Client Alert

New Law Streamlines Release of Subdivision Bonds

7/17/2006

A new law, effective January 1, 2006, makes it easier and quicker for many developers to secure the release of bonds used to guarantee subdivision improvements and the performance of other work.

Assembly Bill 1460, sponsored by Assemblyman Tom Umberg (D-Orange County), amended section 66499.7 of the Subdivision Map Act to include specific procedures and timelines for agencies to release performance security given by developers for subdivision improvements. Most notably, the law includes a "partial release" provision, which can be helpful to developers who are paying the high cost of large bonds over a long period. These provisions do not apply to any warranty security or guarantee.

In general, the new law provides:

  • Performance security must be released within 45 days of "final completion and acceptance of the required work."
  • When a subdivider believes that the required improvements are complete, the subdivider may notify the agency of that belief in writing.
  • Within 45 days of receiving the subdivider’s notice, the agency must review and comment on, or approve, the statement that the work is complete. The 45 days runs from the date the agency receives the notice, not the date of the notice itself. The statute does not provide for the event that the agency fails to timely respond, although presumably this is a mandatory duty under the statute and a writ could be sought to compel the agency to comply.

If the agency determines that the work is not complete, it may provide for partial release of the security. The partial release procedure is described below.

  • If the agency disagrees that the work is complete, it must provide a "punch list" of deficiencies.
  • Within 45 days of receiving the list, the subdivider may, at its option, pursue the "partial release" procedure and provide cost estimates for the remaining work.
  • Within 45 days of receiving the cost estimates, the agency must comment on, approve, modify, or disapprove the cost estimates.
  • If the cost of the remaining work does not exceed 20 percent of the total original cost of the work, and if the agency approves the cost estimate for the remaining work, the agency must return all security except for that necessary to secure up to 200 percent of the cost estimate for the remaining work. (Alternatively, the agency may release the entire security upon the subdivider’s provision of substitute security in the necessary (partial) amount.)
  • An agency may only be compelled to engage in this partial release process one time per security, but it may engage in additional rounds of partial release if it desires. In other words, the developer may only seek the partial release process once (if at all – see below), although the agency may, at its own option, allow for other releases.
  • Within 45 days of the subdivider’s completion of the remaining improvements, the agency must notify the subdivider in writing whether it deems the improvements completed. There appears to be a gap in the statute here because there is no express provision for the subdivider to first notify the agency that it believes the remaining work is complete and compelling the agency to review and comment or approve within a certain time period. Arguably, the earlier steps in the process supply those procedures, but that is not clear.
  • Within 45 days of issuing the notice that the remaining work is complete, the agency must release the remaining security.

These new provisions have the potential of providing more certainty as to the time frame for bond releases, as well as streamlining the process and even providing earlier access to secured funds. In addition, the new partial release procedure should operate to limit an agency’s "punch list" of improvements that must be completed before the bond can be released; in other words, the agency should be held to that first list of deficiencies and cannot add on during the process.

Nonetheless, the new law appears to have a few weaknesses. In particular, the agency holding the security may be able to waive the partial release provisions. Although some of the statutory language indicates that the agency must participate in the partial release procedure if the subdivider elects to pursue it, other language in the bill indicates that this procedure may be optional for the agency, regardless of the subdivider’s election. Moreover, the statute does not provide procedures in the event that the agency fails to respond or disagrees with the cost estimate. Further, the statute does not contain any retroactivity provision, so that it appears to only apply to security given after its effective date, January 1, 2006, rather than earlier bonds. It does not appear that the date of the subdivision improvement agreement pursuant to which the improvements are being provided and secured in the first instance is relevant to this analysis of the new statute’s applicability.

While the new law is a step in the direction of clarifying the release of improvement security and of compelling agencies to hold security no longer than necessary, it appears to potentially fall short of those objectives. In any event, it is imperative for developers to take the necessary steps to make the best use of the new law, as the more far-reaching changes in the law are left to the developer’s option.

 


Citation

Cal. Gov’t Code § 66499.7

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