February 15, 2011

Developer Recovers $30 Million in Lost Profits for a Town’s Breach of a Development Agreement

Holland & Knight Alert
Tamsen Plume | David L. Preiss

The town of Mammoth Lakes, California (the “Town”), must pay a real estate developer $30 million in damages because Town officials refused to move forward with the developer’s proposed project as required by a development agreement, a California appeals court has held.1

The court’s decision affirmed a jury’s verdict in favor of the developer that the Town had committed an “anticipatory breach” of the development agreement. An “anticipatory breach” occurs when a party to a contract informs the other party that it is unwilling to follow the terms of the parties’ agreement. The Town’s “anticipatory breach” occurred when the Town told the developer that the Town would not proceed with the developer’s proposed residential project until a third-party governmental agency was satisfied, even though the parties’ development agreement contained no such condition.

In 1992, the Town received grants from the Federal Aviation Administration (FAA) conditioned on the Town’s assurances that it would not sell or lease any part of the Mammoth Lakes airport property without FAA’s approval. Several years later, the Town negotiated the terms of a development agreement which gave a developer the right to purchase airport property and build a residential project on the parcel. Prior to the Town’s formal approval of the development agreement, Town officials sought input from the FAA. The FAA expressed its concerns to the Town regarding the developer’s option to purchase the airport property. The Town ignored FAA’s comments and entered into the development agreement with the developer anyway. The Town did not disclose to the developer the FAA’s concerns about the development agreement.

After the developer completed airport improvements as required by the development agreement, the Town refused to move forward on the developer’s application for the residential project. The FAA agreed to allow either expanded air service or the residential project, but not both. The Town now preferred expanded air service over residential development. The Town then repeatedly told the developer that the residential project could not move forward until the FAA’s issues were resolved. In addition, the evidence showed that the Town actively sought help from the FAA to create new conditions on the residential project in order to “get rid of” the developer. The developer sued for breach of contract, prevailing at the trial court.

Four Key Issues Affecting Future Development Agreements

The appellate court’s decision addresses four key issues that will influence future negotiation and implementation of development agreements in California:

1) A breach of contract action can be used to enforce a development agreement. The developer’s complaint was not that the Town denied a land use application to construct the residential project. Therefore, it was not necessary for the developer to first seek to resolve its dispute with the Town through the Town’s administrative process for appealing rejected land use applications. Instead, the developer’s complaint was that the Town refused to move forward on the contract without resolving the FAA’s objections to the residential project. When the Town attempted to add FAA approval as a new pre-condition to the Town’s obligations under the development agreement, the actions of Town officials resulted in a breach of contract. The court’s decision shows that local governments must treat development agreements as binding contracts, despite changing political and policy priorities. The Town promised the developer that it would be able to develop a residential project. The Town could not later elevate its policy priorities to improve air service over its contractual commitments to the developer.

2) A force majeure clause may not be used as a defense by a municipality if the municipality’s staff takes independent action that results in another governmental agency imposing restrictions on development. The development agreement contained a provision frequently found in development agreements in California that neither party would be in default due to “governmental restrictions imposed or mandated by governmental entities other than [the] Town ... or similar bases beyond the reasonable control of the party.” (emphasis added). The court concluded that the Town could not rely on this provision. The Town freely made the grant assurances to the FAA in exchange for funding, so the Town could not assert that the grant assurances were beyond the Town’s reasonable control. In addition, the Town asked the FAA to help the Town “get rid of” the developer’s residential project. It was the Town’s own actions that caused the FAA to express reservations about the developer’s residential project.

3) The actions of unelected governmental officials can be attributed to a municipality as a refusal to perform (and breach of) a contract. Town officials were generally charged with fulfilling the Town’s duties under the development agreement. In this case, the town manager and deputy town manager both stated that the Town would not proceed with the residential project until the FAA’s objections to the project were resolved. In addition, the Town actively sought to undermine the developer’s rights by soliciting opposition from the FAA. In light of these facts, it was not necessary for the developer to prove that the Town actually voted to authorize the actions of Town officials to refuse to perform the contract. As stated by the court, any other conclusion would allow a municipality to flout its obligations under any contract by the actions of its officials and suffer no consequences unless the governing council in fact voted to direct its staff to disregard the municipality’s contractual duties.

4) Breach of a development agreement entitles a developer to contract remedies, including the recovery of damages for lost profits. A developer’s anticipated profits may be recovered when they are the natural and direct consequence of a municipality’s breach of contract. Lost profits do not need to be established with certainty. Rather, a reasonable probability that the profits would have been earned except for the breach is sufficient. The court found a reasonable probability that the developer would have earned a $30 million profit on the residential project if the Town had not breached the development agreement. The court’s decision to uphold the damages award for lost profits may be the “incentive” that brings cities to the negotiation table with developers in disputes over development agreements. Lost profits damages may often dwarf the amount of other damages recoverable in a breach of contract action, such as recovery of a developer’s expenditures in preparation and performance in reliance on the contract. In response to this case, more municipalities may require that future development agreements limit a developer’s remedies for breach. On the other hand, developers may either seek to preserve the right to recover lost profits or negotiate a liquidated “break up” fee in lieu of the right to recover lost profits.

Mammoth Lakes Land Acquisition, LLC. v. Town of Mammoth Lakes, Court of Appeal of the State of California Third Appellate District, No. C059239, Super. Ct. No. 15954, Filed 12/30/10. Here is a copy of the decision.

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