Lapse of Subdivision Performance Bond or Letter of Credit
By David R. Connell, legal services counsel with the New Hampshire Local Government Center's Legal Services and Government Affairs Department
Planning board approvals of major subdivision applications are usually made conditional on installation of on-site and off-site improvements, including streets, utilities and other facilities. The developer's obligation to install improvements may be secured by posting a performance bond or letter of credit. (See "Performance Bonds and Letters of Credit for Regulatory Permits" in the January 2011 issue of New Hampshire Town and City for discussion of bonds and letters of credit.)
Letters of credit have expiration dates. Sometimes performance bonds do, too. If no one has paid attention to the issue, the expiration date may precede the deadline to install improvements, or the conditional approval may not stipulate a completion date. Unfortunately, where a development project is delayed for years during an economic downturn, it is not uncommon to discover that the letter of credit or performance bond has expired. In municipalities, large and small, the task of making sure these instruments do not lapse is apt to fall through cracks.
Q. Is the planning board required to accept a bond or letter of credit instead of insisting on installation of improvements before final approval?
A. Yes. The developer may elect to install the improvements prior to signing and recording of final approval, but, if the developer elects to post security to achieve final approval, the statutes require the planning board to "accept a performance bond, irrevocable letter of credit, or other type or types of security as shall be specified in the … regulations…." RSA 674:36, III. Often, developers opt to install enough improvements to make the site functional and then post security for the finishing touches such as final pavement, road shoulders, planting, etc., which are installed after heavy construction vehicles and equipment are off the site.
Q. Does the planning board have to permit construction of houses before the streets and utilities are installed?
A. Yes, but the board has discretion as to when the houses may be occupied. Once construction of streets and utilities has been secured by a bond or letter of credit, the developer is entitled to building permits. RSA 676:12, V. However, the statute gives the planning board discretion to prohibit occupancy prior to completion of improvements except on such terms as the board prescribes in the written conditional approval. As noted above, both parties may prefer to postpone completion of improvements and release of the bond or letter of credit because of the wear and tear caused by heavy construction vehicles and equipment. For this reason, occupancy of some houses in a major subdivision is typically permitted prior to final completion of the improvements.
Q. Whose responsibility is it to keep track of performance bonds and letters of credit?
A. Technically, the planning board is charged by statute with administering the process, Levasseur v. Hudson, 116 N.H. 340 (1976), but, in practice, the responsibility is often divided:
- A consulting engineer determines the recommended amount;
- Counsel approves the form of the security;
- An engineer inspects work in the field; and
- The municipal treasurer or clerk holds the bond or other document.
The planning board moves on to other applications, and sometimes no one tracks the project with the expiration date of the bond or letter of credit in mind.
Q. What is the developer's responsibility if the performance bond or letter of credit lapses?
A. A developer might argue that the town should bear some responsibility if the lapse occurred through the town's negligence, but the developer should also be responsible to monitor the expiration of a bond or letter of credit, and, ultimately, the developer should remain responsible to make the improvements. This is illustrated by a Connecticut case, Town of Brookfield v. Greenridge, Inc., 177 Conn. 527, 418 A.2d 907 (1979). In that case it was held that, where the amount of the performance bond set by the town proved to be too low on account of unanticipated site conditions, the developer remained responsible to complete improvements, no matter what the cost.
If the subdivision project remains viable and the developer remains solvent when a bond or letter of credit lapses, the developer will, upon notice, swiftly post another surety instrument. However, in an economic recession, the project may stall and the developer may be insolvent.
Q. What can the municipality do at that point?
A. When it becomes apparent that the developer cannot or will not post a new bond or letter of credit, the planning board can move to revoke the subdivision approval. RSA 676:4-a, I(e) provides that approvals may be revoked "[w]hen the applicant or successor in interest to the applicant has failed to provide for the continuation of adequate security as provided by RSA 674:36, III(b) … until such time as the work secured thereby has been completed." The statute should be studied closely for the many procedural steps involved.
An approval may be revoked in whole or in part. RSA 676:4-a, III. If little or no infrastructure construction has occurred, an approval can be revoked in its entirety. But, where houses have been completed and occupied by permission of the municipality, occupancy must be allowed to continue.
There are also issues concerning the "vested rights" of the developer. In AWL Power, Inc. v. Rochester, 148 N.H. 603 (2002), the planning board voted to revoke approval of the subdivision and site plan approvals because the 13-year-old stalled project no longer conformed to zoning, and the board found that vested rights had not arisen. The revocation was overturned because the Court held that the project did have vested rights on account of $200,000 worth of public improvements, although this was well short of completion of the required improvements. Given the relatively low threshold established by AWL Power for substantial completion and vested rights under RSA 674:39, it is unclear how effective a tool partial revocation will be.
Q. What is the municipality's responsibility to the residents in a partially developed subdivision where the performance bond or letter of credit has lapsed?
A. In some states, courts have held that lot owners have a right to compel a municipality to furnish improvements where the subdivision plan was approved without requiring adequate security from the developer for the installation of the improvements. Rathkopf's The Law of Zoning and Planning, Vol. 5, sec. 91:25, p. 91-74. In New Hampshire, municipalities are not generally liable to property owners for negligent administration of land use approvals and codes. Stillwater Condominium Ass'n v. Salem, 140 N.H. 505 (1995) (no liability where planning board conditioned subdivision approval on installation of connection to municipal water system, but town failed to require developer to make the connection); Island Shores Estates Condominium Ass'n v. Concord, 136 N.H. 300 (1992) (no liability where city building inspectors failed to detect faulty construction). However, in Wolfeboro Neck Property Owners Ass'n v.Wolfeboro, 146 N.H. 449 (2001), the Court was critical of the town for negligent inspection and acceptance of substandard construction and the resulting release of a subdivision road performance bond:
[T]he town established not only the procedure, but also the means to insure that town standards would be met. As an obligee on the bond, the town's role was like that of a trustee "who was required, should the developer fail to make the secured improvements, to attempt to recover the funds from the bonding company and use them ultimately to complete improvements." [citation omitted]
Id. at 453. In a petition by lot owners to lay out the subdivision road as a public highway years later, the Court held that the board of selectmen could not, under the circumstances, consider the cost of upgrading the road as a factor in determining whether it was in the public interest to accept and maintain the road. The Wolfeboro Neck case does not overrule Stillwater; that is, it does not create tort liability to lot purchasers for damages. But, it remains to be seen if it creates a municipal duty to complete improvements when security is inadequate or lapses entirely.
Q. What should municipalities do to prevent a situation like this?
A. The ideal solution would be to obtain security instruments that will not lapse at a critical time without notice. It may be possible to negotiate for a performance bond that remains in effect indefinitely or for a long period of time. Letters of credit expire in one year unless a different date is stated. Some banks are willing to issue letters of credit that are "self-calling"; that is, the bank obligates itself automatically to send the specified sum to the municipality on a certain date unless the bank is notified that the required improvements have been completed. Ultimately, it behooves the municipality to institute an internal process, painful though it may be, to make one or more officials responsible (1) to calendar the deadlines for completion of improvements, (2) to calendar the expiration date of the letter of credit or performance bond, and (3) to monitor the progress of the development (or lack thereof) in order to take timely steps to collect the funds if that should become necessary.
Local officials in NHMA-member municipalities may contact LGC's legal services attorneys for more information on this and other topics of interest Monday through Friday, from 8:30 a.m. to 4:30 p.m., by calling 800.852.3358, ext. 384. School officials should contact the New Hampshire School Boards Association attorney at 800.272.0653.