Can North Carolina Municipalities Charge Impact Fees in Agreements Signed With Developers?

Back in 2016, land use developers received some welcome news when our North Carolina Supreme Court held that local governments and municipalities could not charge impact fees when approving a subdivision. See Quality Built Homes Inc. v. Town of Carthage, 789 S.E.2d 454 (2016).

In that case, the Town of Carthage had adopted certain water and sewer "impact fee" ordinances which provided that various fees would be assessed and used to cover the costs of expanding the Town's water and sewer systems. Basically, when the Town approved a subdivision of real property, the respective ordinances triggered the charges immediately. The developer in question challenged the ordinances arguing, among other things, that the ordinances exceeded the authority granted to towns and municipalities granted by North Carolina statute.

As a municipality established under North Carolina statute, the Town clearly was empowered to operate water and sewer facilities. Further, the relevant statute also clearly authorized the Town to "... finance the cost of any public enterprise by levying taxes, borrowing money, and appropriating any other revenues therefor." N.C. Gen. Stat. § 160A-313. Thus, in Quality Built Homes, the court held that the Town was clearly authorized to charge fees for water and sewer usage.

However, the impact fees at issue were charges imposed in contemplation of future services. According to the court, the statute in question did not give municipalities the power to impose impact fees for future services. The court noted that the Town's impact fees were not assessed at the time of actual use, but were payable in full at the time of final subdivision plat approval, a time when water and sewer infrastructure likely had not been built. The court further noted that the impact fees were assessed in addition to the regular water and sewer fees, that the impact fees were assessed regardless of actual use of the systems and regardless of whether the Town actually expanded the water or sewer systems to accommodate the subdivision. The court held that the Town exceeded its authority.

As a result of Quality Built Homes, towns and local governments in North Carolina were no longer allowed to charge impact or similar fees in the manner done by the Town of Carthage.

But, one interesting question was whether municipalities could impose fees of this sort in written contractual agreements entered into with land developers. A recent case raised this question, although the court did not reach the question. Bill Clark Homes of Raleigh, LLC. v. Town of Fuquay-Varina, Case No. COA21-79 (NC Court of Appeals, December 21, 2021). In that case, the Town of Fuquay-Varina, North Carolina, and a developer entered into a development agreement in which the developer agreed, among other things, that it would "pay all applicable development fees, including capacity fees, recreation unit fees and other applicable fees as prescribed by the Town's Code of Ordinances and Annual Budget Ordinance and Fee Schedule." As described by the court's opinion, subsequently, the Town sent the developer an invoice for $241,500 -- labeled "WATER & SEWER CONNECTION/INSPECTION FEES -- which was due prior to approval of the final plat of the subdivision. Of that amount, $195,000 was described as "CAPACITY FEES" calculated based on a water-capacity fee of $1,500 per unit and a sewer-capacity fee of $2,750 per unit. The developer paid the invoice.

All of this took place prior to the North Carolina Supreme Court's decision in Quality Built Homes. After that decision was handed down, the developer sued the Town of Fuquay-Varina arguing that the Town did NOT have the authority or power under North Carolina law to enter into an agreement charging fees that were not allowed by law. The developer sought a refund of the whole amount paid.

As noted, for procedural reasons, the court did not reach the ultimate question. Rather, the case was returned to the trial court for further proceedings.

The legal question is interesting and the developer has a solid argument. In general, North Carolina allows municipalities to enter into written agreements with developers. See former N. Car. Gen. Stat., §§ 160A-400.20 and 153A-349.1 now codified at N. Car. Gen. Stat., § 160D-1001. Under both the older and new versions of the statute, "[l]ocal governments may enter into development agreements with developers ..." Both versions also contain this language: "In entering into such agreements, a local government may not exercise any authority or make any commitment not authorized by general or local act and may not impose any tax or fee not authorized by otherwise applicable law." See comparison of versions here, p. 99ff.

In the Bill Clark Homes case, the developer argued that, since impact fees are not authorized by law according to Quality Built Homes, the Town of Fuquay-Varina could not impose such a requirement in an agreement with a developer. Certainly the fees charged by the Town of Fuquay-Varina have many similar features as the fees charged by the Town of Carthage. In both cases, the fees must be paid up front long before the water and sewer facilities are installed, the calculation of the fees is clearly based on future use and, it seems, that the fees must be paid whether the Town actually upgrades and increases the capacity of the water/sewer pipes.

It will be interesting to see how the lower court decides the case and if the case again reaches the Court of Appeals.

For more information, and to schedule a confidential consultation with experienced and dedicated zoning and land use attorneys in Charlotte, contact Arnold & Smith, PLLC. Use our “Contact” page or give us a call at 704-370-2828. We handle land use, zoning and condemnation legal matters in Mecklenburg County and elsewhere in North Carolina. We have offices in Charlotte, Lake Norman, and Union County.