On January 15, during his last day in office, New Jersey Gov. Chris Christie signed into law Assembly Bill 1425/Senate Bill 3233, which implements major reforms to the requirements for the posting of performance and maintenance guarantees under the Municipal Land Use Law (MLUL), N.J.S.A. 40:55D-1 et seq. The new law is effective immediately. Under the new law, municipalities are now constrained from requiring performance and maintenance guarantees for private improvements in a development. This article presents a summary of the key reforms contained in the new MLUL amendments.

Limits on Scope of Performance Guarantees

Performance and maintenance guarantees are furnished to a municipality by developers to ensure that the site improvements required to be installed as part of an approved development are completed and maintained for a period of time. Before the current amendments, a municipality had broad authority under the MLUL to require a developer to furnish guarantees for the cost of any improvement that the municipality deemed “necessary or appropriate.” N.J.S.A. 40:55D-53. This discretionary statutory language often was used by municipalities to mandate that the guarantees cover all on-tract improvements of the project, including both publicly owned and privately owned improvements.

The new law modifies N.J.S.A. 40:55D-53 of the MLUL to limit a municipality’s ability to require such expansive guarantees. Now a municipality will only have the authority to require developers to post performance guarantees that cover improvements required by an approval or developer’s agreement, ordinance or regulation to be dedicated to a public entity, and that have not yet been installed. The one exception is that a municipality may request a performance guarantee for privately owned perimeter buffer landscaping required by either local ordinance or imposed as a condition of approval. A developer has the option to post a separate guarantee for the privately owned perimeter buffer. In addition, the following have been eliminated from the statute’s list of improvements that may be subject to a performance guarantee requirement: culverts, storm sewers, sewage disposal (other than sanitary sewers), erosion control and sedimentation devices, other on-site improvements, and landscaping. The new law also modifies the description of some of the categories of improvements that may be covered by a performance guarantee.

Authorization of Additional Guarantees

The new law confers upon municipalities the authority to adopt ordinances that require two additional types of guarantees: a “temporary certificate of occupancy guarantee” and a “safety and stabilization guarantee.”

Temporary Certificate of Occupancy Guarantee (TCOG). If a developer seeks a temporary certificate of occupancy for a development, unit, building or phase of development, a municipality may require the developer to furnish a TCOG in favor of the municipality in an amount equal to 120 percent of the cost of installation of improvements that remain to be completed and that are required to be completed before the issuance of a permanent certificate of occupancy. The scope and amount of a TCOG will be determined by the zoning officer, the municipal engineer or another municipal official designated by ordinance.

The new law specifies that, at no time, may a municipality hold more than one guarantee or bond of any type with respect to the same line item. Upon posting a TCOG, all sums remaining under the performance guarantee that relate to the development, unit, lot, building or development phase for which the temporary certificate of occupancy is sought must be released. Similarly, the TCOG shall be released on the issuance of a permanent certificate of occupancy with regard to the applicable improvements.

Safety and Stabilization Guarantee (SSG). A municipality may require by ordinance that a developer post an SSG in order to provide the municipality with a source of funds to return the property to “a safe and stable condition or to otherwise implement measures to protect the public from access to an unsafe or unstable condition.” The amount of an SSG that can be requested is based on the cost of the bonded improvements in the project. If the bonded improvements are $100,000 or less, the SSG shall be $5,000. If the project has bonded improvements exceeding $100,000, then the amount of the SSG shall be determined based on a percentage of the bonded improvement costs of the development or phase of development as follows: $5,000 for the first $100,000 of bonded improvement costs, plus 2.5 percent of bonded improvement costs in excess of $100,000 up to $1 million, plus 1 percent of bonded improvement costs in excess of $1 million.

A developer may comply with the SSG requirement imposed under the municipal ordinance either by furnishing a separate guarantee or as a line item within the performance guarantee. If a municipality requires the posting of an SSG before it is necessary for the developer to furnish a performance guarantee, the developer has the option of initially posting a separate SSG, in which case the municipality will be required to release the SSG to the developer when the developer furnishes a subsequent performance guarantee that includes a safety and stabilization line item. In addition, a municipality is required to release the entire SSG when the municipal engineer determines that the development of the project site has reached a point where the improvements installed are adequate to avoid any potential threat to public safety.

A municipality can claim payment under the SSG only if (1) site disturbance has begun and, thereafter, all work on the development has ceased for at least 60 consecutive days following such commencement for reasons other than force majeure and (2) site work has not restarted within 30 days after the municipality notifies the developer in writing of its intent to claim payment under the SSG. A municipality may not send notice of its intent to call the SSG until the 60 days has elapsed during which all work has ceased. Notice from the municipality must be given by certified mail or other form of delivery that provides evidence of receipt.

Changes to Maintenance Guarantee Requirements

The MLUL provisions controlling the posting of maintenance guarantees also changed under the new law. Previously, a municipality could require a developer to furnish a maintenance guarantee for a period of two years after the completion and acceptance of an improvement in an amount not to exceed 15 percent of the cost of the improvement. Under the amendments, a municipality may require a developer to post a maintenance guarantee only for those improvements that are the subject of the performance guarantee and that are being released, as well as for the following private stormwater management improvements: basins, in-flow and water quality structures within the basins, and the outflow pipes and structures of the stormwater management system, if any. The new law also clarifies that the two-year term of a maintenance guarantee will automatically expire at the end of the term.

Inspection Fees

The new legislation makes changes to former requirements concerning a developer’s obligation to pay fees to cover the municipal engineer’s inspection of improvements completed by the developer. Under the new law, a municipality may require a developer to post money in escrow for inspections (1) in an amount not to exceed, except for extraordinary circumstances, the greater of $500 or 5 percent of the cost of the bonded improvements subject to the performance guarantee; and (2) in an amount not to exceed 5 percent of the cost of the private site improvements that are not subject to a performance guarantee. The old law contained a provision that prohibited a municipal engineer from performing inspections if there were insufficient funds to pay for those inspections. Now, if a municipality determines that there are insufficient escrow funds to cover the cost of inspections, the new law allows the municipality to require the developer to deposit additional funds. To do this, the municipality must deliver a written inspection escrow request to the developer, detailing the need for the additional required inspections with an estimate of the time and costs of the inspections.

The new MLUL amendments represent a much-needed set of reforms to a performance and maintenance guarantee process that developers have struggled with over the last several decades. They provide a fair and balanced approach in defining a developer’s obligations to post guarantees with a municipality to ensure the completion and maintenance of development improvements. Developers should consult their legal advisor to discuss how the new law will impact a specific project.