A threshold due diligence question for developers is whether public water and sewer is available for development.  If connection to public water and sewer is not possible or is too expensive, or sufficient capacity is not available, a developer may look elsewhere.  For developers who decide to move forward with a site, water and sewer allocation agreements ensure that capacity will be reserved as the approval process runs its course.

A recent New Jersey Appellate Division decision upheld the validity of a sewer allocation ordinance and by extension the sewer reservation agreements entered into between private developers and the municipality pursuant to the ordinance.  The September 4, 2013 decision, entitled 388 Route 22, Readington Realty Holdings, LLC v. Township of Readington, et al, examines competing developer interests in securing rights to allocated sewer capacity.  The court examined a developer’s attempt to secure sewer rights that were previously contractually allocated by the municipality but were unused. 

Plaintiff’s parcel was located in Readington Township and served by the Readington-Lebanon Sewerage Authority (“RLSA”).  Readington had a 939,000 gallon per day (gpd) share of the available wastewater treatment capacity of RLSA.  To fund its share of the RLSA capacity, Readington adopted a Sewer Allocation Ordinance, section 187-26.  Under the Ordinance, the Township enters into agreements with property owners seeking to acquire a portion of Readington’s share of the RLSA.  The agreements include treatment plant expansion agreements charging property owners a fee of roughly $19 per gallon.  Additionally, property owners with undeveloped parcels must enter into allocation agreements and pay a user charge even if they do not use the capacity.  The user charges under such agreements are nonrefundable and 100% of the user charge is required to be paid in three years. 

Plaintiffs sought roughly 12,000 per day capacity for commercial redevelopment.  Plaintiff requested that the Township terminate its sewer allocation agreements with other property owners whose projects were delayed.  The Ordinance provided that the Township had discretion to terminate sewer rights agreements for projects that did not seek development approval within two years of approval of the allocation, or where construction had not commenced within two years after receipt of preliminary approval.  The Township also had authority to extend agreements based on a showing of good cause.

The Township entered into contractual commitments for its entire allotment of the RLSA capacity, and actually exceeded its allocated capacity.  The Township Committee did not take action to reallocate sewer capacity as requested by plaintiff.

Plaintiff filed suit asserting facial and as applied challenges to the Township Sewer Allocation Ordinance.  With respect to the facial challenge, plaintiff asserted that the Ordinance lacked standards to guide the municipality in determining when to exercise discretion to reacquire sewer allocation rights.  In reviewing the Ordinance, the court determined that sufficient standards existed “to insure the fair and reasonable exercise” of that discretion, and termination of agreements should only be considered “when there is no good cause for delay and the capacity is needed for other projects ready to proceed . . . .”  The court suggested that the Ordinance be improved through inclusion of more specific guidance and standards, but upheld dismissal of the facial challenge. 

The court also rejected the plaintiff’s as applied challenge.  The plaintiff’s development plan was speculative and plaintiff failed to establish that the Township’s action was arbitrary.  “The Township and Sewer Advisory Committee’s decision to refrain from considering recapture of sewer rights held under contract by owners who had paid significant sums to acquire them and were paying significant sums to keep them cannot be deemed unreasonable.” 

The Appellate Division also noted that sewer agreements enjoy protection under the Permit Extension Act.  The Legislature’s determination that sewer allocation agreements should be extended in times of economic downturn was a factor in the court’s decision. 

The development process often spans multiple years and can be affected by economic cycles.  The court’s recognition of contractual rights and its protection of the investment backed expectations of developers will help promote economic recovery by ensuring that stalled developments projects have necessary water and sewer rights to proceed when market conditions change.