Cities take note: Development agreements are to protect developers

As a practical matter, the vested rights doctrine protects developers from changes in the law. In 1976 the California Supreme Court adopted a late vesting rule in AVCO Community Developers, Inc. v. South Coast Regional Commission, holding that a developer's rights vested only when the developer had substantially relied in good faith on a validly issued permit. An earlier court of appeal case, cited with approval in AVCO, had held that even when rights had vested, they vested only with respect to those granted by the permit, i.e., a vested right to do the grading for a multifamily development allowed by a grading permit did not prohibit a downzoning of the site to single family development.

The Legislature recognized the problems that AVCO presented and provided a remedy in 1979 when it enacted the Development Agreement Statute, Government Code Sections 65864 et seq. Now, for the first time, a city or county could enter into a contract freezing "rules, regulations, and official policies" without running afoul of the prohibition against contracting away the police power.

An opinion handed down by the 9th U.S. Circuit Court of Appeals on May 26, Oakland Bulk & Oversized Terminal, LLC v. City of Oakland, 2020 DJDAR 4830, dealt with the developer's claim that the city had breached a development agreement -- a claim that the city had breached a contract -- when it enacted an ordinance which prohibited handling or storage of coal at a commercial rail-to-ship terminal. The ordinance came about because of public complaints after it became known that the developer had subleased the terminal to a company that would bring in coal from Utah to be loaded on to ships. The city claimed that it had the right to enact the ordinance under Section 3.4.2 in the development agreement which allowed it to adopt new regulations if "substantial evidence" showed that use of the terminal would lead to conditions substantially dangerous to public health or safety.

The district court, at a bench trial, heard evidence concerning the adequacy of the information presented to the Oakland City Council when it adopted the ordinance, determined that it was inadequate and that it did not constitute the "substantial evidence" that would allow the city to enact the ordinance, and held that the ordinance was invalid. The Court of Appeals affirmed.

On appeal, the city argued that the district court had erred in allowing extra-record evidence because the "substantial evidence" language used in Section 3.4.2 meant that the city's actions should be reviewed by administrative mandamus which does not allow the introduction of extra-record evidence. The Court of Appeals rejected the city's argument, holding that the action was for a breach of contract and therefore governed by ordinary standards of judicial review. It couldn't find a California Supreme Court case on point but it did refer to two court of appeal cases which supported the Court of Appeals' conclusion. It did not, however, cite Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes, 191 Cal. App. 4th 435, 441 (2010), which held that an action for the breach of a development agreement was an action for breach of contract and not subject to administrative mandamus. The Court of Appeals' opinion also points out that review by administrative mandamus, which upholds governmental action if there is "substantial evidence" in the record to support the action, means that the government almost wins.

The district court had stated that it was allowing extra-record evidence at trial to shed light on the adequacy of the evidence presented to the city council, i.e., whether it was "substantial evidence" as required by Section 3.4.2. The Court of Appeals upheld the district court's admission of extra-record evidence at trial, emphasizing the fact that a 160-page technical report commissioned by the city council was released one business day (italics in the opinion) before the public hearing at which the ordinance was adopted.

Two environmental groups were allowed permissive intervention but their rights were limited by the district court to supporting the city's defense. They tried to argue that the development agreement only allowed freezing land use regulations whereas the ordinance was a health and safety regulation. The district court refused to allow the argument as going beyond the limits imposed because it was essentially a cross-complaint alleging that the city had, by freezing land use regulations "and all other ordinances, resolutions, codes, rules, regulations and policies," unconstitutionally contracted away its police powers. The Court of Appeals upheld the district court in light of the broad discretion given to district court judges in imposing restrictions on permissive intervenors.

Finally, the opinion goes through the evidence as to the adequacy of the evidence provided to the city council in some detail. The Court of Appeals held that the district court's determination that the evidence didn't constitute "substantial evidence," because it was riddled with inaccuracies, major gaps, erroneous assumptions and faulty analysis, wasn't "clearly erroneous" -- the federal standard for appellate review of district court findings -- and so affirmed the district court's judgment.

The opinion highlights the need for the careful choice of words when drafting development agreements. The reference to "substantial evidence" in Section 3.4.2 lead the dissent to argue that review by administrative mandamus was called for, that extra-record evidence shouldn't have been allowed and that "substantial evidence" supported the city's enactment of the ordinance. It should be noted that the majority held that parties couldn't dictate the standard of review in a federal court in any event.

The opinion should serve as a warning to cities and counties that development agreements are meant to provide protection to developers. Giving in to public outrage may look good to a politician but the result can be quite costly for a city. Oakland was lucky because the remedy was to set aside the ordinance. The judgment in the Mammoth Lakes case awarded the developer $30,000,000 together with over $2,350,000 in attorney fees after the town breached a development agreement. 