Economic Development

California Court Affirms $30 Million Judgment Against Local Government for Breach of Development Agreement

The challenges posed by complex development projects to roads, water, sewer, school, and other public services demand an orderly solution. Beginning in 1979 with California, states have enacted statutes to expressly authorize cities and counties to enter into “formal contractual agreements with landowners that lock in existing ordinances affecting a project for an extended period.” David Owens, The Use of Development Agreements to Manage Large-Scale Development: The Law and Practice In North Carolina (October 2009).

In 2006, the North Carolina General Assembly authorized the use of development agreements as a way of addressing the complexities inherent in large-scale development. These arrangements enjoy widespread use in development and local government circles throughout the State. We’ve blogged before here about the use of development agreements to attract innovative, job-creating companies to The Great North State.

But the contractual arrangement isn’t always pretty. Consider a recent case from the California appellate courts affirming a $30 million jury verdict (and judgment in another $2 million of attorney’s fees) in favor of a developer, and against a local government suffering from buyer’s remorse, for the local government’s repudiation of a development agreement. This is especially interesting in light of California’s role, referenced above, on the vanguard of these local government-developer contractual arrangements.

The facts of Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes are relatively straightforward. Developer and local government entered into a development agreement for improvements to an airport and to build a hotel or condominium complex at the airport. At some point, the local government “changed its priorities and no longer wanted the hotel/condominium project.” In a fairly savvy move, and likely realizing the binding contract within which its whims were held hostage, the local government enlisted the FAA–yes, the FAA–to “eliminate the developer’s ability to build.” I’m guessing the local government saw an impossibility defense on the horizon. The FAA heeded the request, but the developer demanded that the local government move ahead with the terms of the development agreement, anyway. The local government refused and the developer sued for anticipatory breach of contract, claiming the local government repudiated the development agreement.

A jury found in favor of the developer, awarding $30 million in damages. The court assessed another $2.36 million in attorney’s fees against the local government. The local government appealed.

The court of appeals affirmed the jury verdict. The court reasoned that (1) the developer showed breach through the conduct of the local government officials acting within their authority, (2) the evidence was not too speculative to show breach insofar as it was clear the officials had no intention of being bound by the development agreement, (3) an un-exercised option to purchase contained in the development agreement did not render the breach claim unripe, and (4) there was no evidence the local government retracted the repudiation.

The lesson, it seems, is that these development agreements are contracts just like any other contract, especially when it comes to enforcement, and should be be treated accordingly. Local governments should not convince themselves otherwise, a fact of which $32 million-plus is a sobering reminder.

Well, at least California local governments have that kind of cash, right?

Mike Thelen is a lawyer in Womble Carlyle’s Real Estate Litigation practice group. He regularly represents a wide variety of clients in land use and land development issues, from local governments to businesses, in both state and federal venues throughout North Carolina.

Categories: Economic Development

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