By David P. Lanferman

The recent decision of the California Supreme Court in Barratt-American v. City of Rancho Cucamonga(37 Cal.Rptr.3d 149) [covered in an earlier update on this site] raises serious questions as to the way many jurisdictions calculate, collect, and apply fees from developers for building permits and building inspections. Back in 1993, the California Attorney General published an opinion which concluded that fees for building permits and inspections are required to be based on the actual or reasonable costs of providing such services, rather than on the value of the proposed construction or improvements [76 Ops.Cal.Atty.Gen. 4]. Nevertheless, many (perhaps most) cities and counties continue to charge building permit fees which are based on the valuation of the construction, rather than being based on staff time and costs of providing service. To the extent that such valuation-based fees may exceed the reasonable costs of providing those services, recent court decisions may now hold cities and counties accountable for the excess revenues collected.

The Court’s decision of Dec. 22, 2005 in Rancho Cucamonga held that the “statutory remedy ” of Government Code Sections 66016 and 66022 is available to challenge the validity of resolutions enacting, extending or amending such fees, and reinstated a homebuilder’s challenge to the validity of a resolution reenacting the schedule of building fees charged by the city as timely. The decision held that the Mitigation Fee Act does not provide a refund remedy to individual builders who are compelled to pay such fees, even if the fees are successfully challenged as excessive. The decision acknowledged that by limiting relief to prospective fee adjustments which credit the excess fees against the amount to be charged to future fee payers, the statutory scheme may result in unfairness. However, the Court suggested that such concerns should be addressed to the Legislature. The Court also side-stepped the issue of whether limiting relief to such prospective fee adjustments may fail to comport with requirements of Due Process, stating that the issue had not be preserved in the lower courts. The decision thus left open the questions of whether the statutory scheme in California creates an unfair lack of effective relief to persons who pay fees which are ultimately held to be excessive and/or fails to provide “meaningful backward-looking relief” as required by the United States Supreme Court in cases involving similar exactions found to be illegal.

The decision in Rancho Cucamonga did not reach the merits of the challenge, which included claims that the city was improperly calculating its fees on the basis of the valuation of the construction proposed. However, it is likely that the merits of these issues involving fees based on valuation rather than on actual costs of providing permit services will soon be addressed by the Supreme Court,in a different case. The Court granted review last year in the case of Barratt-American v. City of Encinitas, in which the merits of this challenge are squarely presented, and placed it on hold pending resolution of the Cucamonga case. The Court of Appeal in the Encinitas case ruled in favor of the builder on the merits of its challenge to the building permit and inspection fees charged on a similar valuation basis. The appellate court cited and expressly agreed with the 1993 Attorney General Opinion which held that permit and inspection fees should be based on costs of service.

The appellate court also held that the city had violated statutory procedures for establishing or modifying fees by allowing its administrative building official to change valuation tables without public notice, hearing or supporting evidence. The Court has not yet set a hearing in Encinitas. Pending the Court’s hearing and resolution of additional issues in the Encinitas case, or possible action by the Legislature on the “statutory remedy” for excessive building permit fees, builders or contractors who may be subjected to such permit or inspection fees may want to consider updating their responsive actions and “protective measures” to reflect the current uncertainty as to the validity of fees based on the “value” of the work, rather than on “costs of service”. For example, it is generally assumed that permit fees which are based on the “value” of construction generate “excessive” fee revenues (especially for larger or more costly residential units) which would be deemed to be invalid if the Court affirms the Encinitas decision. Fee payers may be able to benefit from such Court action by considering timely challenges to new or “re-enacted” fee schedules based on valuation tables, or may attempt to preserve some rights to pursue recovery of any “excess” fees paid under such valuation schedules by adapting their payment under protest notices to these recent decisions.

For more information please contact David Lanferman. Dave Lanferman is a member of the Real Estate, Land Use and Environmental Practice Group in the firm’s San Francisco office.