Sept. 24, 2009 – A business cannot try to grandfather a nonconforming use by kick-starting it just before the effective date of an ordinance change, the Wisconsin Court of Appeals held.

In Town of Cross Plains v. Kitt’s “Field of Dreams” Korner, Inc., 2008AP546, the court considered the extent to which Wis. Stat. section 59.69 (10)(a) shields a nonconforming use. Besides showing the nonconforming use is “actual and active,” the court concluded that a business must demonstrate a substantial investment in the use or the prospect of a substantial financial loss if the use is discontinued to prove it has a protectable “vested interest” in it.

However, the court said that section 59.69 (10)(a) is also predicated on a business owner’s reasonable reliance on existing law at the time investments are made in the nonconforming use.  In the circumstances of this case, the court held that the owners failed to demonstrate that reasonable reliance because they knew of the pending ordinance amendment before they made expenditures and incurred liabilities to establish the use.

Adult entertainment club

Kitt Klascheur sold his sports bar business in the town of Cross Plains to Bow-Wow Entertainment, LLC, on Feb. 11, 2005. That same night, Kitt’s Korner became Hot Rods, featuring adult entertainment.

Gerald Wood, a managing member of Bow-Wow, testified that he knew an amendment requiring a zoning change for an adult entertainment tavern was going to be adopted sometime in early 2005. He hoped that Hot Rods would be “grandfathered” under the new ordinance by starting operations before the law’s effective date.

Bow-Wow incurred start-up expenses, including those for a DJ, dancers, and rented cubicles. Two days before the Dane County ordinance became effective on Feb. 23, extensive remodeling had begun at Hot Rods.

Before the circuit court, the business owners and the town filed summary judgment motions asking whether the adult entertainment was a lawful nonconforming use under section 59.69 (10)(a). The circuit court concluded that the owner’s use of the premises for adult entertainment from Feb. 11 until Feb. 23 was insufficient to create a protectable vested interest in an ongoing adult entertainment business. The business owners appealed.

More than ‘actual and active use’

In an opinion authored by Judge Margaret Vergeront, the court of appeals rejected the business owners’ argument that section 59.69 (10)(a) only requires demonstration of an “actual and active use” to exempt a nonconforming use as a vested interest.

Informed by an analysis of the case law developed on the issue of nonconforming uses, the court of appeals concluded that a property owner must also show that failure to exempt a use lawful before enactment of a new ordinance will adversely affect a “substantial right.”

“The case law shows that having a vested interest in the continuance of a use is fundamental to protection of a use under Wis. Stat. § 59.69 (10)(a),” the court said. “The ‘actual and active use’ standard tells us that there can be no vested interest if the use is not actually and actively occurring at the time the ordinance amendment takes effect. However, it does not follow, as the owners contend, that any use that is actually occurring on the effective date of the amendment is sufficient to give the owner a vested interest in its continued use.”

“In describing the rights that have vested and thus created an interest that ought to be protected from a retroactive zoning law or ordinance, Wisconsin courts have used the term ‘substantial rights,’” the court wrote, citing Atkinson v. Piper (Building Height cases), 181 Wis. 519 (1923), Rosenberg v. Vill. of Whitefish Bay, 199 Wis. 214 (1929), State ex rel. Schroedel v. Pagels, 257 Wis. 376 (1950), County of Sauk v. Trager, 113 Wis. 2d 48 (Ct. App. 1983), and Hearst-Argyle Stations, Inc. v. Board of Zoning Appeals, 2003 WI App 48.

“We are convinced that the legislature did not intend to protect a use as a nonconforming use under Wis. Stat. § 59.69 (10)(a) unless substantial rights would be adversely affected if the use were discontinued,” the court reasoned. “This reading of the statute is consistent with the principle that nonconforming uses are not favored.”

In the context of trade and industry, a showing of impaired substantial rights “will ordinarily mean that there has been a substantial investment in the use or that there will be a substantial loss if the use is discontinued,” the court said.

“The owners contend that consideration of the investment made in a new use in deciding if it is entitled to protection under Wis. Stat. § 59.69 (10)(a) is unfair to small enterprises that do not have the resources to fully establish a business at the outset and so start out ‘on a shoestring.’ We do not agree,” the court wrote, explaining that the determination of a substantial investment or risk of substantial loss will be made on the particular circumstances of each business owner.

Consideration of the investment in a use in its beginning stages may include expenditures made and liabilities incurred, even if all the changes contemplated to accommodate the new use are not complete, the court added.

Knowledge precludes a vested interest

But aside from questions of investment or potential loss related to a nonconforming use, the court held that owners must have reasonably relied on the existing law when they initiated the use.

In this case, the court found, the owners knew the existing law was soon to change. Therefore, they acted unreasonably.

Wisconsin case law has not expressly addressed the significance of the owner’s knowledge, or lack thereof, of a pending change in the law, the court acknowledged. “However, the thread running through the cases that protect a use, or development of a new use, from a new statute or ordinance prohibiting the use is that it is unfair to deprive persons of the benefits of their investments when at the time they made them they were reasonably relying on the existing law,” the court stated.

“The fairness analysis is significantly altered when the owners know before they undertake to establish a new use that an ordinance amendment will soon prohibit the use in that zoning district,” the court said.

Moreover, the court noted that “the purpose of § 59.69 (10)(a) is to protect a use where substantial rights would be adversely affected if the use was discontinued and to do so in a way that restricts, rather than encourages, nonconforming uses.”

“This purpose is undermined if a business owner may avail himself or herself of the protections of the statute by establishing a use after learning that it will soon be prohibited,” the court said.

The owners argued that businesses commonly act to avoid the negative effect of a new law, such as a retail store having a sale before a sales tax increase. But the court faulted the analogy because a retail store does not have to demonstrate a vested interest in its efforts.

Likewise, the court discounted the owners’ concern that a proposed ordinance might be tabled for an indefinite period or otherwise has an uncertain fate,  “[A]s a general matter, the dampening effect on establishing a particular new use while the zoning authority is considering limiting or prohibiting that use is not inconsistent with the purposes of Wis. Stat. § 59.69 (10)(a),” the court said.

“If there are particular circumstances making it reasonable for a business owner to invest in a use despite uncertainty about when or if a proposed change in the law will take effect, the reasonable reliance standard permits consideration of those circumstances,” the court added.