Rourke of Bergeron, Paradis,
Fitzpatrick & Smith, Essex Junction, for plaintiffs-appellees
Frank H. Langrock of Langrock Sperry & Wool, Burlington, for
defendants-appellants
PRESENT: Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.
DOOLEY, J. Defendants Michael and Karen Lorenz appeal from a
judgment entered against them holding that a sale of property that was in
violation of zoning laws breached the covenant against encumbrances in a
warranty deed. We affirm the judgment and hold that an encumbrance exists
when the seller can determine from municipal records that the property is
in violation of local zoning law at the time of conveyance and the
violation substantially impairs the purchaser's use and enjoyment of the
property. We reverse the award of post-judgment interest and remand for
recalculation.
In 1986, defendants purchased a lot in the town of Jericho, Vermont.
In May 1987, defendants asked a state-certified site technician to design a
septic system for the lot. They told the technician that they were planning
to build a four-bedroom home, and the technician visited the site with
Karen Lorenz's father, Maurice Begnoche, who was the building contractor.
After examining the soils, water table, grading and lot configuration, the
technician designed a septic system for a three-bedroom home because the
small lot size and other physical characteristics
<Page 2>
of the lot prevented the installation of a septic system large enough to
service a four-bedroom house. The technician delivered the plans to Mr.
Lorenz and went over the design with him. The plan stated that the site
technician should be notified and the system inspected before it was
covered.
In June 1987 defendants obtained a building permit. The application
provided that "[a]ll construction [was] to be completed in accordance with
the Zoning Laws of the Town of Jericho and State of Vermont." Jericho's
zoning regulations require an owner of a newly constructed home to apply
for a certificate of occupancy. Jericho, Vt., Zoning Regulations § 1204(2)
(1981). The certificate will be issued only after the home is inspected
and found to be in compliance with the building and septic permits. The
zoning regulations make it unlawful to use or occupy a building until
issuance of a certificate of occupancy. Id. § 1203(2). Under 24 V.S.A. §§
4444 and 4445, the Town has the authority to enforce its zoning laws
through fines and injunctions.
Defendants also obtained a septic permit from the Town of Jericho.
The permit stated that the septic system was "to be constructed in
accordance with [the] design by [the site technician] . . . and inspected
by her upon completion. Written notice must be received by this office
prior to issuance of an Occupancy Permit."
Defendants relied upon their general contractor, Mr. Begnoche, to
obtain all the necessary permits and to construct the home in compliance
with the permit conditions. Defendants' general contractor built a
four-bedroom house in place of a three-bedroom house, and did not follow
the site technician's septic or grading plan. Instead, the general
contractor installed a substandard septic system with numerous defects and
poor grading. The completed septic system was never inspected by the site
technician, and a certificate of occupancy was never issued. Defendants
were unaware of these zoning violations.
In 1990, defendants listed their home for sale. During negotiations
with plaintiffs Anthony and Nancy Bianchi, defendants made no
representations concerning the septic system
<Page 3>
or the lack of a certificate of occupancy. In December 1990, plaintiffs
purchased the home and received from defendants a warranty deed with a
covenant stating that the property was free from every encumbrance.
In the summer and fall of 1991, plaintiffs noticed that the portion of
their backyard above the septic system contained grass that was unusually
lush. Plaintiffs noticed a fetid odor the following spring. Shortly
thereafter, septic effluent surfaced in their backyard. Plaintiffs had
their septic system inspected by an engineer, who told them that the system
deviated from the site technician's plans. The Jericho health officer
informed plaintiffs that they would need to replace the septic system and
obtain a certificate of occupancy to comply with the zoning laws.
Plaintiffs incurred $38,415.00 in costs to replace the septic system and
$2,804.00 in refinancing costs for their home; they expected to incur
additional future costs to comply with conditions in the certificate of
occupancy, which they eventually received.
Alleging consumer fraud, negligence, and breach of warranty,
plaintiffs sued to recover the cost of replacing the septic system. Only
the breach of warranty claim survived defendants' motion for directed
verdict.(FN1) After the close of evidence, the court found that defendants
had breached the covenant against encumbrances in the warranty deed, and
awarded plaintiffs damages for the costs incurred to replace the septic
system.
Defendants argue that a violation of a zoning ordinance does not
constitute an encumbrance for purposes of the covenant against encumbrances
in a warranty deed. We disagree and hold that an encumbrance is present at
least when the seller can determine from municipal records that the
property violates local zoning regulations at the time of conveyance, and
the violation substantially impairs the purchaser's use and enjoyment of
the property.
This case is governed by our recent decision in Hunter Broadcasting,
Inc. v. City of Burlington, 164 Vt. 391, 670 A.2d 836 (1995). In Hunter
Broadcasting, we held that a violation
<Page 4>
of Vermont's public health regulation requiring a subdivision permit
constitutes an encumbrance for purposes of the covenant against
encumbrances in a warranty deed. Id. at 394, 670 A.2d at 839. In that
case, the seller subdivided its land and created a single, 9.7-acre lot,
which it conveyed to the buyer without obtaining required state subdivision
approval. The transaction in Hunter Broadcasting involved a two-step
process: first, the seller illegally subdivided the parcel; second, the
seller conveyed the illegally subdivided parcel to the buyer. The instant
case is analogous to Hunter Broadcasting. Here, sellers illegally moved
into their home without obtaining a certificate of occupancy; then, a few
years later, sellers sold the illegally occupied house to buyers.
We note that the majority rule in other jurisdictions in the country
is that a violation of zoning regulations existing at the time of the
conveyance is an encumbrance, at least where the violation has a
substantial impact on the use and enjoyment of the land. See Feit v.
Donahue, 826 P.2d 407, 410 (Colo. Ct. App. 1992) ("numerous jurisdictions
have held that an existing violation of a zoning law constitutes an
encumbrance," collecting cases); FFG, Inc. v. Jones, 708 P.2d 836, 846
(Haw. Ct. App. 1985) (majority of jurisdictions that have decided question
hold that zoning code violation is encumbrance within meaning of covenant
against encumbrances); Seymour v. Evans, 608 So. 2d 1141, 1146 (Miss. 1992)
(majority of jurisdictions regard existing violation of zoning regulations
as breach of covenant against encumbrances, collecting cases).
The briefing and argument in this case occurred before we issued the
decision in Hunter Broadcasting. As a result, most of defendants'
arguments are addressed directly by that decision. For example, defendants
argue that the zoning violation cannot be an encumbrance unless the
municipality has brought an enforcement action that gives the municipality
an interest in the land to the diminution in value of the fee holder.
There was, however, no enforcement action in Hunter Broadcasting, and the
Agency of Natural Resources had no more interest in the land involved in
that case than the Town of Jericho has interest in the property involved
here.
<Page 5>
Two differences between this case and Hunter Broadcasting require some
analysis. First, our decision in that case relied, in part, on the section
of the subdivision rules that prohibited resale of a subdivided lot without
the permit needed for the original subdivision. There is no identical
provision in this regulatory scheme. We did not mean to suggest in Hunter
Broadcasting that a regulatory violation is an encumbrance only if it
creates an impairment of title. Indeed, by definition an encumbrance
creates a "`diminution of the value of the estate of the tenant [that is]
consistent[] with the passing of the fee.'" Olcott v. Southworth, 115 Vt.
421, 424, 63 A.2d 189, ___ (1949) (emphasis added) (quoting Bouvier Law
Dictionary, "Incumbrance" (Rawle's 3d rev.)). The point of Hunter
Broadcasting was that the subdivision rule created a substantial diminution
in value.
Although the Jericho zoning ordinance does not prohibit reconveyance
of the property, it does severely diminish the value of this residential
property. The ordinance makes it unlawful to "use or occupy . . . any
building or other structure, or part thereof, for which a zoning permit is
required until a certificate of occupancy has been issued by the Zoning
Administrator." Jericho, Vt., Zoning Regulations § 1203(2) (1981). The
zoning administrator has the power to enforce this provision by an action
to "restrain, correct or abate such . . . use, or to prevent . . . any . .
. use constituting a violation." 24 V.S.A. § 4445. The property involved
in this case is a small residential lot with a four-bedroom home on it. It
is difficult to conceive of a greater diminution in value of a residential
property than that accompanying the loss of the right to use or occupy the
home.
This case is similar to Feit, where the buyers could not list the
property for sale because it lacked a certificate of occupancy, and the
court found an encumbrance. 826 P.2d at 410-11. The impact in Feit was
identical to that present here -- the absence of a certificate of occupancy
precluded all practical use of the property and, therefore, made it
unmarketable.
The second distinction is that the regulatory scheme is local, rather
than state, and the nature of the search for encumbrances may be different.
On its face, this is a distinction without
<Page 6>
a relevant difference. The encumbrance here is caused by the absence of a
required certificate of occupancy. The legal consequence of the missing
certificate is similar to the legal consequence of the missing subdivision
permit despite the fact that different regulatory regimes are involved.
Nor can we find, as defendants have argued, that any violation of the
zoning ordinance is latent and not discoverable. See, e.g., Frimberger v.
Anzellotti, 594 A.2d 1029, 1033-34 (Conn. App. Ct. 1991) (holding that
latent violation of zoning regulation is not encumbrance). In Hunter
Broadcasting, we distinguished the facts in Frimberger because the City's
violation of subdivision regulations "should have been obvious to the City
from the very nature of the transaction." Hunter Broadcasting, 164 Vt. at
396, 670 A.2d at 840.
In comparing this case to Hunter Broadcasting, we emphasize that the
critical violation of the zoning ordinance was not the failure to construct
the septic system in accordance with the plans or the extra bedroom that
was constructed. The critical violation was the failure to obtain the
required certificate of occupancy. Like the failure to obtain a
subdivision permit in Hunter Broadcasting, this failure was obvious from
the very nature of the transaction -- that is, the construction of a new
house.
Defendants argue that the violation is latent because it cannot be
found in the land records. As we held in Hunter Broadcasting, a violation
is not latent merely because the purchaser must examine the records of a
separate agency.(FN2) Likewise here, the violation of the
<Page 7>
zoning regulations is not latent merely because defendant must examine
municipal records in addition to land records.
Similarly, we do not agree that this decision will create uncertainty
in the law of conveyancing, as argued by defendants. We agree that
stability in real estate transactions is an important policy goal, and we
have written narrowly to resolve this case where the balance of risks is
clear. This is not a case where defendants, or an attorney performing a
title search, must physically examine the property to determine whether a
zoning violation is present.(FN3) The seller must determine only whether a
certificate of occupancy has been issued as required by the zoning
regulations. This determination can be made from municipal records when a
land record search is made. If no certificate has been issued, the owner
must bring the property into zoning compliance by meeting zoning permit
requirements for an occupancy permit.
Last, defendants challenge the trial court's calculation of damages.
Defendants claim that the trial court failed to find a causal relationship
between costs incurred by the buyers and sellers' failure to obtain a
certificate of occupancy; that the trial court erred in awarding damages
for work completed after buyers obtained a certificate of occupancy; and
that the trial court erred in awarding damages for regrading and certain
other costs.
<Page 8>
In reviewing matters on appeal, we will set aside factual findings of
the trial court only if they are clearly erroneous. V.R.C.P. 52(a)(2).
Factual findings are viewed in the light most favorable to the prevailing
party, disregarding modifying evidence. Lecours v. Nationwide Mut. Ins.
Co., 163 Vt. 157, 159, 657 A.2d 177, 178 (1995). "A finding will not be
disturbed merely because it is contradicted by substantial evidence;
rather, an appellant must show there is no credible evidence to support the
finding." Highgate Assocs. v. Merryfield, 157 Vt. 313, 315, 597 A.2d 1280,
1281 (1991).
Defendants' first claim is that plaintiffs failed to establish a
causal relationship between the costs incurred by plaintiffs and
defendants' breach of the covenant against encumbrances. In the absence of
private negotiations to the contrary, the seller owes a duty to the buyer
to bring land into compliance with local zoning regulations necessary for
an occupancy permit at the time of conveyance. The trial court found that
the buyers incurred, and will incur, substantial costs to satisfy the local
zoning regulations.
Defendants argue that plaintiffs failed to establish the necessary
causal link because (1) even if the Town had inspected the property, it
might not have discovered the zoning violation, and (2) any septic system
may fail. These arguments skirt the trial court's finding that, at the
time of conveyance, the septic system violated the zoning regulations.
Furthermore, the buyers incurred and will incur substantial costs improving
the septic system in order to obtain a certificate of occupancy. The
covenant against encumbrances indemnifies the buyer for any encumbrances on
the property at the time of conveyance. See 14 R. Powell & P. Rohan,
Powell on Real Property, 900[4], at 81A-148 (1997). The property was
encumbered at the time of the conveyance because it lacked a certificate of
occupancy; to obtain a certificate of occupancy, the buyers must improve
the septic system, which was in violation of the zoning regulations at the
time of conveyance. Thus, trial court's finding that plaintiffs' costs
were the result of the encumbrance was not clearly erroneous.
Defendants' second claim is that the trial court erred in awarding
damages for work
<Page 9>
completed after buyers obtained a certificate of occupancy in December
1993. The evidence indicates that the septic permit issued in September
1993 was for two people, and that the certificate of occupancy contemplated
occupancy by two people in a four-bedroom house. The septic permit states
that a new aeration unit must be installed if sewage flows increase. Thus,
plaintiffs cannot sell the four-bedroom house as a house for four people
until they install a new septic system. We hold that the trial court did
not clearly err when it included the costs for increasing the capacity of
the septic system in the damages it awarded.
Defendants' third claim is that the regrading of plaintiffs' backyard
billed by plaintiffs' contractor in January 1994 was unrelated to work on
the septic system, and that the contractor double-charged for overhead and
profit. Plaintiff testified that regrading was necessary to prevent
ponding of water near the septic system. Plaintiffs' contractor testified
concerning overhead and profit, and defendants failed to present contrary
evidence. We therefore conclude that the trial court's award of damages
for regrading, overhead and profit was not clearly erroneous.
Plaintiffs note that the trial court improperly calculated the per
diem post-judgment interest rate. Under 9 V.S.A. § 41a(a), "the rate of
interest or sum allowed for forbearance or use of money shall be twelve
percent per annum computed by the actuarial method." See Greenmoss
Builders, Inc. v. Dun & Bradstreet, Inc., 149 Vt. 365, 370, 543 A.2d 1320,
1324 (1988) (interpreting actuarial method as simple interest method). We
agree with plaintiffs and remand for recalculation of the interest payment
pursuant to 9 V.S.A. § 41a(a).
Affirmed in part and reversed in part; remanded for recalculation of
per diem post-judgment interest payment.
_______________________________________
Associate Justice
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Footnotes
FN1. Plaintiffs have not appealed the directed verdicts on their other claims.
FN2. The concurring opinion argues that the failure to obtain a
certificate of occupancy cannot be ascertained from a perusal of municipal
records because no law requires that the municipalities keep such records.
The concurring opinion is warring with Hunter Broadcasting. At the time of
the events in that case, subdivision permits were not required to be
recorded in land records, and thus, title searchers must look to the
records of the Department of Environmental Conservation. There is no
specific statutory requirement that DEC permits be recorded or indexed.
Although the Legislature has required that subdivision permits be recorded
in the land records as of September 1, 1994, 18 V.S.A. § 1221b, older
permits will remain unrecorded, and it will still be necessary to search
DEC records. Nothing in this record, or that of Hunter Broadcasting,
suggests that it would be harder to find the absence of a town
certificate-of-occupancy permit than to find the absence of a DEC
subdivision permit.
Permit copies and records are public documents, which by law are open
to public inspection. See 1 V.S.A. §§ 316(a), 317(b). Thus, the only real
concern is that municipalities issue permits orally or do not make copies
of the permits that are issued. As in Hunter Broadcasting, we do not
believe this is a serious risk. It is highly unlikely that a town would
adopt a certificate-of-occupancy requirement and deprive itself of any
method of enforcing it by failing to keep records of permits. The
Legislature can, of course, require that certificate-of-occupancy permits
be filed in the land records in aid of accessibility of these records.
FN3. We do not know how an attorney doing a title search could
discover the encumbrance under the theory urged by the concurrence, except
to examine the municipal records which the concurrence argues are
unreliable. Further, our law provides that the covenant against
encumbrances runs with the land, see Hunter Broadcasting, Inc. v. City of
Burlington, 164 Vt. 391, 397, 670 A.2d 836, 840 (1995), and disputes will
often arise between title-holders who had no part in creating the situation
that caused the encumbrance. It would be unfair to make a subsequent
seller liable for a breach of the covenant if that seller has no way to
discover the facts that give rise to the encumbrance. The theory which we
have adopted allows subsequent sellers and buyers to determine whether
there is an encumbrance from municipal records.
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Concurring
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
No. 95-224
Anthony and Nancy Bianchi Supreme Court
On Appeal from
v. Chittenden Superior Court
Michael and Karen Lorenz January Term, 1996
Linda Levitt, J.
Vincent A. Paradis and Daniel P. O'Rourke of Bergeron, Paradis, Fitzpatrick & Smith,
Essex Junction, for plaintiffs-appellees
Frank H. Langrock of Langrock, Sperry & Wool, Burlington, for defendants-appellants
PRESENT: Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.
ALLEN, C.J., concurring. While I concur with the result, I would
substantially narrow the majority's holding. The majority presupposes that
the failure to obtain a certificate of occupancy, which is a violation of
local regulations, can somehow be ascertained from perusal of municipal
records that are not required to be kept. Municipalities are not required
to record, index, or even make copies of certificates of occupancy. See 24
V.S.A. § 4443(a)(2) (municipalities may require that certificates of
occupancy be issued prior to use of land or structure where such land or
structure has been created, erected, changed, converted, altered or
enlarged) (emphasis added); cf. id. § 4443(b)(1), (2) (administrative
officer must deliver copy of zoning permit to listers and post copy of
permit in at least one public place in municipality for fifteen days from
date of issuance). Because the absence of a certificate of occupancy in
local records does not necessarily signify that a certificate was never
issued, a seller cannot determine from municipal records whether a parcel
is in violation of local zoning law.
Traditional encumbrances, such as mortgages, easements, liens,
judgments, restrictive
<Page 2>
covenants, and the like, must be recorded in the land records and indexed
so that one may readily ascertain their existence or nonexistence. See 24
V.S.A. § 1161 ("A town clerk shall keep a general index of transactions
affecting the title to real estate . . . of every deed, conveyance,
mortgage, lease or other instrument affecting the title to real estate, and
each writ of attachment, notice of lien or other instrument evidencing or
giving notice of an encumbrance on real estate . . . ."); Hunter
Broadcasting, Inc. v. City of Burlington, 164 Vt. 391, 394, 670 A.2d 836,
838-39 (1995) (failure to obtain state subdivision permit results in fine
secured by lien against real estate). In Hunter Broadcasting the seller
knew that a state subdivision permit had not been obtained when it conveyed
the property. A subsequent seller could easily verify the existence or
non-existence of the state subdivision permit by contacting the issuing
agency for permits required to be issued before September 1, 1994, or by
searching the land records for permits issued after that date.
Municipalities have been authorized to require occupancy permits for over
thirty years. See 24 V.S.A. § 4443(a)(2). In Jericho they are issued by
the zoning administrator, but neither the enabling statute nor the zoning
regulation requires that a copy be made or kept, or if made, where it is
kept. A seller conveying by a deed warranting against encumbrances, a
buyer searching for the existence of encumbrances, and title insurers
insuring titles to real estate can no longer rely upon the land records but
now will be required to examine "municipal records" for instruments that
may or may not have ever existed.(FN1)
Contrary to the majority's characterization of the failure to obtain a
certificate of occupancy as an "obvious" violation of the zoning ordinance,
ante, at 6, the violation is not in fact "obvious" when the failure was the
fault of the first seller in the chain of title and there is no way to
determine from municipal records whether a certificate has issued. In
light of the
<Page 3>
lack of a requirement that certificates of occupancy be indexed and
recorded or that copies be kept, the rule enunciated in Frimberger v.
Anzellotti, 594 A.2d 1029 (Conn. App. Ct. 1991), should be applied:
"Latent violations of state or municipal land use regulations that do not
appear on the land records, that are unknown to the seller of the property,
as to which the agency charged with enforcement has taken no official
action to compel compliance at the time the deed was executed, and that
have not ripened into an interest that can be recorded on the land records
do not constitute an encumbrance for the purpose of the deed warranty."
Id. at 1033-34.
In the present case a state-certified site technician testified that
she designed sellers' septic system based upon a proposed three-bedroom
house and that she discussed her design with one of the sellers. In
addition, the conditional septic permit obtained by sellers specifically
required that the house be constructed in accordance with the site
technician's design. It also states that an occupancy permit is required
and will not be issued until after "successful completion and inspection of
the septic system."
Sellers thus knew that the design for the system was based upon a
three-bedroom house, the system was to be constructed in accordance with
that design, and an occupancy permit would issue only upon successful
completion and inspection of the system. While they may not have been
aware that the system was poorly constructed or that it was not constructed
in accordance with the septic plan, they certainly knew that they were
conveying a four-bedroom house with a septic system designed for a
three-bedroom house, a violation of the septic permit and the local zoning
ordinance. See Jericho, Vt., Zoning Regulations § 1118 (1981) (no zoning
permit shall issue for any structure unless plans are certified to be in
compliance with applicable regulations). Because sellers knew that they
were in violation of municipal regulations, the violation constitutes an
encumbrance under Frimberger, and sellers are therefore liable to buyers.
While I concur in the result of the majority opinion, I dissent from
the mischief that will occur from holding that the absence of a certificate
of occupancy in municipal records signifies
<Page 4>
a violation of local regulations and results in an encumbrance. Under the
majority holding the covenant against encumbrances would be breached where
a certificate of occupancy was actually issued, but could not be located in
the "municipal records." I am authorized to state that Justice Johnson
joins in this concurrence.
_______________________________________
Chief Justice
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Footnotes
FN1. While the majority does not define the term "municipal records,"
they clearly intend it to mean something more than the land records.
Municipal clerks can now anticipate requests to search their files, desks,
and storage facilities, and zoning administrators and their predecessors in
office can look forward to similar requests regarding their attics,
basements, and garages.
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