Town Forced to Pay $30 Million for Breach of a Development Agreement

By Cori Badgley

As we previously learned in Building Industry Association of Central California v. City of Patterson (2009) 171 Cal.App.4th 886, the interpretation of development agreements is governed by contract law and not statutory interpretation principles. In the more recent case of Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes (Dec. 30, 2010, No. C059239) __ Cal.App.4th __, we learned that the breach of a development agreement by a municipality can have a hefty price tag, and under contract law, there are no immunities protecting the municipality from having to pay up.

In 1997, plaintiff and defendant, Town of Mammoth Lakes, entered into a development agreement whereby plaintiff would lease the land encompassing and surrounding the airport from the town with an option to purchase and would operate the airport in conjunction with developing the land near the airport into a condominium or hotel complex. In 2000, after plaintiff completed the required airport improvements, plaintiff submitted an application for development of a residential condominium complex. The development agreement stated: “Town and its agents, employees and contractors shall exercise discretionary approvals applicable to the Project reasonably, in good faith, and in a timely manner.” The town disliked the residential concept, and eventually, plaintiff submitted another application involving time-share facilities with the option of renting the units out when the owners were not using them. This new plan was submitted in 2004. Around the same time, the town contacted the FAA to gain approval to expand their airport facilities to accommodate commercial jets. The FAA stated that it would not approve the expansion and the town was in jeopardy of losing its federal funding, if a condominium/hotel complex would be built on the surrounding property. The town then proceeded to work against plaintiff’s application for development and refused to process the application without first resolving the FAA issues.

Plaintiff sued the town on the grounds of anticipatory breach of contract. A jury found in favor of plaintiff and awarded plaintiff $30 Million in damages for the breach. Subsequently, the judge also granted plaintiff approximately $2.3 Million in attorneys fees under the “prevailing party” provision of the development agreement. The town appealed on the following grounds: 1) Plaintiff failed to exhaust its administrative remedies; 2) Three clauses in the development agreement excused the town’s performance; and 3) There was no substantial evidence to support the jury’s determination of breach. The appellate court found none of the town’s arguments meritorious and upheld the award for damages and attorneys fees.

On the first issue of exhaustion, the town argued that Plaintiff was required to engage in the administrative process before filing suit and that the proper action was a Petition for Writ of Mandate. The appellate court disagreed. A claim for breach of a development agreement is a contract action, not a writ of mandate action, especially when the action is for damages, which are not allowed in writ actions. If the challenge was based on the validity of the agreement under development agreement law, then a writ of mandate and exhaustion of administrative remedies would be appropriate. However, this action rests solely on the terms of the agreement and whether the town breached those terms, and therefore, exhaustion was not required and the principles of contract law apply.

On the second issue of excused performance, the court rejected all of the town’s attempts to assert defenses under the agreement. The court found that the clauses requiring compliance with governmental restrictions and FAA regulations provided no protection because the restrictions at issue were under the town’s control and the grant assurances between the FAA and the town did not constitute FAA regulations. Additionally, Plaintiff knew nothing of the grant assurances between the town and the FAA and, thus, did not assume any responsibility in regards thereto.

On the third issue of substantial evidence, the appellate court carefully evaluated the evidence and found that it was adequate to support the jury’s determination. Therefore, the appellate court affirmed the trial court’s award of damages.

This case acts as a reminder to local agency’s that development agreements cannot simply be dismissed after they are executed. Future consequences need to be taken into account before the agreement is entered into, like any other contractual agreement between private parties, including the provisions for legal remedies if a party defaults.

Cori M. Badgley is an associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

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