By Cori Badgley

In interpreting the provision of a development agreement imposing an in-lieu affordable housing fee, the court in Building Industry Association of Central California v. City of Patterson (2009) 171 Cal.App.4th 886 enunciated two important rulings: 1) development agreements are interpreted under contract law, and 2) an in-lieu affordable housing fee is not reasonably justified if the fee is simply based on the amount of housing allocated to the jurisdiction under the regional housing need assessment.

This case involved a development agreement entered into between the City of Patterson and Morrison Homes, Inc. (“Developer”).  The development agreement stated that the Developer would pay an in-lieu affordable housing fee in the amount to be revised and adopted at a future date by ordinance, “providing the same is reasonably justified.”  The fee finally adopted by the City totaled $20,946 per unit.  The Developer sued claiming that the fee violated “(1) its vested property rights, (2) its contractual rights under the development agreement, (3) various statutory provisions, and (4) constitutional provisions requiring voter approval of special taxes.”  The trial court found in favor of the City.

The Court of Appeal Fifth Appellate District reversed, focusing on the language in the development agreement requiring that the fee “is reasonably justified.”  Interpreting the development agreement using contract law, the court found that the language “reasonably justified” was meant to impose the standard articulated in prior case law: there must be “a reasonable relationship between the amount of the fee, as increased and ‘the deleterious public impact of the development.’”

The method used to calculate the fee took the 642 units allocated to the City under the regional housing need assessment and essentially divided this number of units among the unentitled lots identified by the Fee Justification Study.  According to the court, this method failed to demonstrate a reasonable relationship between the imposition and the impacts caused by the particular development project.  Thus, the imposition lacked the proper nexus and accordingly, the City violated the terms of the development agreement.

This case affirms that general contract principles apply to development agreements.  Drafters of development agreements should take into account that the language will be interpreted like any other contract.  Additionally, jurisdictions cannot simply take their regional housing need allocation and divide it among the unentitled lots to justify their fees for affordable housing.  A reasonable relationship must be shown between the specific development and the amount of the fee.

Cori 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.