Is It Legal to Require Indemnification on Project Application or as Condition of Approval?

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Highlights

  • Local agencies routinely require project applicants to agree to indemnification on application forms or as conditions of approval. These agreements or conditions of approval typically include language requiring an applicant to agree to defend, indemnify, protect and hold harmless the local agency in any action arising from the application.
  • In San Luis Obispo Local Agency Formation Commission v. City of Pismo Beach (San Luis Obispo), the Second Appellate District Court of Appeal of California struck down San Luis Obispo Local Agency Formation Commission's assertion that it had an "implied power" to contract for fees by inserting an indemnity agreement into its annexation application.

The court's decision is significant because it holds the door open to potentially challenge such practices if there is a statutory limitation on a local agency's authority to impose fees, as was the case in San Luis Obispo.

Local agencies routinely require project applicants to agree to indemnification on application forms or as conditions of approval. These agreements or conditions of approval typically include language requiring an applicant to agree to defend, indemnify, protect and hold harmless the local agency in any action arising from the application. Indemnification obligations would expose an applicant to various unknown costs that may occur after the processing of the application, even for expenses that are not under his or her control.

In a recent Second Appellate District Court of Appeal of California decision, San Luis Obispo Local Agency Formation Commission (LAFCO) v. City of Pismo Beach (City), Case No. B296968 (March 3, 2021) (San Luis Obispo), the court struck down LAFCO's assertion that it had an "implied power" to contract for fees by inserting an indemnity agreement into its annexation application. The court's decision is significant because it holds the door open to potentially challenge such practices if there is a statutory limitation on a local agency's authority to impose fees, as was the case here.

Case Background

In San Luis Obispo, the City and a developer submitted an application to LAFCO to annex a parcel of land into the City. The application included an indemnification clause that provided that the developer and City would indemnify LAFCO for "damages, costs, expenses, attorneys' fees, and expert witness fees…arising out of or in connection with the application."1 Following denial of the annexation application, the City refused to pay for LAFCO's attorneys' fees and costs associated with a lawsuit that took place following the processing of the application. In response, LAFCO brought action against the City, asserting breach of contract. LAFCO contended that the indemnification agreement was "given in consideration for not requiring anticipated attorney fees to be paid as part of the application fee at the beginning of the process."2

The court held that LAFCO had no authority to impose such fees for post-administrative proceedings. The statutory authority for local agency formation commissions only permits the imposition of fees or fee increases associated with application processing,3 and application processing does not include indemnification for post-application processing. Further, LAFCO did not have the implied power to require attorneys' fees and there was no valid indemnification agreement.4 "Here attorney fees in post-administrative actions are not 'specifically provided for by statute.' Nor is there a valid agreement for such fees. LAFCO's remedy is with the Legislature."5 Here, an "agreement" to indemnify was not an actual agreement since there was no consideration.

The holding applies specifically to the statutory authority granted by California Gov. Code § 56383 to local agency formation commissions, but may invite challenges of other local agencies that routinely insert indemnity provisions into their applications or conditions of approval if there is a limitation on a local agency's statutory authority to impose fees on application filing and processing. Local agencies routinely require indemnification for processing an entitlement application or as a condition of approval. Key questions are whether the local agency has the legal power to potentially require an applicant to indemnify the agency, and whether there is statutory authority to impose such fees for indemnification.

Conclusion and Takeaways

State law does not expressly address the assignment of attorneys' fees for local planning agencies. However, unlike local agency formation commissions, Gov. Code § 65104 grants the legislative body of a city or county6 broad authority to establish "any fees to support the work of the planning agency … not to exceed the reasonable cost of providing the service for which the fee is charged." The grant of authority to the legislative bodies of local planning agencies to authorize fees is more broad than the statutory language in Gov. Code § 56383 applicable to local agency formation commissions. While Gov. Code § 65104 does not expressly provide for attorneys' fees, it broadly applies to the "work of the planning agency." Arguably, the work of the "planning agency" could include defending a project from legal challenge.

Critically, assuming that indemnification of attorneys' fees would "support the work of the planning agency," Gov. Code § 65104 mandates that the legislative body impose such fees subject to Gov. Code § 66016's procedures for imposition of fees.7 Absent clear planning agency local statute or resolution, imposition of fees on an ad hoc basis through an application form or conditions of approval, especially as seen with San Luis Obispo, could be subject to potential challenge. If cities and counties interpret Gov. Code § 65104 as a means to potentially impose indemnification, in an effort to survive a legal challenge it is likely that local agencies will formalize indemnification requirements pursuant to local statute or resolution, as opposed to applying them on an ad hoc basis.

Notes

1 San Luis Obispo, No. B296968, slip op. at 3 (Cal. Ct. App., March 3, 2021).

2 Id., slip op. at 4.

3 "[Gov. Code] section 56383 contemplates that the fees charged thereunder will be limited to those necessary to the administrative process, not to post-decision court proceedings." San Luis Obispo, slip op. at 6. "The clear mandate of [Gov. Code] section 56383, subdivision (c) is that the executive officer must settle the costs charged under the section at the end of the administrative proceedings. The section does not provide for costs that may accrue thereafter." Id.

4 See Code of Civ. Proc. § 1021.

5 Id., slip op. at 7.

6 Gov. Code § 65104 also applies to charter cities.

7 See Gov. Code § 66016(b) ("Any action by a local agency to levy a new fee or service charge … shall be taken only by ordinance or resolution."). See also Gov. Code § 66016(a) (restricting the amount of the new fee or service charge to the amount for which the fee or service charge is levied, and in the event the fee or service charge creates revenues in excess of actual cost, those excess fees shall be used to reduce the fee or service charge creating the excess).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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