In an attempt to get out of paying the city of Palo Alto hundreds of thousands of dollars in fines, the owner of College Terrace Centre filed for an injunction in July in Santa Clara County Superior Court arguing that the original building developer's obligation to the city isn't transferable to a new owner.
The request for an injunction, filed by AGB-Pact Owner LP, seeks to throw out nearly $345,000 in penalties for leaving the neighborhood grocery store space at 501 Oxford Ave. vacant for a year.
The grocery store was required as a "public benefit" and under the planned community ordinance, the city can levy penalties of $2,000 if such a business is not operating at the site.
The center's original developer, Twenty-One Hundred Ventures, worked out a deal with the city in 2010 to include a grocery store as part of College Terrace Centre, a mixed-use development at 2100 El Camino Real, which includes 38,980 square feet of office space, 5,580 square feet of retail, eight below-market-rate housing units and the 8,000-square-foot market space.
The grocery store was to replace the beloved JJ&F Market, which had been at the site for 65 years. In exchange for the store, below-market-rate-housing and other community benefits, the City Council approved a zoning change for the site from Neighborhood Commercial to Planned Community (PC), which allows for offices and greater building density.
The council passed an ordinance that required Twenty-One Hundred Ventures to follow a restrictive covenant, which mandated retaining and operating the grocery store for the lifetime of College Terrace Centre. If the development failed to have an operating grocery after a six-month grace period, the property owner would face daily penalties of $2,000.
The grace period for a cumulative six months is only allotted every five years. The covenant and the ordinance apply to any new property owner.
College Terrace Centre's first grocer, College Terrace Market, abruptly shuttered on Jan. 10, 2018 after six months in business. Prior to the first penalty, New York-based Greystone Property Development sold the center to local developer and Blox Ventures CEO Jason Oberman for $78 million on June 29, 2018, almost immediately assuming it avoided the penalties, which the city began imposing on July 10 after the six month-vacancy grace period had ended. Court documents indicate the city fined the new property owner more than $345,000 for the grocery store that stood empty for a year before Khoury's Market opened in January 2019.
AGB, a limited partnership under Oberman, is asking the court to throw out all of the penalties and to prevent the city from further fining the company.
The property owner claims the city's penalties are arbitrary; unconstitutional under federal and state law; and exceed its limited powers regarding regulatory land use under state and local law. A requirement for the continuing operation of a grocery store, without regard to changing economic conditions, is vague and unenforceable, the lawsuit claims.
The ordinance's restrictive covenant, which governs the use of the 8,000-square-foot site as a grocery store in perpetuity and proscribes the penalties if the store is not continuously operational, is unenforceable, according to the lawsuit. Compliance with the city's interpretation would be impossible and the city has not followed municipal or state law regarding issuing citations and fines. In addition, the ordinance doesn't allow the city to impose penalties, AGB argued.
The lawsuit is part of a complicated legal situation. Khoury's Market, the grocery business Oberman signed to replace the College Terrace Market, announced last Friday that it will close after a year at the site. Oberman and AGB-Pact Owner could be liable for additional penalties from that closure.
AGB is also asking the court to vacate a May 6 ruling by Administrative Law Judge Alan Seltzer, who cut AGB's liability to $140,000 in penalties, in addition to unspecified damages and reasonable legal expenses and attorney fees.
Seltzer said he didn't have the authority to rule on the city's $2,000 a day penalty, which is proscribed under the restrictive covenant, a civil matter. He noted the city erred by not adding the penalty to its official administrative schedule and not adding the penalty to College Terrace Centre's ordinance.
But AGB did violate what's known as "administrative" penalties, which are $1,000 day. By violating the ordinance for 165 days (after it bought the building), AGB owed the city $164,250 for being out of compliance from July 10, 2018, to Dec. 21, 2018. Seltzer reduced this sum by $25,000 for a total of $139,250, finding that AGB had made good-faith efforts to come into compliance after purchasing the property. AGB had quickly signed Khoury's Market to take over the space on Aug. 21, 2018.
The city contends in court papers that AGB didn't file the lawsuit within 20 days after being served with the administrative court's final decision and the case should be thrown out. The city isn't arguing about the reduced penalties imposed by Seltzer.
AGB's challenge to the validity of the ordinance is barred by a 90-day statute of limitations, according to the city. The limited partnership can't challenge the ordinance's validity because its predecessors, the property's developers, requested the City Council adopt the ordinance for the developer's benefit. Twenty-One Hundred Ventures received substantial benefit and value from the property later acquired by AGB, with full advance notice of the ordinance's requirements. The purchase price AGB paid should have and did take into account the restrictions and requirements, the city wrote.
AGB's lawsuit contends that Seltzer should have thrown out all of the penalties. Seltzer didn't have the authority to rule on the city's $344,943 in penalties, the lawsuit states. The city erred when it didn't add the penalty to its official administrative schedule or add the penalty to College Terrace Centre's "planned community" ordinance. The penalty only appears in the separate restrictive covenant document.
However, Seltzer did rule that the schedule of administrative penalties the City Council adopted was in effect on the date when the violation began.
AGB also claimed that as the new owner, it is also entitled to another six-month grace period. Seltzer disagreed.
Seltzer called AGB's contention that it can't be liable for a breach of the covenant that occurred before it bought the site "an argument (that) has an absurd result." If true, it would overturn state Supreme Court precedent "by allowing a developer to escape the promises made in exchange for the benefits granted by a development permit in every case where the restrictions are in the form of recorded covenants."
There are currently no upcoming hearings scheduled for the case.