Seven Hills, LLC v. Chelan County: When Does a Nonconforming Use Come into Existence?

Nonconforming use cases tend to be tricky because they reflect the tension between a local government’s regulatory authority and the right of a business or property owner to use real property in a manner that was, at one time, permitted by code.

Washington courts define “nonconforming use” as a use that lawfully existed prior to the enactment of a zoning ordinance, and which is maintained after the effective date of the ordinance, although it does not comply with the newer zoning restrictions applicable to the district in which it is situated. 

Nonconforming uses frequently arise with respect to agricultural or mining uses in areas where land use patterns are changing. An example is Rhod-A-Zalea & 35^th, Inc. v. Snohomish County (1998), in which the Washington Supreme Court (Supreme Court) upheld the ability of a county to require grading permits from a peat mining operation that had been in operation since 1961. The Supreme Court noted that since nonconforming uses limit the effectiveness of land use controls, they are disfavored by courts and should be phased out.  However, it also noted that local governments may allow legal nonconforming uses to continue until they are either: (1) abandoned or (2) eliminated pursuant to a reasonable “amortization schedule” to avoid constitutional issues and hardship on business owners.

Nonconforming Uses and the Legalization of Cannabis

Washington voters passed Initiative 502 (I-502) in 2012, which decriminalized possession, use, and production of cannabis and called for licensing of cannabis businesses through the Washington State Liquor and Cannabis Board (Board).  The Board then established licensing requirements for cannabis production, processing, and sales. Local governments retain the ability to regulate or prohibit cannabis businesses from a zoning standpoint, but in those early days, it was hard to predict or understand how the arrival of cannabis businesses would impact their communities.

As local governments were grappling with whether to allow such uses, cannabis businesses were in a race to obtain one of the limited number of licenses available and become participants in a newly legalized market.  The Supreme Court’s decision in Seven Hills LLC v. Chelan County (September 23, 2021) represents an unique context for analysis of nonconforming uses because it arises in the context of a new business opportunities instead of long-established uses.

A timeline is helpful for understanding the competing interests of Chelan County (County) and Seven Hills LLC (Seven Hills):

• November 6, 2012: Washington voters approve I-502.
• October 2013: The Board establishes application requirements for being a cannabis producer or processor.
• 2013: County adopts moratorium on locating and permitting cannabis-related businesses and uses within the County and subsequently extends the moratorium through January 14, 2014. 
• January 14, 2024: County terminates the moratorium and leaves (for the time being) the decision of siting and licensing cannabis operations to the Board.
• May 2014: Seven Hills submits required operating plan to the Board to establish a cannabis business.
• December 2014 to February 2015: Seven Hills and County exchange emails regarding cannabis-specific County regulations. County indicates that no additional regulations exist, and that cannabis production is treated as an agricultural business.
• February 11, 2015: Seven Hills enters into a real property lease for the purpose of cannabis production and processing.
• May 27, 2015: Seven Hills applies for a permit for an eight-foot chain link fence (which is a state requirement for cannabis operations) and passes final fence inspection on August 21, 2015.
• September 29, 2015: County adopts moratorium on the siting of cannabis businesses, including production and processing, and subsequently extends the moratorium through March 27, 2016.
• January 26, 2016: Seven Hills is approved by the Board for a Tier 3 cannabis producer and processor license.
• February 16, 2016: County adopts resolution amending the definition of “agricultural” to specifically exclude cannabis, which had the effect of banning cannabis production and processing within the County. 
• 2016-2017: County brings a code enforcement action against Seven Hills, which is ultimately appealed to the Washington Supreme Court. 

Much of the case turns on two simple questions: (1) When is a nonconforming use established?; and (2) What impact (if any) does a moratorium have on a business owner’s attempt to establish such a use?

Moratoriums Do not Necessarily Preclude Establishment of a Use

To answer the second question first, the Chelan County Hearing Examiner, the trial court, and the Washington Court of Appeals ruled that Seven Hills did not have a legal nonconforming use when the County issued its September 29, 2015 moratorium.  The Court of Appeals reasoned that since Seven Hills did not receive its cannabis producer and processer license until January 2016, it could not have had a valid non-conforming use at the time the moratorium was adopted in September 2015.

In a 5-4 decision, the state Supreme Court disagreed.  It noted that while the moratorium prohibited the siting of cannabis processing and production facilities in the County, the “measure did not suspend all cannabis businesses — it spoke only to the siting of newly licensed businesses.”  For the majority, the moratorium temporarily suspended the County’s power to designate locations where otherwise licensed cannabis businesses could operate, but did not change the County’s underlying zoning provisions, which until February 16, 2016, did not prohibit cannabis businesses. Since Seven Hills obtained its cannabis production and processing license from the Board on January 26, 2016, it had an allowed use prior to the amendments to the County’s regulations. 

Establishment of a Nonconforming Right is Fact-Specific

The Supreme Court observed that the analysis of whether a nonconforming use is established is fact dependent:

Nonconforming use law is not so much a bright line as much as it is about establishing principles that guide a court’s decision-making. All nonconforming use cases are fact-specific, and all require concrete evidence that the petitioner did more to establish their nonconforming use rights than just preparatory work.

It found that Seven Hills showed more than the “mere intention or contemplation of an eventual use of land.”  For the majority, Seven Hills did enough to establish a nonconforming use by incurring $750,000 in costs and site improvements, acquiring permits, and obtaining the required license from the Board on January 26, 2016, prior to the County’s prohibition of cannabis-related uses on February 16, 2016.  Clearly, the majority’s use of the later date (February 16, 2016, instead of the September 26, 2015, moratorium date) had a major impact on the outcome of the case.

In a footnote, the Supreme Court declined to rule on whether a two-year year amortization period in the County’s zoning regulations applied to Seven Hills, finding that the issue was not properly before the court.

Four Justices Dissent

The dissent criticized the majority’s narrow interpretation of the effect of the moratorium, noting that:

[A]s a matter of undisputed fact and unambiguous law, Seven Hills’s cannabis production business did not exist until several months after the moratorium came into effect. And despite the majority’s insistence to the contrary, a business that does not yet exist cannot already be sited.

The dissent also described the efforts of the County to ascertain the negative impacts of cannabis production and processing through research, community input, and public hearings. It took issue with the majority’s description of the effect of the moratorium:

Temporary moratoria enacted by resolutions are not merely symbolic expressions of local preference. They are “legislative acts” by local governments pursuant to their police powers, which “may be adopted as emergency zoning ordinances.”  The purpose of such interim zoning measures is “to preserve the status quo so that new plans and regulations will not be rendered moot by intervening development.”  For temporary moratoria to serve their intended purpose, they must be enforceable. [citations omitted]

Conclusion

The tension between the interests of property owners and local government takes on added intensity when a nonconforming use issue arises in connection with a new and lucrative market. The majority’s decision calls into question the ability of local governments to use moratoriums to preserve the status quo while further study of regulatory options occurs. It also illustrates the need for very careful drafting of moratorium language.