On June 22, 2023, the First District Court of Appeal reversed the trial court’s decision in Discovery Builders, Inc. v. City of Oakland, granting Discovery Builder’s challenge to the City of Oakland’s attempt to impose a development impact fee on their project. The Court held that any provision in an agreement between the two parties that prevents the City from imposing impact fees on the development project constitutes an impermissible infringement on the City’s police power and is therefore invalid.
City Police Power
The California Constitution grants cities and counties what are commonly known as police powers. Article XI, Section 7 of the California Constitution allows cities and counties to make and enforce within its limits “all local, police, sanitary, and other ordinances and regulations not in conflict with general laws.” This police power allows a city to control land uses and enact comprehensive land use and zoning laws. It is well established that the government may not contract away its right to exercise the police power in the future. Any agreement that contracts away police power functions is invalid and unenforceable as contrary to public policy.
Background
Starting in the early 2000s, developers had been working to construct a large residential neighborhood in Oakland. The process of approval from the City was lengthy and required a level of review beyond the City’s standard practices for a development project. Mitigation measures were identified, and those mitigation measures would require numerous experts to oversee those measures.
Due to the additional oversight needed, in 2005 the City and developers entered into a cost-allocation agreement (the “Agreement”). The Agreement set the terms for reimbursing the City for employee services and outside consultants and stated that those payments would satisfy “all of the Developer’s obligations for fees due to the City for the Project.” The Agreement was signed by the City’s Director of Planning, Building and Major Projects.
On September 1, 2016, three new impact fees for development projects were adopted by the City—affordable housing impact fee, transportation impact fee, and a capital improvements impact fee. All three impact fees were assessed as a condition of the building permit. Between October and December 2016 – after the impact fees took effect – developers filed building permit applications for five buildings for the development. Though the permits were filed after the new fees had taken effect, permits for all five buildings were issued without any new impact fees being assessed or paid. In August and December of 2019, developers filed permits for three buildings in the development. For each of the three building permits, the City assessed all three impact fees. In total, the City assessed developers $432,000 in impact fees for the three buildings.
Developers asserted that the 2005 Agreement barred the imposition of impact fees or any new fees. Developers filed a petition for writ of mandate challenging imposition of the 2016 impact fees. The trial court granted their petition. The trial court found that Section 7 of the Agreement reflected the City’s agreement to limit the fees applied to the project to only those identified in the Agreement. The trial court also found that nothing in the Agreement authorized the City to impose new fees. The trial court found that developers maintained a contractual right not to pay the impact fees. The trial court also found that enforcing the contract did not infringe on the City’s police power.
On appeal, the City argued: (1) the agreement does not prohibit the assessment of impact fees; (2) the trial court’s construction of the agreement infringed upon the City’s exercise of its police power; and (3) the doctrine of equitable estoppel did not prohibit the City from exercising its police power.
The Court found that the Agreement was intended to address only certain types of fees (reimbursement of staff and consultant fees) and impact feels fell outside of those categories. The Court further held that a city may not contract away its right to exercise its police power in the future, and the levying of impact fees reflects an exercise of the City’s police power. As such, any provision or interpretation of the Agreement that would prevent Oakland from imposing new development impact fees could not be enforced.
The Court also rejected developers’ estoppel argument because it was waived for failure to raise it at the trial court, but on its merits as well, because developers who suffered pure economic loss could not show a grave injustice warranting estoppel because courts are generally skeptical of claims involving pure economic hardship in the context of equitable estoppel.
Practice Tip
The holding of this case applies to general contracts between private parties and cities; however, the result would have likely been different if the parties had entered into a Development Agreement. Development Agreements are contracts between developers and public agencies that govern land uses, fees, and other terms. Importantly, they provide vested rights to the developer in exchange for concessions by the developer.
Questions
If you have any questions regarding this Legal Alert, please contact the following attorneys from our office or the attorney with whom you typically consult.
Mona Ebrahimi
mebrahimi@kmtg.com | 916.321.4597
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