Supreme Court Limits Developer’s Remedies in Challenge to Building Permit Fees

April 19, 2006

The California Supreme Court issued its decision in Barratt American, Inc. v. City of Rancho Cucamonga, 37 Cal. 4th 685 (2005), a case closely watched by the building industry, in which a home builder sued a city for charging excessive fees for building permits and inspections. Barratt American had paid those fees under protest and sued for a refund of that portion of the fees alleged to be excessive. While permitting the lawsuit to go forward in order to test the legality of the fee ordinances in question, the Court ruled that the developer had no right under state law for a refund of fees already paid.

Under Government Code section 66014 and 66016, a city may only impose fees for building permits, inspections, subdivision map processing and other enumerated services in an amount that does not exceed the reasonable cost of providing such services. Nonetheless, many local governments, including the City of Rancho Cucamonga, have adopted fee schedules for these services based, not on actual staff time and costs incurred, but on the costs of the construction undertaken. In Barratt the developer paid these fees under protest and then brought suit to have the fee ordinance declared illegal and to obtain a refund of the objectionable fees.

The Supreme Court held that Barratt had timely filed suit to invalidate the fee ordinances (within 120 days of the ordinance’s effective date). If successful on that claim, Barratt would be afforded the statutory remedy, under Government Code sections 66016 and 66022, of requiring the City to apply prospectively the excessive fees collected to reduce its fees for future developers. The Court rejected, however, Barratt’s claim for a direct refund of claimed excessive fees, holding that the Mitigation Fee Act does not recognize the remedy of direct refunds for these types of fees, and that permitting a direct refund would be inconsistent with the requirement that cities apply over-charges to reduce future fees going forward.

The Court did not rule on Barratt’s constitutional claim that limiting its relief to such prospective fee adjustments deprives it of due process, holding instead that the issue had not been properly preserved in the lower courts, and hence was not before it. The Court did acknowledge the potential unfairness in denying a developer of a direct refund in order to benefit future developers, but it noted that its role was not to pass on the wisdom of the legislative scheme, and that such concerns were better addressed to the legislature.

Barratt obviously is not good news for developers, though it does leave open the possibility of direct refunds for excessive fees based on constitutional considerations.

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