Seven years after Sterling Park received Palo Alto's blessing to construct a condominium complex on West Bayshore Road, the project remains in legal limbo, with the developer and the city clashing over affordable housing.

But thanks to a recent ruling from California's highest court, Sterling Park can proceed with the project even as it continues to challenge Palo Alto's requirements that it devote 10 units of the 96-condominium project to below-market-rate housing and contribute funds toward the city's affordable-housing program.

The October ruling from the state Supreme Court reversed two prior rulings from the Superior Court and the state Court of Appeals, both of which sided with the city. The two courts had concurred that Sterling Park cannot challenge the conditions of approval laid out in its 2007 agreement with the city because the 90-day statute of limitation had long expired. Sterling Park first challenged the city's affordable-housing requirement in 2009, long after the City Council and the various land-use boards gave the project the green light.

The Supreme Court saw things differently and concluded that Sterling Park could indeed proceed with its legal challenge because of a separate law that allows developers to contest mitigation fees. Unlike the other two courts, the Supreme Court decided that the dispute between Palo Alto and Sterling Park should not be subject to the 90-day rule and should instead be governed by the Mitigation Fee Act. The law allows a developer to pay fees under protest and then seek reimbursement.

Under this act, the statute of limitations doesn't kick in until after the city notifies the developer of the fees owed and the right to protest. In this case, Sterling Park claimed it never received such a notice and the time limits thus don't apply.

City Attorney Molly Stump did not return a request for comment.

The crux of the disagreement between the highest court and the two lower ones comes down to one vague word: "exaction." The Mitigation Fee Act specifically states, "Any party on whom a fee, tax, assessment, dedication, reservation, or other exaction has been imposed, the payment or performance of which is required to obtain governmental approval of a development ... or development project, may protest the establishment or imposition of the fee, tax, assessment, dedication, reservation or other exaction" as provided in the statute.

The fees developers usually have to provide include funds to support parks, libraries and other infrastructure or defray some of the cost of the new development to the city.

But what exactly is an "exaction?" Depends on which court you consult. The lower courts relied in their rulings on a prior case, Trinity Park vs. the City of Sunnyvale, in which the courts wrestled with the word "exaction" before concluding that the fees in the Mitigation Fee Act should be limited to those imposed for the purpose of "defraying all or a portion of the cost of public facilities related to the development project" or, as the Supreme Court stated in a different ruling, to "alleviate the effects of development on the community."

Using the Trinity Park logic, the lower courts in the Sterling Park case concluded that affordable-housing requirements don't count.

In its July 2012 ruling, the Sixth District Court of Appeals noted that "one purpose of the BMR housing program is to improve air quality and reduce demand on regional transportation infrastructure by insuring (sic) that people of all economic levels can afford to live and work within the city limits rather than commute."

"This has nothing to do with defraying the cost of public facilities necessitated by the new development itself," appeals court Justice Eugine M. Premo wrote in the opinion, which concluded that since the Mitigation Fee Act should not apply, Sterling Park's challenge should be subject to the regular 90-day period, effectively making it moot.

Not so, argued the Supreme Court. Even though the affordable-housing fees are different from the other mitigations listed in the statute, they fall under the general category of "other exactions."

The court in the Trinity Park case "erred in interpreting the term 'other exactions' so narrowly," Justice Ming Chin wrote in the Supreme Court's ruling.

In rejecting the Trinity Park case, the Supreme Court relied on two other cases (Williams Communications v. City of Riverside; and Fogarty vs. City of Chico), which have a broader definition of "exaction." In these cases, the term applies to actions that "divest the developer of money or possessory interest in property," with less regard to whether the contested fees defray the cost of the development.

The Supreme Court noted that under the faulty logic in the Trinity Park case, the Mitigation Fee Act would "only govern fees that are related to the project but arguably excessive; it would not govern fees or other exactions that are blatantly arbitrary and unlawful."

The city's argument that the 90-day statute of limitation had expired would make sense, the Supreme Court noted, if the disagreement revolved around a condition such as the number of units allowed. It wouldn't make sense, it argued, for the developer to proceed with construction of units that are under dispute while protesting the city's failure to approve them. Obviously, Chin wrote, "one cannot build a project now and litigate later how many units the project can contain – or how large each unit can be, or the validity of other use restrictions a local entity might impose."

"But the validity of monetary exactions, or requirements that the developer later set aside a certain number of units to be sold below market value, can be litigated while the project is getting built," Chin wrote.

The Supreme Court did not make any findings about the merits of Sterling Park's challenge, but merely concluded that the Mitigation Fee Act applies to the challenge. The decision means the case will now return to the appeals court.