The First [Houston] Court of Appeals has allowed a commercial real estate developer to pursue a breach of contract claim against the City of Sealy arising from a Chapter 380 economic development agreement. Chapter 380, Local Government Code, authorizes cities to make grants of public money to private persons for economic development purposes. In Town Park Center, LLC. v. City of Sealy (No. 01-19-00768-CV), the Town Park and the city entered into an agreement to develop a shopping center on Town Park’s 71 acres adjacent to I-10. In return for grants from the city, the developer agreed to construct internal streets that would become public right-of-way and assist in the design and funding of a frontage road connecting the development to I-10. The agreement further obligated Town Center to construct water and wastewater services into the property and gave Town Center the option to buy storm water retention storage in an existing retention pond hear the site.

Town Park alleged that the City breached the 380 agreement by refusing to sell it sufficient off- storm water retention capacity for the project and limiting Town Center’s existing capacity for offsite storage to an insufficient level for an HEB grocery store, one of the major tenants. It sued the city for breach of contract and $1.8 million in damages. It also asserted ultra vires claims against several city officials and requested injunctive relief mandating that the city make the additional storage available. The city filed a plea to the jurisdiction, which the trial court granted. Town City nonsuited its claims and filed a second suit with substantially the same claims. It later nonsuited again, purportedly to allow it to settle with the city. When a settlement did not materialize, Town City filed a third suit, this time claiming that governmental immunity was waived under Chapter 271, Local Government Code for its breach of contract and declaratory judgment claims and under §245.006(b), Local Government Code, because it had a vested right to a share of the storage capacity under the 380 agreement. Town Park filed (improperly, the court of appeals ruled, because it should have filed an amended pleading) a supplemental pleading claiming inverse condemnation. The city responded once more with plea to the jurisdiction and that the suit was barred by res judicata based on the first lawsuit. It argued further that Chapter 271 did not waive the city’s immunity to suit because the 380 agreement was not a contract for providing goods and services to the city and that §245.006(b) did not apply since no permit was involved (Chapter 245 prevents a city from changing permitting rules applying to a specific permit application after the application has been filed). The trial court once again granted the plea to the jurisdiction and dismissed the suit.

The First Court of Appeals rejected the city’s res judicata claim. The trial court erred in treating res judicata as a jurisdictional bar rather than an affirmative defense (plea in bar). Dismissal of a suit on res judicata grounds may only occur subsequent to a summary judgment proceeding with adequate notice, which did not happen in this case. The court of appeals, however, agreed with the city that the trial court properly dismissed Town City’s vested rights, taking, and ultra vires claims. Regarding the vested rights claim, no change in the city’s land-use regulations changed after the vesting date, so the city’s sovereign immunity was not waived under Chapter 245. The takings claim failed because Town City could not establish that the city imposed any restrictions depriving the developer of all economically viable use of the property or that unreasonably interfered with the developer’s use and enjoyment of the property. Here the consequences to Town City of the city’s refusal to sell capacity in an off-site retention pond merely resulted in Town City assigning 1.9 acres to HEB for an on-site pond—hardly a deprivation of all economically viable use. Moreover, the Chapter 380 agreement itself contemplated the use of on-site storage to begin with. Finally, Town City’s ultra vires claim failed because it could not prove that the named local officials had acted without legal authority or failed to perform a ministerial duty (a breach of contract alone does not support an ultra vires action).

Town City successfully argued that the city’s alleged breach of the Chapter 380 agreement waived sovereign immunity under Chapter 271. The court of appeals found that the agreement met the definition of a “contract for goods or services” under Chapter 271. In return for economic development grants from the city, Town City agreed to construct public right-of-way and contribute to designing and building an I-10 frontage road from which the city would benefit. Additionally, the contract explicitly stated that the development would assist the city’s economic development and stimulate business activity. Responding to the city’s argument that the 380 agreement did not obligate the city to pay anything to Town City for the right-of-way construction but only to make annual grants from sales and use tax revenue generated by the development, the court of appeals held that either direct or indirect payments, including grants from tax revenue, satisfy Chapter 271. The court thus held that the trial court improperly dismissed the Town City’s breach of contract claim and remanded for further proceedings.

Chapter 380 agreements are on the most important tools in the economic development toolbox. They are distinct from tax abatement agreements and give cities wide latitude in structuring economic development incentives. This case illustrates the interaction between Chapter 380 and Chapter 271’s waiver of sovereign immunity. From the city’s perspective, great care should be taken in drafting 380 agreements if the city wishes to retain immunity against a potential breach of contract claim. From the standpoint of the business, the agreement should specify the precise nature of the quid pro quo it provides to the city in exchange for grants of public money.

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