EMINENT DOMAIN HAS been called the "despotic power" for good reason. The government is given the power to force an owner to "sell" his or her property on only the conditions that the land be put to a "public use" and that "just compensation" is paid. While cases like Kelo v. New London, where private property was allowed to be taken for "economic development," show that the federal courts have watered down the public-use requirement, at least those property owners who are ousted from possession of their property are paid for it. That is often not the case with regulatory takings, where the owner retains possession of the land, but governmental restrictions limit its use.
The U.S. Supreme Court has recognized that the rationale behind the Fifth Amendment's Taking Clause was to bar "Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole." But the Supreme Court has recognized that its "regulatory takings jurisprudence cannot be characterized as unified," which has hampered achievement of this goal.
In 1922, the Supreme Court began its examination of regulatory takings by stating "if regulation goes too far it will be recognized as a taking." It is once a taking has occurred that the courts scrutinize the public-use question and mandate the property be paid for. But the case law developed by the Supreme Court often prevents a finding of a regulatory taking in the first instance.
There are two main cases related to regulatory takings, Penn Central Transportation Company v. New York and Lucas v. South Carolina Coastal Council. An examination of these cases will show the difficulties a typical owner faced with a burdensome regulation has.
Penn Central involved New York City's historical landmark law. The six-member majority opinion began by noting that historical preservation laws protect "structures with special historic, cultural, or architectural significance [and] enhance the quality of life for all. Not only do these buildings and their workmanship represent the lessons of the past and embody precious features of our heritage, they serve as examples of quality for today." The city justified the law as: (1) fostering civic pride in "noble accomplishments of the past"; (2) enhancing the city's value to tourists; (3) supporting and stimulating business and industry; (4) strengthening the city's economy; and (5) promoting the use of historical landmarks for "the education, pleasure and welfare of the people of the city."
The majority discussed how historic preservation laws typically work:
The New York City law is typical of many urban landmark laws in that its primary method of achieving its goals is not by acquisitions of historic properties, but rather by involving public entities in land-use decisions affecting these properties and providing services, standards, controls, and incentives that will encourage preservation by private owners and users. While the law does place special restrictions on landmark properties as a necessary feature to the attainment of its larger objectives, the major theme of the law is to ensure the owners of any such properties both a "reasonable return" on their investments and maximum latitude to use their parcels for purposes not inconsistent with the preservation goals.
The majority noted that most municipalities do not try to either buy or condemn the property to be preserved:
The consensus is that widespread public ownership of historic properties in urban settings is neither feasible nor wise. Public ownership reduces the tax base, burdens the public budget with costs of acquisitions and maintenance, and results in the preservation of public buildings as museums and similar facilities, rather than as economically productive features of the urban scene.
The city's law initially required a city commission to designate a building as a historical landmark. Such a designation "results in restrictions upon the property owner's options concerning use of the landmark site," such as requiring the owner to keep the exterior in good repair and requiring city approval of any change to exterior architectural features, which thereby "ensur[es] that decisions concerning construction on the landmark site are made with due consideration of both the public interest in the maintenance of the structure and the landowner's interest in use of the property."
The building at issue was Grand Central Station. Its original plans called for a 20-story building that was never constructed. The owners wanted to construct a building with around 50 floors over the station. The majority first rejected any argument based on diminution of value (the addition of the skyscraper would have been worth millions annually) noting that the court's prior cases had found no takings occurred where up to 88 percent of the value of a property was lost due to a zoning regulation. It also held that the fact that this law differed from zoning laws in that it could single out a sole building for this treatment did not cause a taking.
The majority claimed that there were situations where a land owner could recover due to a burdensome regulation. The factors to be considered included: (1) the economic impact of the regulation on the claimant; (2) the extent it has interfered with investment-backed expectations; and (3) the character of the invasion. Former Justice O'Connor later admitted that the subsidiary questions created by this test were "vexing." Some law professors have not been so kind. One declared this test as "well nigh useless" and "a disaster in terms of clarity and predictability." Another referred to it as "a confused test that can be manipulated to justify any outcome."
The test from Lucas is easier to apply. But, it only applies in rare circumstances.
In Lucas, a man purchased two beachfront lots for close to $1 million. He planned to build homes on the lots. After his purchase, South Carolina enacted a law meant to protect its coastline. This law had the direct effect of prohibiting construction on the two lots, and led to a state court finding the properties valueless.
A six-member majority of the U.S. Supreme Court held that when a regulation makes a property entirely valueless then the owner is entitled to full compensation for the value of the property. But they admitted that there may be situations where a landowner loses 95 percent of the value of the land due to a regulation and is then forced into the Penn Central test and gets nothing:
It is true that in at least some cases the landowner with 95 percent loss will get nothing, while the landowner with total loss will recover in full. But that occasional result is no more strange than the gross disparity between the landowner whose premises are taken for a highway (who recovers in full) and the landowner whose property is reduced to 5 percent of its former value by the highway (who recovers nothing). Takings law is full of these "all-or-nothing" situations.
Thus, if the South Carolina law had left the property owner with $50,000 of value out of his $1 million purchase, the state might have not had to provided the owner with any compensation.
These two cases show the difficulties that face an owner seeking to bring a constitutional claim for regulatory takings. The Penn Central test is arbitrary and easily manipulated, and the facts from that case show the level of general platitudes from the legislature that the courts will defer to. Further, seeking a remedy under that case will likely lead to high legal costs as the test is so amorphic that both sides often feel the need to pursue any and all appeals. Lucas, meanwhile, only applies in rare instances.
Reform through the courts must remain an option, if only to highlight injustices as was done in Kelo. That case raised public awareness of problems with the public-use question in regard to physical takings and led to many state law changes through legislation and the initiative process. Legislation and the initiative process are the most likely avenues for fundamental regulatory takings reform at this moment. In the last five years, both Arizona and Oregon enacted regulatory takings reforms through the initiative process, although many of the Oregon reforms were watered down in a subsequent initiative. Whatever path is taken, achieving reform will not be easy. But reform is necessary to reinvigorate the property rights that are so important to a free society.