Bianchi v. Lorenz

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

 

  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

 

  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

 

  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.

 

       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

 

  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

 

  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.

 

       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

 

  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





  ---------------------------------------------------------------------------
                                  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.


------------------------------------------------------------------------------
                                 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

 

  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

 

  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

 

  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




  -----------------------------------------------------------------------------
                                  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.