On April 8, 2014, the Commonwealth Court of Pennsylvania issued its decision in Kraftdev Assoc., LLC v. East Cocalico Township Authority, affirming the trial court’s grant of summary judgment in favor of Kraftdev Associates, LLC (“Kraftdev”). In so doing, the Court clarified some important aspects of the scope and application of the Development Permit Extension Act, Act of July 9, 2013, P.L. 362, 53 P.S. §§11703.1-11703.8 (the “Extension Act”).

In 2007, Kraftdev began preparations to construct an approximately 57 acre commercial real estate development in East Cocalico Township, Lancaster County, Pennsylvania (the “Township”). As part of its final land development approval for the project, the Township required Kraftdev to obtain capacity letters for sewer and water service from the East Cocalico Township Authority (the “Authority”). In order to receive the capacity letters, Kraftdev would be required to make capital contributions to the Authority to fund the expansion of the Authority’s water system servicing the development and its surrounding area.

In February 2008, Kraftdev and the Authority entered into an agreement pursuant to which Kraftdev would fund its capital contribution toward the water system expansion project by means of two standby letters of credit in favor of the Authority. Kraftdev posted its first letter of credit upon signing the agreement, in an amount equivalent to approximately 1/3 of the cost of the expansion project. The agreement required Kraftdev to pay the remaining capital contribution via another letter of credit within 15 days after written demand by the Authority. If Kraftdev failed to post the second letter of credit, the agreement provided that the first letter of credit would be forfeited as liquidated damages to the Authority.

During the economic downturn beginning in 2008, several of Kraftdev’s key commercial tenants withdrew from the project. As a result, Kraftdev decided to postpone the project indefinitely. Despite the postponement, the Authority sent Kraftdev a written demand for the second letter of credit in August 2012. Kraftdev refused to pay the Authority’s demand, asserting that its obligation to pay the second letter of credit was suspended under the Extension Act until July 2016. Kraftdev then filed a complaint seeking a declaration that the Extension Act applied to the Agreement and requesting injunctive relief to stop the Authority from demanding the second letter of credit or retaining the first letter of credit as liquidated damages. The trial court ruled in favor of Kraftdev, after which the Authority appealed the ruling to the Pennsylvania Commonwealth Court.

Section 3 of the Extension Act provides that, “The expiration date of an approval by a governmental agency that is granted for or in effect” during the period between December 31, 2008 and July 2, 2016 would be “automatically suspended during the extension period.” 53 P.S. §11703.3 (emphasis added). Section 2 of the Extension Act defines “approval” as any government agency approval, agreement, permit … or other authorization or decision (i) allowing a development or construction project to proceed.” 53 P.S. §11703.2. On appeal to Commonwealth Court, the Authority asserted that its agreement with Kraftdev was not necessary for the development project to proceed, because its requirements to make capital contributions through the two letters of credit were merely funding mechanisms and not development approvals. The Commonwealth Court disagreed, noting that the definition of “approval” in Section 2 of the Extension Act is broadly written. Because the Township’s land development approval was expressly conditioned upon Kraftdev entering into the funding agreement with the Authority, the requirement to post the two letters of credit under that agreement, the Commonwealth Court determined that such a requirement was an “approval” for purposes of the Extension Act and that its performance thus could be suspended until July 2016.

The Kraftdev decision is important because it clarifies what types of developer obligations in a real estate development project fall within the definition of “approval” under the Extension Act. A typical real estate development project in Pennsylvania requires both core approvals, such as a municipal land development and zoning approval, a building permit and state highway occupancy and environmental impact permits, as well as various ancillary obligations of the developer related to securing utility service, managing stormwater flow and other similar requirements. While the Extension Act clearly applies to the core development approvals, the Kraftdev case also clarified that it applies to the developer’s ancillary obligations such as funding water service capacity expansions. Based on the Kraftdev decision, real estate developers who entered, or may enter, into land development agreements during the 2008-2016 period covered by the Extension Act may be able to suspend the performance of their financial or other development-related obligations under such agreements until the July 2, 2016 expiration date of the extension period.