New Jersey Supreme Court Returns to "Bright Line" Test of Ownership for Doctrine of Lot Merger

Last year, the Appellate Division sent tremors through the real estate world by expanding the settled doctrine of lot merger to cases of equitable ownership in Jock v. Zoning Bd of Adjustment. On August 4, 2005, the New Jersey Supreme Court unanimously reversed the Appellate Division and returned to the bright-line test for lot merger, first expressed in Loechner v. Campoli, 49 N.J. 504 (1967). Loechner provided that adjoining undersized lots under common ownership are merged into one parcel for zoning purposes such that a subdivision and variances would be required to sell any portion of the merged parcel.

The Appellate Division had held that two contiguous undersized lots had merged on the basis of common equitable or constructive ownership despite the fact that the lots were titled in separate parties. The pertinent facts involved two undersized lots owned by the Allens, identified as Lots 26 and 27. The lots were created and conveyed to the Allens prior to the Township's enactment of a zoning ordinance that rendered the lots non-conforming as to the minimum lot size under the ordinance. The Allens took title to Lot 26 in their own name but at closing had title to adjoining Lot 27 deeded to their son, Robert. Subsequently, Raymond, the Allen's other son, acquired an interest in Lot 27 as a tenant in common with Robert. Though Lot 27 was titled in his sons' names, the elder Allen lived on Lot 26 and used the adjoining Lot 27 as if it were his own. He enclosed the lot with a fence, planted a garden and made several other improvements over the years including constructing a tool shed.

The elder Allens determined to sell Lots 26 and 27 in an effort to relocate, presumably for retirement as they were in their 80's. With their sons' consent, the Allens listed Lots 26 and 27 separately for sale. Paul Amato became aware that the properties were for sale. Mr. Amato made an inquiry of the properties to the Zoning Officer specifically asking if the undersigned lots had merged. The Zoning Officer replied that the lots were in separate legal ownership and therefore no merger occurred. The Zoning Officer also confirmed the validity of a variance previously granted to Lot 27 to permit a smaller side yard set back than required, confirming to Amato that the Township was treating the lots as separate and distinct for zoning purposes.

Amato entered into separate contracts for Lots 26 and 27. The elder Allens were the sellers of Lot 26; their sons were listed as sellers of Lot 27. With respect to Lot 27, Amato assigned his rights in the contract to Shire Realty, Inc., a corporation in which he was a 50% shareholder. The other 50% was owned by his wife. Title to Lot 26 was subsequently transferred to Amato. Lot 27 was conveyed to Shire Realty, Inc.

Amato immediately re-listed Lot 26 for sale and made an application to the Wall Township Zoning Board of Adjustment for a variance to construct a single family residence on the undersized Lot 27. The Board approved that application, granting variances for Lot 27 as to minimum lot size, lot width and side and front yard setbacks. The owners of adjoining Lot 28 filed a complaint in lieu of prerogative writs challenging the variances.

The plaintiffs sought to overturn the variances on the basis that, among other things, a merger of Lots 26 and 27 had occurred as a matter of law both under the Allen's ownership as well as Amato's. With respect to the Allens, the plaintiffs argued a merger occurred as a result of the elder Allen's "constructive ownership" and use of Lot 27. As to Amato, the plaintiffs contended that Lots 26 and 27 merged because Amato was the "equitable owner" of both lots triggering a merger of the lots as a matter of law. Plaintiffs sought summary judgment on these grounds.

The trial judge disagreed, finding "nothing in real estate or municipal law" to support a "constructive merger" concept. The Plaintiffs appealed. The Appellate Division reversed the trial court and in so holding introduced a formerly unrecognized expansion of the Loechner merger doctrine.

The Appellate Division found that the doctrine of merger could be applied on an equitable ownership theory and found that a "Loechner merger" is not limited to circumstances where one party holds legal title to two adjoining undersized lots. Instead, the Appellate Division took an expansive view of the concept and found that a merger can also occur where "one party exercises dominion and control over the contiguous non conforming lot of another or where the property is in equitable or constructive ownership."

Applying this rationale, the Appellate Division found that Lot 26 and 27 had merged due to the elder Allen's use of the property as if it were his own even though Lot 27 was legally titled in the names of his sons. As to Amato, the Appellate Division found that Lot 26 and 27 also merged under Amato as the "equitable owner" of both lots despite the separate legal title in Amato individually and the corporate entity Shire Realty. The Supreme Court later referred to these conclusions of the Appellate Division as "wide of the mark".

The New Jersey Supreme Court granted Amato's petition for certification and unanimously reversed the Appellate Division. The Supreme Court noted that the case could have been disposed of by application of a well recognized exception to the merger doctrine. The Supreme Court cited Scardigli v. Borough of Haddonfiled Board of Adjustment, 300 N.J. Super. 314 (App. Div. 1997), for the proposition that no merger of undersized lots occurs where the planning board has previously approved the lots in question. The Supreme Court noted that Lot 26 had been the subject of a prior application involving the subdivision of a 20' strip from adjoining Lot 25 that was purchased by Allen and added to his Lot 26 so that Lot 26 would have a complying side yard, if not complying area. The Supreme Court, relying on Scardigli, held that the actions of the Board in previously approving the undersized Lot 26 "insulated it [Lot 26] from Loechner merger with Lot 27."

The Supreme Court's inquiry could have ended at that point. However, the Supreme Court went on to specifically address the Appellate Division's application of the Loechner doctrine in view of the implications of the Appellate Division's treatment and unwarranted expansion of the doctrine. The Supreme Court began its analysis in this regard by noting that:

Over the past 38 years and until the decision of the Appellate Division in this case, the view that Loechner requires identity of legal title appears to have been well understood. Indeed, plaintiffs were unable to cite a single New Jersey case that has ever considered a merger analysis in the absence of common legal title.

The Supreme Court re-affirmed the traditional and essential requirement of merger: common legal title of undersized lots. The Appellate Division's holding applying merger based upon "equitable ownership" was unsupported and appeared to have been created from thin air.

The Supreme Court noted the uncertainty that would be introduced as a result of the Appellate Division reasoning. The Supreme Court explained that the requirement of common legal title served to provide certainty in the application of Loechner. A simple title search would reveal any adjoining lots that are undersized and titled under common legal ownership. The Court noted that the Appellate Division's approach would render the title of all contiguous undersized lots in doubt. The Supreme Court explained:

It would [referring to the Appellate Division's holding] further devolve upon the land use authorities the job of determining, not only the results of a title search, which under Loechner, would be sufficient, but also the historical relationship between and conduct of adjoining property owners towards each other and toward the land. It goes without saying that proof problems would be complicated and the nature of proceedings vastly expanded. The same onus would fall on all purchasers of undersized lots, in contravention of the accepted principle that a purchaser should be able to rely on record title...

In reversing the Appellate Division, the New Jersey Supreme Court has made clear that the merger doctrine entails a bright line test that requires commonality of legal title in order to apply. Prospective purchasers can once again rely on the record of title when purchasing.