BUILDING INDUSTRY ASSOCIATION OF CENTRAL CALIFORNIA v.

CITY OF PATTERSON











Filed 1/30/09; part. pub. & mod. order 3/2/09 (see end of opn.)






IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT

BUILDING INDUSTRY ASSOCIATION OF CENTRAL CALIFORNIA et al., Plaintiffs and Appellants, v. CITY OF PATTERSON, Defendant and Respondent.

F054785 (Super. Ct. No. 610611) OPINION

STORY CONTINUED FROM PART I…

C. Meaning of “Reasonably Justified”

The parties dispute what the phrase “reasonably justified” means. City contends this standard effectively waived any legal requirements that otherwise might have applied to the fee increase. In contrast, Developer contends the standard incorporated the legal requirements applicable to the fee increase. (See 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 752, pp. 842-843, and cases cited therein [generally, existing legal standards are implied by law into a contract].) Developer contends, in other words, that the terms cannot be interpreted as consenting to an increase that did not conform to otherwise applicable law.
“California courts have long recognized that the interpretation of a written instrument is a judicial function unless the interpretation turns upon the credibility of extrinsic evidence [citation].” (The Lundin/Weber Co. v. Brea Oil Co., Inc. (2004) 117 Cal.App.4th 427, 433.) In this case, the parties presented no conflicting extrinsic evidence regarding what was intended by the term “reasonably justified” at the time of contracting. Consequently, we conclude the meaning of the term “reasonably justified” presents a question of law subject to independent review on appeal. (Smith v. Selma Community Hospital (2008) 164 Cal.App.4th 1478, 1502 [interpretation of a writing is a question of law where credibility of extrinsic evidence is not an issue].)
A court’s determination of the meaning of a contract is designed “to give effect to the mutual intention of the parties as it existed at the time of contracting .…” (Civ. Code, § 1636.) When contractual language is clear and explicit, it governs. (Id., § 1638.) Alternatively, where uncertainty or ambiguity exists, the language “must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.” (Id., § 1649.) This rule is designed to protect the objectively reasonable expectations of the promisee. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1265; see generally Wonnell, Expectation, Reliance, and the Two Contractual Wrongs (2001) 38 San Diego L.Rev. 53.)
Here, we conclude that an objectively reasonable person would expect the term “reasonably justified” to mean that any increase in the affordable housing in-lieu fee would conform to existing law. In other words, part of the way one would show a fee is reasonably justified is to show that it does not violate established legal principles. The contrary interpretation, which would conclude that the term did away with applicable legal requirements, would create much greater change in the relationship between the parties. An objectively reasonable person would expect more explicit language to implement such a change. Thus, it is too great a leap to infer that the term “reasonably justified” demonstrates an intention to waive applicable legal requirements.
Based on this interpretation, we next consider what legal requirements were incorporated into the Development Agreement. We have not far to look.

D. Established Legal Principles

In San Remo Hotel v. City and County of San Francisco (2002) 27 Cal.4th 643 (San Remo), the court considered the validity of a San Francisco ordinance addressing and limiting the conversion of residential hotel rooms (usually occupied by low-income tenants) to tourist hotel rooms. The ordinance was enacted in response to a perceived need to preserve the availability of residential hotel rooms for the city’s low-income residents who, otherwise, would have no viable housing choices. Permission to make such conversions was conditioned upon either a one-to-one replacement of the residential units converted or, among other alternatives, payment of a replacement in-lieu fee. Such an in-lieu fee thus is similar to the affordable housing in-lieu fee involved here.
Rejecting the plaintiff’s argument that a form of stricter scrutiny applied to its review of the replacement in-lieu fee, the San Remo court said that “legislatively imposed development mitigation fees … must bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development. (Gov. Code, § 66001; Ehrlich[v. City of Culver City (1996)] 12 Cal.4th [854,] 865, 867 (plur. opn. of Arabian, J.); id. at p. 897 (conc. opn. of Mosk, J.); Associated Home Builders etc., Inc. v. City of Walnut Creek (1971) 4 Cal.3d 633, 640.)” (San Remo, supra, 27 Cal.4th at p. 671.)
Similarly, in Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, where the court was called upon to distinguish a fee from a special tax, the latter of which would have required two-thirds voter approval, the court said “development fees exacted in return for building permits or other governmental privileges are not special taxes if the amount of the fees bears a reasonable relation to the development’s probable costs to the community and benefits to the developer.” (Id. at p. 875.)
Government Code section 66001, subdivision (b) states the test this way:
“In any action imposing a fee as a condition of approval of a development project by a local agency, the local agency shall determine how there is a reasonable relationship between the amount of the fee and the cost of the public facility or portion of the public facility attributable to the development on which the fee is imposed.”^[1]
Based on these authorities, we conclude that the increase in the fee is not “reasonably justified” as required by the Development Agreement unless there is a reasonable relationship between the amount of the fee, as increased, and “the deleterious public impact of the development.” (San Remo, supra, 27 Cal.4th at p. 671.) In short, the Development Agreement precluded City from imposing a fee that bears no reasonable relationship to the need for affordable housing generated by Developer’s project.
City, we note, argues for no different test. Instead, without being more specific or explaining the point in any way, City merely states that the Fee Justification Study “clearly shows the need for affordable housing generated by the new construction.” Though we are by no means required to do so,^[2] we have examined the cited Fee Justification Study in detail. Having done so, we cannot agree that it supplies the reasonable relation between the increased fee and the need for affordable housing generated by the project.
The evidence presented in this case reveals that the amount of the fee was not calculated based on the cost of City’s affordable housing need attributable to the 214 residential lots that constitute the two subdivisions owned by Developer. Neither was it based on the affordable housing need attributable to the 3,507 unentitled lots on which it was imposed. Instead, the Fee Justification Study shows that the affordable housing in-lieu fee of $20,946 per market rate unit was calculated based on an estimate of City’s need for 642 units of affordable housing. No connection is shown, by the Fee Justification Study or by anything else in the record, between this 642-unit figure and the need for affordable housing generated by new market rate development. Accordingly, the fee calculations described in the Fee Justification Study and Moran’s declaration do not support a finding that the fees to be borne by Developer’s project reflected the costs attributable to it.
We conclude, therefore, that the increased fee of $20,946 violated section 4.5(d)(ii) of the Development Agreement because it was not “reasonably justified” within the meaning of that provision.
Based on this conclusion, we need not address (1) Developer’s claim that the trial court erred by overruling its evidentiary objections to Moran’s declaration or (2) Developer’s arguments regarding constitutional violations.^[3]

IV. Remedy

The appellate briefing did not address the appropriate remedy in this case. During oral argument, counsel for Developer contended that there were three possible remedies this court could direct the trial court to implement. Because the bases relevant to choosing among these and other remedies have not been developed before this court, we conclude the superior court should decide the issue of the appropriate remedy in the first instance.
DISPOSITION
The judgment is reversed and the matter is remanded to the trial court for further proceedings. The trial court is directed to (1) vacate its decision of December 20, 2007, (2) enter a new decision that invalidates the $20,946 per unit fee because it violates the terms of the Development Agreement and (3) determine the remedy after conducting any proceedings it deems necessary or appropriate.^[4] Costs on appeal are awarded to appellants.

__________________________
DAWSON, J.
WE CONCUR:


________________________________
VARTABEDIAN, Acting P.J.


________________________________
CORNELL, J.

Filed 3/2/09




CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT

BUILDING INDUSTRY ASSOCIATION OF CENTRAL CALIFORNIA et al., Plaintiffs and Appellants, v. CITY OF PATTERSON, Defendant and Respondent.

F054785 (Super. Ct. No. 610611) Order Modifying Opinion, Certifying Opinion For Partial Publication [No Change in Judgment]

THE COURT:
It is ordered that the opinion filed herein on January 30, 2009, be modified as follows:
1. On page 3, the first paragraph beginning “Developer owns” is modified to read as follows:
Developer owns two residential subdivisions, known as Magnolia and Bella Flora and consisting of 214 single family residential lots. The subdivisions are part of a larger development known as Patterson Gardens, which contains 305.3 acres that are divided into seven different areas or phases. Plans for Patterson Gardens include five areas of low density residential housing that cover 228.5 acres and contain a total of 985 dwelling units.
2. At the top of page 4, the clause beginning “(4) pay an in-lieu fee” is modified to read:
(4) pay an in-lieu fee at the time the building permit is issued for a market rate housing unit.
3. On page 7, the first sentence of the first paragraph of footnote 8 is modified to read:
The Fee Justification Study states that data available from City’s Department of Finance suggest that about 5,940 dwelling units remained to be constructed in City’s general plan area and 2,433 of those units previously had been entitled.
4. On page 9, the fourth full paragraph beginning “In this case” is deleted and the following paragraph inserted in its place:
In this case, if the increased fee complies with the Development Agreement, it will have been imposed in accordance with the conditions under which the vesting tentative map was approved. Thus, the increased fee would not be a new condition, but simply would reflect the removal of uncertainty inherent in a prior condition. As such, the increase would fall outside the scope of Government Code section 65961.
5. On page 10, the first sentence of the third paragraph beginning “Developer contends” is modified to read as follows:
Developer contends its acknowledgement of the preparation of an updated analysis should not be interpreted to mean that City was allowed to change the method of analysis upon which it based the affordable housing fee.
6. On page 11, after the first full paragraph ending “otherwise applicable law” insert the following paragraph:
To resolve this dispute over the meaning of the Development Agreement, we assume that the ordinary rules of contract interpretation apply. No party has argued otherwise.
7. Beginning on page 12 and continuing to page 17, delete the subheading, paragraphs and footnotes of part III.D. and insert the following subheading, paragraphs and footnotes:
D. Applicable Legal Requirements
The authority of local governments to impose exactions as a condition of developing land is limited by various rules of law, including the takings clause of the California Constitution (art. I, § 19) and the federal takings clause (U.S. Const., 5th Amend.). (See San Remo Hotel v. City and County of San Francisco (2002) 27 Cal.4th 643, 663-664 [state and federal takings clauses construed congruently] (San Remo).)
The general principle of takings analysis relevant to this case is the requirement that a land use regulation substantially advance a legitimate state interest. (Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003, 1016.) This principle is sometimes referred to as a means-end test—that is, it requires the property regulation in question (the means) to advance the purpose the government is seeking to achieve (the end). (Santa Monica Beach, Ltd. v. Superior Court (1999) 19 Cal.4th 952, 975 [conc. opn. of Kennard, J.].) The “substantially advance” principle is implemented by using different levels of scrutiny depending upon the circumstances. (San Remo, supra, 27 Cal.4th at p. 665.) Therefore, to apply the “substantially advance” principle in this case, we must decide which level of scrutiny applies to City’s increase in its affordable housing in-lieu fee. San Remo provides guidance on this question.
In San Remo, owners of a hotel sued to invalidate a San Francisco ordinance limiting the conversion of residential hotel rooms (usually occupied by low-income tenants) to tourist hotel rooms. The purpose of the ordinance was to preserve the availability of residential hotel rooms for the city’s low-income residents who, otherwise, would have had no viable housing options. To achieve that goal, the ordinance required a hotel converting a residential hotel unit into a tourist unit to replace the residential unit elsewhere, pay a fee in-lieu of providing the replacement unit, or take other action that would further replacement. Pursuant to the ordinance, the city issued the hotel owners a conditional use permit authorizing the conversion of hotel rooms only upon compliance with one of those alternatives.
The hotel owners filed suit, alleging the ordinance was unconstitutional because it violated the state takings clause. They argued that Nollan/Dolan/Erhlich¹² scrutiny applied to the court’s review of the replacement in-lieu fee. The Nollan/Dolan/Erhlich heightened level of constitutional scrutiny inquires whether an “essential nexus” and “rough proportionality” are shown between an ad hoc exaction, imposed as a condition of development, and the impact of that development. (San Remo, supra, 27 Cal.4th at pp. 665-667, 671.) The San Remo court refused to apply this heightened level of scrutiny to the San Francisco ordinance, stating:
“Nor are plaintiffs correct that, without Nollan/Dolan/Ehrlich scrutiny, legislatively imposed development mitigation fees are subject to no meaningful means-ends review. As a matter of both statutory and constitutional law, such fees must bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development. (Gov. Code, § 66001; Ehrlich, supra, 12 Cal.4th at pp. 865, 867 (plur. opn. of Arabian, J.); id. at p. 897 (conc. opn. of Mosk, J.); Associated Home Builders etc., Inc. v. City of Walnut Creek (1971) 4 Cal.3d 633, 640.) … While the relationship between means and ends need not be so close or so thoroughly established for legislatively imposed fees as for ad hoc fees subject to Ehrlich, the arbitrary and extortionate use of purported mitigation fees, even where legislatively mandated, will not pass constitutional muster.” (San Remo, supra, 27 Cal.4th at p. 671.)¹³
Similarly, the court in Action Apartment Assn. v. City of Santa Monica (2008) 166 Cal.App.4th 456, refused to apply the Nollan/Dolan/Ehrlich test when analyzing the facial validity of an ordinance of general application that required construction of affordable multifamily housing as a condition to development of multifamily ownership projects. (Action Apartment Assn. v. City of Santa Monica, at pp. 469-471.)¹⁴
Upon examination, it appears that the affordable housing in-lieu fee challenged here is not substantively different from the replacement in-lieu fee considered in San Remo. Both are formulaic, legislatively mandated fees imposed as conditions to developing property, not discretionary ad hoc exactions. (San Remo, supra, 27 Cal.4th at p. 671.) We conclude, for this reason, that the level of constitutional scrutiny applied by the court in San Remo must be applied to City’s affordable housing in-lieu fee and is one of the legal requirements incorporated into the Development Agreement.
Accordingly, we conclude that the increase in the fee is not “reasonably justified” as required by the Development Agreement unless there is a reasonable relationship between the amount of the fee, as increased, and “the deleterious public impact of the development.” (San Remo, supra, 27 Cal.4th at p. 671.)
City, we note, argues for no different test. Instead, without being more specific or explaining the point in any way, City merely states that the Fee Justification Study “clearly shows the need for affordable housing generated by the new construction.” Despite the lack of an argument from City addressed to the reasonable relationship test, we have examined the cited Fee Justification Study in detail, as well as Moran’s declaration and other documents, to determine whether the test is satisfied by the information provided. In the process, we have located nothing that demonstrates or implies the increased fee was reasonably related to the need for affordable housing associated with the project.
The record in this matter reveals no reasonable relationship between the extent of City’s affordable housing need and development of either (1) the 214 residential lots that constitute the two subdivisions owned by Developer or (2) the 3,507 unentitled lots identified in the Fee Justification Study. Instead, the Fee Justification Study reveals that the in-lieu fee of $20,946 per market rate unit was calculated based on an allocation to City of 642 affordable housing units, out of the total regional need for affordable housing identified in the 2001-2002 Regional Housing Needs Assessment for Stanislaus County. No connection is shown, by the Fee Justification Study or by anything else in the record, between this 642-unit figure and the need for affordable housing associated with new market rate development. Accordingly, the fee calculations described in the Fee Justification Study and Moran’s declaration do not support a finding that the fees to be borne by Developer’s project bore any reasonable relationship to any deleterious impact associated with the project.
For this reason, we conclude that the increased fee of $20,946 violated section 4.5(d)(ii) of the Development Agreement because it was not “reasonably justified” within the meaning of that provision.

There is no change in the judgment.
The opinion in the above-entitled matter filed on January 30, 2009, was not certified for publication in the Official Reports. For good cause it now appears that the opinion should be published in the Official Reports with the exception of parts I. and II.B., and it is so ordered.

__________________________
DAWSON, J.
WE CONCUR:


________________________________
VARTABEDIAN, Acting P.J.


________________________________
CORNELL, J.


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