The U.S. Supreme Court's 2004-2005 session produced several important decisions concerning the taking of private property for public use under the Takings Clause of the Fifth Amendment to the U.S. Constitution. Two decisions in particular, Kelo v. City of New London , 125 S.Ct. 2655 (2005), and Lingle v. Chevron U.S.A., Inc., 125 S.Ct. 2074 (2005), appear to have broadened the constitutional powers of cities and municipalities to regulate and acquire privately owned land. Government entities certainly will look to these two new cases for guidance when making important decisions that will create economic benefits for the public and/or economic burdens for landowners.
The planning community considers itself lucky if the U.S. Supreme Court hands down one important land- use decision in a single term. The Supreme Court's 2004-2005 session, however, produced several significant decisions that will undoubtedly be the subject of much discussion by planners, consultants, lawyers, and legislators during the next few months and even years. Two of these important decisions involve challenges to a government entity's exercise of power for the purpose of creating an economic benefit to the public, to the detriment of private landowners. Whether the purpose of the government's action is to curtail escalating gasoline prices or to rejuvenate a declining local economy, the Supreme Court appears to have broadened the power of government to benefit the general public economically to the detriment of private landowners.
The case of Kelo v. City of New London , 125 S.Ct. 2655 (2005), answered the highly debated question of whether a government entity may exercise its constitutional powers of eminent domain and condemn private property for the sole purpose of revitalizing an ailing local economy. To that question, a divided Supreme Court answered yes. In the other case, Lingle v. Chevron U.S.A, Inc., 125 S.Ct. 2074 (2005), a unanimous Supreme Court overturned a historic and frequently cited takings case that had previously limited the government's ability to regulate property interests where the regulation did not substantially serve a legitimate government interest. The Supreme Court eliminated this due process standard and spelled out, in detail, the current view of modern takings jurisprudence. Both decisions are considered wins for cities and municipalities looking to regulate property interests. Conversely, landowners see the decisions as further dilution of their property rights and protections under the Takings Clause of the Fifth Amendment to the U.S. Constitution.
Lingle v. Chevron U.S.A., Inc. did not get the same amount of attention in the press as did Kelo v. City of New London. This is understandable, considering that the Kelo case involved the taking of family homes to build shopping malls and pharmaceutical research facilities. The Lingle case, in that it concerned restrictions on the amount of rent oil companies could charge for gasoline station leases, was not nearly as sexy as government confiscating grandma's home to make room for big business. Yet, don't let the amount of media attention given to the Lingle case downplay its significance. Lingle essentially redefines and restates a basic element of constitutional takings jurisprudence. And since the Supreme Court was gracious enough to include a primer on takings law in its lengthy opinion, Lingle serves as an excellent place to begin any discussion on takings.
Here are the basic facts of the case. The State of Hawaii, in an attempt to soften the impact of escalating gasoline prices on the public, enacted a statute that limited the amount of rent that oil companies could charge dealers leasing company-owned gasoline stations. The oil companies challenged the statute, claiming that the state, by squelching their profits, was infringing upon their property rights and, thus, effecting a taking of property for public use without just compensation in violation of the Fifth Amendment to the U.S. Constitution. In support of their challenge, the oil companies relied on the landmark Supreme Court takings case of Agins v. City of Tiburon, 447 U.S. 255 (1980). Among other things, the Agins case stood for the proposition that a law or regulation impacting property rights would effect a regulatory taking and thus require the payment of just compensation by the government if the law or regulation did not substantially advance a legitimate state governmental interest. The appropriateness of applying this heightened due process standard of judicial review in takings cases was brought into question in the Lingle case. In reaching the answer to this question, the Supreme Court first clarified the rules for determining when government activity has resulted in a taking under the Fifth Amendment.
Retiring Justice Sandra Day O'Connor, writing for the Court, stated that there are four categories of government activity that constitute a taking of private land for public use which requires the payment of just compensation to the property owner. The first and most obvious circumstance comes about when the government entity directly appropriates or physically invades private property. This classic example of a taking, commonly referred to as a "physical taking," always requires the payment of just compensation.
There are, however, circumstances where a taking results from government action even though land is not appropriated or physically invaded. These circumstances are referred to as "regulatory takings" and make up the second and third categories commonly referred to as " Lucas takings" and " Penn Central takings." Lucas takings are analyzed under the standards set forth in the 1992 Supreme Court case of Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), and arise when a governmental regulation or action completely deprives a landowner of all economically beneficial use of the property. Lucas takings are distinct from physical takings because, as mentioned above, the government has not appropriated or physically invaded the land. Despite that distinction, there is no practical difference between the two, because in a Lucas taking, the government's regulatory action has similarly resulted in a complete deprivation of the landowner's viable use of the property. The landowner is essentially left with worthless land and therefore must be compensated by the government.
However, even if the government's action does not completely deprive the landowner of all beneficial use of the property, the action may fall within the third takings category — Penn Central takings. Unlike Lucas, the case of Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), did not establish a bright -line rule for determining when a taking occurs. Instead, the court established several factors under which regulatory takings claims should be evaluated. These factors include the character of the government action, the economic impact of the action on the landowner, and the extent to which the government's action has interfered with the landowner's investment-backed expectations. The courts will balance these factors to determine whether the government has effected a taking. The important thing to note is that Penn Central factors address the impact of the regulation on the property owner and not the purpose or intent behind the regulation.
The fourth and final category of takings is often lumped together with the regulatory takings group, but really falls into a category of its own. These are situations where a government entity requires an exaction from a landowner as a condition of receiving some benefit, such as a development permit or entitlement. Exaction takings are evaluated under the rules stated in the landmark cases of Nolan v. California Coastal Commission, 483 U.S. 825 (1987), and Dollan v. City of Tigard, 512 U.S. 374 (1994). Generally stated, the basic rules in exaction cases are that:
(1) there must be a nexus between the government-imposed exaction and the impacts created by the proposed development and (2) the exaction must be roughly proportionate, in both nature and extent, to the impacts of the proposed development. If the exaction fails either of these two requirements, the government has effected an unconstitutional taking.
After clarifying these rules, the Supreme Court turned to the facts in the case. The statute passed by the State of Hawaii and challenged by the oil companies falls under the rules for regulatory takings. Because the statute did not completely deprive the oil companies of beneficial use of their land — it simply limited the amount of rent they could charge their lessees — the regulation fell within the Penn Central takings category. However, the oil companies argued that the court should strike down the law under a different legal theory — the standard established by the Supreme Court in the 1980 case of Agins v. City of Tiburon. The Agins case created a rule of law that deems a regulation an unconstitutional taking of property if the regulation does not substantially advance a legitimate government interest. Unlike the Penn Central factors, this standard looks at the purpose of the regulation rather than its impact. For more than 25 years, courts around the country have relied upon the Agins case in their evaluations of regulatory takings cases.
The Supreme Court, to the surprise of many, held that the Agins standard for reviewing the legitimacy of a law or regulation that impacts property rights is no longer applicable and is essentially irrelevant to regulatory takings analysis. The Court reasoned that a standard that looks at the purpose of a regulation has no place in takings jurisprudence, which traditionally focuses on the impact of a regulation. Regulatory takings, therefore, will be reviewed solely under the fundamental rules set forth in Penn Central and Lucas.
The practical effect of the Lingle holding is that land owners have lost valuable ammunition for challenging laws or regulations that deprive them of some use of their land. Consequently, cities now have somewhat broader discretion to enact regulations that impact property rights. Whether a government entity's regulatory actions are taken for a legitimate purpose is of no import. The test will focus merely on the regulation's "impact" on the property owner, regardless of the regulation's underlying purpose.
Throughout the years, the now-defunct Agins case has been cited by many state and federal courts in takings cases and has served as the foundation for numerous precedential holdings. Undoubtedly, the validity of many of these holdings will now be questioned as a result of the Supreme Court's ruling in Lingle and, therefore, it is reasonable to expect more regulatory takings cases will find their way to the Supreme Court in the near future. It also will be interesting to see what comes of these future cases in light of Lingle author Justice Sandra Day O'Connor's retirement from the bench.
The highly publicized case of Kelo v. City of New London concerns a different aspect of takings law than that raised by Lingle. Kelo deals not with whether the government regulation constitutes a taking of property that requires just compensation. Rather, it involves a determination of whether the purpose behind the exercise of eminent domain power was appropriate. The distinction arises because, in Kelo, there was no question that the city sought to physically take land from private landowners — the city was exercising its powers of eminent domain to condemn several homes within a redevelopment area. The fundamental issue presented in the Kelo case is whether the city's decision to condemn private property to revitalize an economically depressed portion of the city satisfied the U.S. Constitution's Fifth Amendment requirement that private property be taken only for "public use." Specifically, the Court was asked to decide whether condemnation of private property for economic development purposes alone fell within the definition of "public use."
This issue has been the subject of debate for many years, and the thinking was that the facts of the Kelo case presented the perfect opportunity for the Court to finally resolve the issue. In the late 1980s and early 1990s, New London, Connecticut, had fallen victim to economic decline. This was particularly true with regard to its lakefront community of Fort Trumbull. In an attempt to revitalize the area, the city prepared a plan to redevelop the area with retail, commercial, office, and recreational uses, including a $300 million Pfizer research facility. The revitalization plan was expected to bring more than 1,000 new jobs to the city and substantially increase tax revenues.
To implement the redevelopment plan, the city had to acquire private land within the redevelopment area, either through outright purchase or through its use of eminent domain powers. The majority of the affected private landowners voluntarily sold their land to the city; however, two landowners refused to sell their land and the city was forced to initiate condemnation proceedings. The landowners challenged the validity of the city's use of its eminent domain powers to acquire their land for the purpose of revitalizing the economically depressed community.
One of the most important facts of the Kelo case is that none of the properties purchased or slated for condemnation by the city was in blighted condition. Also, none of those properties was being acquired to provide for the construction of public facilities, such as roads, utilities, schools, or airports. This is somewhat of an anomaly in eminent domain cases, since most involve, to one extent or another, the construction of public facilities or the elimination of blight to justify the government's exercise of its eminent domain powers. However, in this case the sole justification given by the city for condemning the private property was the revitalization of an economically depressed area. For this reason, the Supreme Court had the rare opportunity to decide whether economic development alone satisfied the "public use" requirement of the Takings Clause of the Fifth Amendment.
The Supreme Court again sided with the government and held that economic development fits within the definition of public use and, thus, justified the condemnation of private property. Justice John Paul Stevens, writing for the majority of a sharply divided Court, delivered an opinion that broadened the powers of government and, at the same time, astonished the general public.
The Court relied on several factors in reaching its decision. First, the court emphasized its longstanding policy of deferring to the judgment of those who are best suited to making decisions about local land-use policy and the needs of the community, which in this case were the New London City Council and Planning Commission. The court recognized that each jurisdiction's needs are unique and, therefore, local legislators are in the best position to determine what public needs justify the use of the takings power.
Second, the court stressed that the city's use of eminent domain was executed pursuant to a carefully considered, carefully formulated, comprehensive plan for economic development. The redevelopment plan was not premised on the conferring of economic benefits to a particular developer or private party, nor was it focused on impacting a particular landowner. There was no evidence that the plan was founded on an illegitimate purpose, such as condemnation of land for the sole purpose of conferring a private benefit on a particular private party.
Justice Stevens stated that challenges to the legitimacy of the government's actions must be evaluated "not on a piecemeal basis, but rather in light of the entire plan." In the eyes of the Court, the city's comprehensive plan to revitalize an economically depressed area with a variety of commercial, residential and recreational uses, in the eyes of the court "unquestionably serves a public purpose."
The Court's ruling was intentionally open ended, as it refused to establish a bright -line rule for delineating public use or public purpose in the context of economic development. However, the Court did state that promoting economic development is a traditional and long-accepted function of government, and therefore it is indistinguishable from other public purposes recognized by the court in takings jurisprudence.
The Kelo case is unquestionably a victory for cities and counties that seek to cure economic decline with redevelopment. And although the decision has been characterized by the press as affording government the unfettered ability to seize the corner store whenever it resolves to bring the corporate superstars of the world within its boundaries, the words of at least one Supreme Court justice may limit the breadth of the majority's decision.
Justice Kennedy, who was considered the swing-vote in this 5 to 4 decision, cautioned in a separate concurring opinion that, if a city's exercise of its eminent domain power is clearly intended to favor a particular party, with only "incidental or pretextual" benefits to the public, then the city's action must be stricken down by the courts. Justice Kennedy's concurring opinion also appears to qualify the majority's rule somewhat by limiting its application to cases where the city is "sorely in need" of economic revitalization. If so, we may see courts applying higher levels of scrutiny in future eminent domain challenges where the city is not in a dire economic situation and the anticipated level of economic gain is not as substantial.
In the eight states where the legislature has not yet passed laws requiring the presence of blight before property can be condemned within a redevelopment area, Justice Kennedy's concurring opinion should serve as guidance for government entities wishing to exercising their powers of eminent domain to revitalize economically depressed areas. To minimize the potential for challenges by affected landowners, cities will want to tailor their findings to show: (1) that the redevelopment area is in substantial need of economic revitalization; (2) that the anticipated economic benefits to the redevelopment area are more than de minimis in nature; and (3) that, although private entities will likely benefit from the action, the economic benefits to the community are not merely incidental or pretextual to the private benefits that will be enjoyed by private parties, i.e., the economic benefit to the public is the motivating factor behind the government's action.
Again, the unexpected departure of Justice O'Connor from the court may be an indication of future debates in this area of the law. This time, Justice O'Connor wrote a lengthy dissenting opinion, joined by three other justices, criticizing the majority's ruling in the case. Because Justice Kennedy's concurring opinion opened the door to future high court cases limiting the use of eminent domain for economic development, whoever ends up as Justice O'Connor's replacement on the bench will be presented with the unique opportunity to bolster the majority's position, solidifying the resolve of the court, or to serve as a check on the exercise of government power under the Fifth Amendment.
Outside of the judiciary, the public's reaction to the Kelo decision already has prompted some state legislatures to seek limitations on use of eminent domain. For example, in California where the use of eminent domain is already substantially limited by statute, legislators have proposed a constitutional amendment to further limit its use for a "stated" public purpose, and only then, upon an independent judicial determination that no reasonable alternatives exist to the exercise of eminent domain. Then, if the public entity ceases to use the property for the stated use, the original owner could reacquire the property for the lesser of the compensation paid by the government or fair market value. The Kelo decision undoubtedly will prompt other states to take similar action, especially those where blight is not required as a prerequisite to condemning private property.
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