Michigan Supreme Court Bars City of Troy From Profiting on Building Permit Fees After 15-Year Battle

Michigan Supreme Court Ruling Sets Precedent for Municipal Permit Fees

LANSING — A 15-year legal battle over how Michigan cities charge building permit fees has ended with a major ruling against the City of Troy, the Michigan Supreme Court found this week.

The court's final decision orders Troy to pay approximately $575,000 in attorney and expert witness fees and permanently bars the city from continuing the disputed fee practices, according to a statement from the Home Builders Association of Michigan (HBAM).

The Privatized Model at Issue

At the center of the case was Troy's use of a privatized "turnkey" building department model through a contract with SafeBuilt of Michigan. Under that arrangement, the contractor collected roughly 75% to 80% of permit fees, while the city retained the remaining 20% to 25% as surplus revenue.

The Michigan Supreme Court found that structure violated the state's Construction Code Act, which requires permit fees be reasonably tied to the actual cost of providing services such as inspections and code enforcement.

"This is a massive win for housing affordability and transparency in what local governments charge for housing-related permit fees," said Bob Filka, CEO of HBAM, in a statement released Monday.

"Permit fees are intended to cover the cost of administering and enforcing the Michigan Residential Code, not to serve as a hidden profit center for local governments."

Why Troy's Model Failed

Troy initially challenged its contract with the private firm after the city privatized its building inspection department in 2010, following the recession. The city entered into a contract with Safe Built that allowed it to capture 25% of all building permit fees.

Throughout the litigation, Troy attempted to justify higher fees through various accounting methods, including:

• Spreading overhead costs from other city departments into its building department budget
• Including unrelated costs such as the clerk and treasurer offices
• Using fee-setting models based on construction value estimates from the International Code Council

The Michigan Court of Appeals ruled that Troy's approach also violated state law, as well as the Headlee Amendment, which limits how local governments can generate revenue.

In its ruling, the appeals court clarified several key points that could have broader implications for municipalities across Michigan:

• Only the designated enforcing agency, typically a city's building department, can oversee code enforcement, even if some services are contracted out
• Cities may include limited, proportional overhead costs, such as utilities or human resources, but cannot charge for unrelated offices
• Revenue from permit fees must be used strictly for building department operations and cannot be diverted elsewhere

The Legal History

The litigation for this issue has been ongoing since 2010. The HBAM first filed when the city chose to outsource its permitting activities and received a 20% to 25% commission on every permit issued by its contractor.

"We tried to reach a compromise back in the day and the city said no," Filka said during the November 2024 announcement of a Court of Appeals victory. "We're going to stick this out."

In this recent three-to-zero unanimous decision, the Michigan Court of Appeals rejected the city's appeal of a lower court's ruling that the city violated the state Headlee Amendment. The city was ordered to pay around $600,000 in legal fees to HBAM.

"Once these issues have been officially resolved, the HBAM plans to further provide support to other Michigan communities that are facing similar challenges with these fees," Filka said.

Implications for Other Michigan Communities

The decision should put every community in the state on notice: building permit fee revenue can only be used to pay for permitting and inspection activities.

"If you are charging exorbitant fees and/or are utilizing those dollars for other government purposes, we're going to be knocking on your door and pointing to this decision," Filka said.

"Excessive fees only increase the cost of housing in our state, and while most communities recognize this and have established fees that comply with state law, there are a number that do not. That needs to change, and this decision should get the attention of those skirting the law."

The HBAM, which represents more than 5,000 builders, subcontractors and suppliers across 16 local associations, said the ruling sets a precedent that could impact how permit fees are calculated statewide, and potentially lower costs for homeowners and developers.

HBAM has also expressed concerns to city officials about recent fee increases. "Prior to June 1, 2024, HBAM's members were paying Building Permit Plan Review Fees between $250 and $450. Today, permits for building the same house cost between $3,600 and $4,900," Filka said.

"Overall, HBAM members are experiencing increased permit costs per home in double the amount paid prior to June 1, 2024. This is not the case in neighboring communities such as Farmington Hills and Royal Oak which have flat fees."

City officials have not officially responded to the HBAM at this time on this issue, but they have said they are evaluating their options.

Broader Impact

The case also raises questions about widely used fee-setting models, such as those based on construction value estimates from the International Code Council. HBAM argues those models often fail to comply with Michigan law because they are not directly tied to actual service costs.

"Local jurisdictions should immediately re-evaluate their fee structures to avoid future disputes," Filka said. "Arbitrary fees based on anything other than a jurisdiction's actual building department expenditures may result in injunctions or court-ordered refunds."

Following 15 years of litigation in MAHB v City of Troy, the Michigan Supreme Court and Court of Appeals have strictly defined how municipalities may calculate and spend building department fees.

The city is currently reviewing the opinion and exploring its options. Troy's response was filed on May 19, 2014, and the Michigan Supreme Court ordered that the matter be scheduled for oral argument. The Court also permitted the parties to submit supplemental briefs.

What Comes Next

The remaining 20% of fees was deposited into a special fund, and the case has been heard at the state Supreme Court multiple times since 2011. SafeBuilt would only receive 75% while Troy would receive 25% of the fees.

City officials previously stated they were evaluating whether they could charge for the time spent by other City employees necessary for enforcement of the Michigan Building Code, such as the Fire Department, or whether they can only recoup the costs for employees registered as trade professionals.

A second issue was whether HBAM is a taxpayer that is able to bring this lawsuit against the City regarding standing.

The HBAM has stated that once these issues have been officially resolved, the association plans to further provide support to other Michigan communities facing similar challenges with permit fees.

"This decision should put every community in the state on notice," Filka said. "If you are charging exorbitant fees and/or are utilizing those dollars for other government purposes, we're going to be knocking on your door and pointing to this decision."