Published On: July 26th, 2016 / Categories: construction, County Fees, fees /

mitigation feeHigh impact fees

After the passage of Proposition 13 in 1978, many California cities and counties turned to imposing high impact fees upon development projects (i.e., exactions required as a condition of project approval ) as a means of closing budget gaps sparked by the resultant decline in property tax revenues. At that time, if the fee was paid so that the project could proceed, the fee could not be challenged; if someone wanted to dispute the fee, it was necessary to refuse to pay the fee, thus bringing the project to a standstill. In 1987, in response to pressure from the development industry regarding this dilemma, the California legislature enacted the Mitigation Fee Act, which helped resolve this situation by codifying the circumstances under which such fees could be properly imposed and allowing projects to proceed pending a dispute of such fees.

Sole method for addressing disputes

While this legislation explicitly did not modify or change existing law, it memorialized the practices and procedures for the administration of these development fees, and established itself as the sole method for addressing disputes with regard to these fees. Although the Act has generally proved to be a boon for the real estate profession, it can be a harsh mistress. A Southern California homebuilder has learned this lesson the hard way, as shown by a recent decision in a case coming out of the Second Appellate District.

School district development fee

That case involved a school district development fee imposed by the City of Los Angeles as a condition of issuing a building permit. Because the Los Angeles Unified School District collected this fee based solely upon the net increase in square footage of a development, however, a developer who demolished an existing structure as part of the development could receive a square footage demolition credit against the initial fee paid, and apply for a refund of a portion of the fee. The deadline for applying for this demolition refund was 90 days after payment of the fee.

To obtain a permit from the City of Los Angeles to build a single-family residence, the developer in this case, Merkoh Associates (“MA”), paid school district development fees of $25,052. On July 30, 2013, MA applied for a partial refund of the development fee, submitting proof that the existing residence had been demolished. After several months with no response, MA wrote a letter to the school district on March 14, 2014, repeating its request for a refund. On April 16, 2014, nearly eight months after MA’s initial application, the district issued an $8,852 refund to MA. No interest was included in this amount.

Sued the school district

On August 21, 2014, MA sued the school district, claiming interest on the refund and seeking class action certification on the ground that the school district wrongfully delayed refund payments without paying interest. MA asserted that interest on the refund was owed under California Civil Code Section 3287, a statute of general application. The school district demurred to the complaint; the trial court sustained the demurrer without leave to amend, on the grounds that (1) Section 3287 did not support a claim for interest on a refund of developer fees and (2) the lawsuit was time-barred by the Mitigation Fee Act.

The mitigation fee prevailed

On appeal, MA’s claims were rejected once more. The Second District noted that the Mitigation Fee Act provided the exclusive method for challenging school district development fees, including cases such as MA’s. Thus, and because the Act includes provisions governing awards of interest on refund claims, the terms of this “special statute” must prevail over statutes of general application, including Civil Code Section 3287. Finally, the Second District concluded that MA could no longer attempt to pursue its remedies under the Mitigation Fee Act, as they were now untimely under the terms of the Act.

In the face of such a draconian result in spite of the merits of the facts of this case, it would behoove developers to pay close attention to the development fees they are required to pay in connection with their projects. Experienced real estate counsel can help make sure that prudent developers avoid such unpleasant outcomes.

The case is Merkoh Associates, LLC v. Los Angeles Unified School District (2nd Dist., Mar. 22, 2016) ___ Cal.App.4th ____.

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