Formula Retail Scuffle in Malibu

This week’s update focuses on a scuffle over chain stores currently taking place in Malibu. In June, an appellate court overturned a voter-approved initiative imposing a number of restrictions on formula retailers, aka chain stores. Just last week, the Malibu Planning Commission proposed a more watered-down version of the chain store restrictions, aiming to pass judicial muster. The court’s rationale for invalidating the original ordinance, and the city’s retooled current approach, present an interesting case study about the limits of a city’s land use authority to restrict a certain kind of business.

Intending to preserve Malibu’s “small-town, rural character” and prevent it from turning into “Anything Mall, USA”, in late 2014 Malibu voters passed an initiative that had two primary components. First, all mixed-use projects over 20,000 square feet needed to prepare a specific plan amendment to the Malibu General Plan, and then be put on the ballot of an upcoming election for a popular vote. Second, new chain stores were restricted in size, subjected to clustering limitations, and required to obtain a Conditional Use (“CU”) permit to open.

The formula retail CU requirement was “establishment specific” and restricted in transferability: it ran solely with the operation of that business, and could not be transferred to a different chain store at the site, even if the new chain store proposed the exact same use. For example, a CU to operate a Burger King was effective if a new owner and operator proposed to keep a Burger King on the site, but not if a new owner or operator wanted to open an In-N-Out Burger.

The trial court found both aspects of the initiative problematic, and the Court of Appeal agreed. The primary deficiency of the formula retail restriction was that it used the CU process to confer a “personal” interest that attached specifically to a permittee—and not the right to operate a certain kind of land use at a site. Malibu argued that formula retail stores are in and of themselves a certain kind of land use. The court rejected this rationale, explaining that a CU cannot be imposed against a specific kind of business, and must be grounded in the use of the land itself. The court’s example was Starbucks: Starbucks is not a land use; coffee shop or restaurant is.

The California Supreme Court declined to hear Malibu’s appeal of the Court of Appeal’s decision in early August, making the appellate decision final. Just last week on October 30, Malibu’s Planning Commission recommended that its City Council approve a new watered-down version of the formula retail restrictions intended to correct deficiencies the court identified in the original ordinance. The two most important changes are (1) replacing the Conditional Use requirement with a new “formula retail clearance”—a ministerial approval processed by department staff that compared the proposal against size and clustering restrictions; and (2) allowing the “formula retail clearance” to be transferred to other businesses proposing the same use. It remains to be seen if the shopping center owners that challenged the original formula retail restriction will accept the retooled program. According to one news article, one of the lawyers who challenged the voter initiative expressed doubt about the legality of any land use restriction on what kind of tenant a property owner can rent to.

Malibu’s past legal defeat and current proposal could be informative for how other jurisdictions structure their own rules. A number of cities regulate chain stores, including San Francisco. For example, San Francisco bans formula retail businesses in some parts of town and requires a CU to open a formula retail store in many others. Malibu’s initial effort to require a CU for new formula retailers was rejected by the courts, so it is now suggesting a ministerial approval so long as the chain store meets certain size and clustering restrictions.  Also, unlike Malibu’s initial proposal, San Francisco does allow a change from one business to another within the same use category without a new CU. But only in some circumstances:  the space cannot increase in size or add a commercial kitchen, and the new business must have fewer locations worldwide than the business which secured the CU. Malibu’s proposed new ordinance has a restriction on transfer when the new retailer would increase size, but does not attempt to limit the transfer to a chain store with more locations or a similar business proposing a commercial kitchen.

It will be interesting to see if Malibu’s City Council adopts a program in line with what the Planning Commission recommended, and how opponents of the initial formula retail restrictions react to the ultimate proposal. Here in San Francisco, it seems unlikely that after years of increasing regulations on chain stores, the city will change its approach to eliminate process and discretionary land use authority in order to make it easier for those businesses to open.


Authored by Reuben, Junius & Rose, LLP  Attorney, Mark Loper

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full-service real estate law firm.  We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision, and condominium work.