By Henry Hardy, Rose Law Group Land Use Attorney
Developers can now recover monetary damages from municipalities for negligent misrepresentation during the land development process, marking a significant shift in the legal landscape.
During the real estate development process, the relationship between a developer and a municipality can vary. At times, they might act as adversaries, at others, as collaborative partners, or simply as a regulatory body governing land use decisions. Rarely, however, is this relationship viewed as a “special relationship” comparable to that between a lawyer, consultant, or accountant and their clients. In such professional relationships, clients pay for expertise, and professionals have a duty to provide accurate information, with failure to do so leading to claims of negligent misrepresentation under Restatement (Second) of Torts § 552.
In the case of Hammer Homes vs. City of Phoenix, the Arizona[1] Court of Appeals ruled that the relationship between developers and city planning staff is more akin to these professional relationships due to the city’s financial interest in the potential application fees and development fees it could collect if the developer moves forward.
This ruling means the city owes a duty to the developer, allowing developers to bring claims of negligent misrepresentation under Restatement (Second) of Torts § 552 if that duty is breached. This decision deviates from how development disputes have traditionally been litigated.
Historically, when municipalities provided incorrect information leading to financial losses, plaintiffs had to rely on equitable estoppel rather than tort claims. For instance, in Pingitore v. Town of Cave Creek[2], the court found that the developers reasonably relied on the town’s actions and assurances, and the town could be estopped from preventing construction after issuing necessary permits and variances. In Pingitore, the relationship between the municipality and the developer was not treated as a professional or pecuniary relationship, therefore preventing tort claims. Instead, the developers were granted equitable relief based on their reliance on municipal representations, consistent with the principles of equitable estoppel.
While the Hammer Homes ruling allows developers to recover monetary damages due to misrepresentation by municipal planning staff, it also creates greater risks for municipalities. The ability to recoup costs offers clear benefits for developers, however municipalities must be cautious, as this could lead to more formalized, risk-averse discussions, potentially stifling collaboration.
In response, some municipalities have begun adding waiver language to their forms, clarifying that no legal duty or special relationship exists between the person requesting information and the municipality. The long-term effects of this shift on the development process and timelines remain to be seen. Though developers may initially view these changes as a victory for accountability, the potential for delayed approvals and increased formality in municipal interactions could ultimately impact the pace and nature of future projects.
[1] Hammer Homes, LLC v. City of Phoenix, 256 Ariz. 472, 541 P.3d 597 (Ct. App. 2023), review denied (Sept. 10, 2024)
[2] Pingitore v. Town of Cave Creek, 194 Ariz. 261, 981 P.2d 129 (Ct. App. 1998)
