In Discovery Builders, Inc. v. City of Oakland (2023) 92 Cal.App.5th 799, the First District Court of Appeal held an agreement between a developer and the City of Oakland was unenforceable to the extent it prevented the city from imposing new impact fees in the future. The court reasoned such a provision constituted an impermissible contracting away of the city’s police power.

Between 2004 and 2005, the city approved a vesting tentative map and final tract maps for a 400-unit housing project. The city’s approval required that the developer satisfy various terms and mitigate various environmental impacts. In 2005, the city and developer entered into a separate agreement (“2005 Agreement”), which set the terms by which the developer would compensate the city for employee services and outside consultants required to satisfy the agreed-upon terms and mitigation requirements. Development of the project began soon thereafter.

In 2016, as development was continuing, the city enacted three new impact fees for development projects —an affordable housing impact fee, a transportation impact fee, and a capital improvements impact fee. In 2019, the developer filed for the last round of building permits for the project. The city assessed all three new fees against each of three requested building permits. The developer filed a petition for writ of mandate against the city, which the trial court granted. The trial court relied on Section 7 of the 2005 Agreement, which stated that the “City Fees and other monies paid and to be paid by Developer which are referred to in [the] Agreement satisfy all the Developer’s obligations for fees to the city for the Project.” The trial court held this provision reflected the city’s agreement to limit the fees applied to the project to only those identified in the 2005 Agreement and ordered the fees refunded.

The appellate court reversed the trial court’s decision. Relying on Avco Community Developers Inc. v. South Coast Regional Committee (1976) 178 Cal.3d 785, and its progeny, the court held the 2005 Agreement was invalid to the extent it prevented the city from imposing impact fees in the future, reasoning that municipalities may not contract away their usage of the police power in the future. Because the city rightfully exercised its police power in enacting the 2016 fees, any provision of the 2005 Agreement that sought to limit such a rightful usage of the city’s police power was impermissible.

The developer argued the city did not contract away its police power in the 2005 Agreement because the agreement did not impact the city’s ability to legislate, suggesting, in the words of the court, that “a city’s police power is concerned only with the power to enact laws, not the power to enforce laws.” The court disagreed, citing article XI section 7 of the California Constitution, which states that the city may “make and enforce” ordinances and regulations related to the police power. The developer also argued the city did not contract away its police power in the 2005 Agreement because the agreement did not interfere with the city’s ability to make and enforce future zoning laws on other developers. The court disagreed, citing precedent that invalidated agreements exempting a small subset of parties from laws and ordinances.

Commentary: What is interesting in Discovery Builders is the omission of any discussion of development agreements. California’s development agreement law allows developers to secure a customized vested right through the freedom of contract. (Gov. Code, § 65864-65869.5.) Development agreements can lock in laws, regulations, and fees in existence at the time of execution. Development agreements are only valid to the extent they satisfy numerous requirements created by statute. The development agreement law is best thought of as a rare exception to the ban on municipalities limiting their police power in the future. Here, an effective development agreement could have plausibly helped the developer avoid the end-stage fee increases present in this case. Other courts when faced with similar vesting arguments associated with an agreement have discussed statutory developments as the recognized exception to the Avco rule. While this court was not required to discuss statutory development agreements, the court’s silence should not be treated as a rejection of statutory development agreements as a tool.

William Abbott is Of Counsel and Garrett Bergthold is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or 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.