Court Permits Landowner To Challenge Growth Control Extension

A state appellate court has cleared the way for a property owner to challenge an extension of a Morgan Hill growth control ordinance. The court ruled that the 10-year extension of an ordinance that was scheduled to sunset in 2010 could be contested even if the ordinance was unchanged from the original.

Importantly, the Sixth District Court of Appeal refused to apply the federal court precedent from De Anza Properties X, Ltd. v. County of Santa Cruz, 936 F. 2d 1084 (1991), in which the Ninth Circuit Court of Appeals ruled that a property owner could not challenge the county's decision to delete a sunset provision in a mobile home rent control ordinance. The Ninth Circuit said the property owner could contest the ordinance only when it was first passed.

In the Morgan Hill case, the court said De Anza did not apply "because it arose in a different legal context." At the time, a rent control ordinance was considered a physical taking of property; the Morgan Hill ordinance is being challenged as a regulatory taking, the court noted. The court made no ruling on the merits of the lawsuit and returned it to Santa Clara County Superior Court for trial.

Attorney Diana Hanna, who represents property owner Arcadia Development Company in the case, said the decision provides an important precedent.

"It's the first published decision in California that specifically acknowledges that when a local agency extends a land use regulation, even if there was no change in the regulation, it creates a new cause of action, a new harm," Hanna said. "I think cities and counties have been using the De Anza decision as a shield to prevent review of an ordinance extension."

But attorney Ellison Folk, Morgan Hill's legal counsel, insisted De Anza is directly on point and has been relied upon by federal courts for years.

"The court had a hard time with the idea that the city could extend the term of an ordinance and a limitation on the development of property without an opportunity for challenge," Folk said.

At issue is Morgan Hill's scheme for regulating housing development. In the late 1970s, city voters approved Measure E, which imposed a residential development control system (RDCS) that limited the number of housing allotments the city could grant in a year. In 1990, voters approved Measure P, which continued the RDCS and imposed new restrictions to prevent outward growth that would strain city services. Measure P prohibited the city from adding land to its urban service area except for "desirable infill," until a time when the city has less than five years of land inventory for residential growth.

Several property owners – including Arcadia – beat Measure P by applying for annexation prior to the ballot measure's December 8, 1990, effective date. In 1991, the city awarded Arcadia an allotment for an 11-acre housing subdivision but the city said further subdivision of Arcadia's remaining 69 acres would have to comply with the city's growth regulations. Barring annexation, Arcadia would be limited to development based on county zoning regulations, which would permit four new houses.

In 2002, city officials began considering amendments to Measure P. The city made a few refinements but the most important change was an extension of the sunset date from 2010 to 2020. Voters approved the restrictions in March 2004 as Measure C. Arcadia sued the city shortly after the election, arguing that the density restriction is arbitrary and unreasonable, amounts to inverse condemnation and violates the property owner's equal protection rights. Essentially, Arcadia argued the density restriction applied only to its property and no one else's property, which was unfair.

Arcadia and the city commenced a trial nearly two years ago, but Superior Court Judge Marc Pochι halted the proceedings after one day to consider the statute of limitations issue raised by the city. He then ruled that the 90-day statute of limitations for challenging a zoning ordinance began to run on December 8, 1990 – the day Measure P took effect. Arcadia appealed that ruling to the Sixth District.

The city argued that because Measure C merely extended an existing ordinance, the time had long passed for Arcadia to sue. The city also contended that Arcadia's consent to the 1991 subdivision approval conditions – which specify that no further subdivision would be permitted except as allowed by the RDCS – barred the landowner's legal challenge. The appellate court focused on the first argument.

In finding that Arcadia could sue over Measure C, the court cited Barratt American, Inc. v. City of Rancho Cucamonga, (2005) 37 Cal.4th 685 (see CP&DR Legal Digest, January 2006). In that case, the state Supreme Court ruled a homebuilder could sue over the city's reenactment of development and building fees, even though the fees were unchanged. Morgan Hill argued that the statutory requirements in Barratt were different than those at issue here, but the Sixth District found that Barratt's "reasoning is applicable" in that reenactments should not escape judicial review.

Morgan Hill "did not intend for the 1990 density restriction to be permanent," Justice Eugene Premo wrote for the court. "The temporary nature of the original restriction meant that any decision extending the density restriction would have to be based upon then-existing circumstances such as the amount and location of the intervening growth."

"The temporary nature of the 1990 restriction also means that extending it for 10 additional years was a new burden upon the Arcadia property, triggering a new inverse condemnation claim," Premo wrote.

Toward the end of the opinion, Premo attempted to clarify the court's decision: "Our decision should not be read as holding that any renewal of an existing ordinance gives rise to a new cause of action. Our decision is based upon the facts of this case, which show that City recognized that the density restriction, as originally enacted, was intended to be temporary and that it would be lifted when circumstances changed. City's 2004 decision changed the impact of the restriction upon Arcadia's property based upon circumstances that existed in 2004. That impact and the 2004 circumstances must be considered in assessing the validity of the density restriction under the equal protection and takings theories of this case. Measure C's 10-year extension of the density restriction was a substantive change, which City and its voters considered and decided anew when Measure C was approved in 2004. It follows that Arcadia may challenge the 10-year extension of the density restriction, even though Arcadia is barred from challenging the original 20-year restriction."

The court further ruled that the development restriction that Arcadia accepted in 1991 had similarly changed because Measure C altered the sunset date.

The lawyers differed on the meaning of the decision for the case once it returns to Superior Court for a trial on the merits.

"I think the appellate court decision accepts the underlying premise of the city's decision," said Folk, the city's attorney. Namely, the court recognized that limiting outward growth and promoting infill are legitimate government interests, she said.

Hanna said Arcadia's case is helped by the court's insistence that the date for analysis of impacts is 2004, and not 1990. Circumstances did change, and the renewed regulation prevents only one property owner – Arcadia – from participating in the city's housing allocation process, she said. There is no justification for that exclusion, she said.

The litigation is likely to resume in Santa Clara County Superior Court this spring.

The Case:
Arcadia Development Company v. City of Morgan Hill, No. H032201, 08 C.D.O.S. 15174, 2008 DJDAR 18369. Filed December 16, 2008.
The Lawyers:
For Arcadia: Diane Hanna, Ellman, Burke, Hoffman & Johnson, (415) 777-2727.
For the city: Ellison Folk, Shute, Mihaly & Weinberger, (415) 552-7272.