January 1, 1900

by Kenneth E. Meiser

A recent case, Hillsborough Alliance for Adult Living v. Tp. of Hillsborough, has revealed all too painfully how numerous approvals and vested development rights can turn out to be a house of cards, blown over by a conflict of interest. The case also reveals that contract purchasers must always be alert to the potential of such conflicts, including an inquiry as to whether a predecessor in title may have engaged in conduct constituting a conflict.

The Facts of the Case

In 1991, developers of a 760 acre tract obtained general development plan approval for a proposed 11,400 unit adult community development. This project would have doubled the housing stock in Hillsborough Township. In 1995, an amended general development plan approval reduced the number of units to 3,000. Hillsborough proposed to satisfy a very large portion of its fair share obligation through this development and the Council on Affordable Housing (COAH) granted substantive certification of the plan on April 3, 1996.

As a result of changes in government, the Township withdrew its support for the development by refusing to assist the developer in obtaining sewer service. COAH, in response, revoked the Township's substantive certification and, as a result, the developer filed a builder's remedy complaint in 1998 seeking an order requiring the Township to fully support its efforts to provide Mount Laurel housing, and to obtain sewer for it.

The Conflict of Interest Issue

The case turned on conflict of interest questions. In 1989, the property owners had reached an agreement with a local official to obtain a rezoning from the existing density of one home per three acres. In exchange, the official was to receive 10% of the increase in the value of the property resulting from the rezoning. The official served as Chairman of the Hillsborough Township Municipal Utilities Authorities, as the Township's delegate to the County Subcommittee on Wastewater Management Planning, and as a member of the Somerset Raritan Valley Sewerage Authority. In addition, the official enticed others into conflict of interest situations. He loaned $20,000.00 to the chairman of the planning board and never required that the loan be repaid. He also retained, as his attorney to assist him in obtaining development rights for the property, the counsel for the Somerset County Board of Chosen Freeholders.

The official had appeared before the planning board to discuss the planned adult community on several occasions in 1989 and 1990. The application was processed by the Somerset County counsel whom the official had retained. In 1995, when amended approval was sought, the municipal official signed the application. He appeared before the Mount Laurel subcommittee of the planning board concerning the fair share plan which was, in response to his presentation, adopted with his site made as part of the plan. He included proposals to include the property in the existing municipal wastewater management plan and in the pending county wastewater management plan. He next negotiated a municipal development agreement with the Township which provided that he would continue to pursue sewer approval from NJDEP on behalf of the developers.

He participated both as public official and as a representative of the developers in efforts to include the properties in the wastewater management plan. The county freeholders endorsed the wastewater management plan at a 1995 meeting at which the county counsel did not recuse himself.

The Court's Decision

Following the events outlined above, a major housing developer entered into an agreement to purchase the property. It argued that the facts of the municipal official's involvement were known in 1989 and that it was far too late to bring conflict of interest charges based on actions that occurred, in some instances, more than 10 years ago. The developer also raised technical arguments asserting that the underlying actions did not violate any specific legal ethics requirement. In its decision, the trial court responded that "if the circumstances of this case do not present an appearance of impropriety, nothing does". Indeed, the municipal official at the time of trial had received payment in excess of $500,000.00 from the property owners, for the services which he had rendered, as an advance on the 10% of the increased value of the property which he would have received at closing. Among other things, the court specifically declared that it is "simply wrong for the chairman of the utilities authority to champion a project which requires a sewer expansion." The general development plan application forms did not disclose his interest in the project. Under these circumstances, the court declared that it was manifest that the interest of justice required an exception to the usual 45 day limitation for challenging a conflict of interest. As a result of this conduct, the court invalidated approvals dating back to 1991 which, under virtually any other circumstances, would have been immune from legal challenge.

The Lessons of the Case

In order to be protected from such a result, a contract purchaser must, as part of due diligence, investigate whether there was any conflict of interest by the seller or the seller's predecessor in obtaining approvals. Nothing in the record indicates how much the national developer knew about the past conflicts. Beyond due diligence, it may be necessary, as part of the sales agreement, to obtain a representation and warranty that there has been no conflict of interest by the seller or the seller's predecessors. The Hillsborough case shows the extraordinarily dire consequences of such a conflict: the total destruction of a 10 year project.

Kenneth E. Meiser, a Land Use Division partner, serves on the New Jersey Builders Association's Legal Action Committee and is Chairman of the 450-member Land Use Section of the New Jersey State Bar Association. His practice is concentrated in the areas of land use applications and litigation.