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Regulatory Takings

REGULATORY TAKINGS

The central disputes of modern takings law revolve around the legal rules governing the dispossession and regulation of private property under the takings clause of the Fifth Amendment, which states: "nor shall private property be taken for public use, without just compensation." The point of departure for this analysis is the Supreme Court's critical decision in lucas v. south carolina coastal council (1992).

The expression "regulatory taking" is a relatively recent addition to the Court's lexicon, having been formally introduced in the dissent of Justice william j. brennan, jr. , in San Diego Gas & Electric Co. v. City of San Diego (1981). Even before the terminology took hold, however, the Court had struggled over the classification of various government actions that in some fashion denied or restricted the use that a private owner could make of his own land. The "easy" cases have long involved the physical taking of property; that is, cases in which the government has forced a private party to part with permanent possession of all or part (even a very small part) of private property, which is then occupied or used by the government itself or by some private individual under government authorization. In these cases, the Court has gravitated toward a rule of virtual per se compensability on the ground that the exclusive right to possession is the cardinal element of a system of private property. Denial of that fundamental right to just compensation is not justified or excused by any gain that the state realizes from the occupation or use of the property in question. The public benefit may justify the government taking, but it does not excuse government from its obligation to pay for damages. It is hard to see how the rule could be otherwise without gutting the just compensation requirement of the takings clause.

The hard question asks what, if anything, should be done with those government regulations that allow a landowner to retain exclusive possession of his land, but restrict the way in which he may use it. The types of restrictions in question include the traditional setbacks for building, or density requirements for planned-unit development. More recently, these restrictions have expanded to embrace total or partial moratoria on private development imposed for environmental objectives: lands are designated as wetlands, sensitive dunes, coastal lands, or habitat for an endangered species. The restrictions on use could be total or partial, and they could have a large or small impact on the value of the regulated land. The burning question is which, if any, of these restrictions require the state to compensate the owner of the property, and how much.

These questions have provoked a heated judicial debate, but the outlines of the current position have been clarified to some degree by Justice antonin scalia's 1992 opinion in Lucas. That opinion uses two tests to determine whether the state owed compensation when it imposed land use restrictions. The first asks whether the property continues to have any viable economic use after the restrictions are imposed. The second asks whether, if no viable economic use survives, the state can advance some legitimate interest to justify the restriction in question. If, however, the land use restriction does not wholly destroy the land's entire economic value, then the state prevails without having to show the justifications demanded in cases of total economic loss. As applied to the Lucas case itself, the Court tests required the South Carolina Coastal Council to pay Lucas full value for two plots of land on which it prevented him from building any houses. The promotion of tourism within the region and the possible prevention of the further deterioration of public beach-front property did not fall within the nuisance-prevention rationales needed to justify the regulation.

The first question posed by Lucas asks why total and partial land use restrictions are treated differently. One explanation is that the test was designed to reaffirm the soundness of earlier cases that had held that government restrictions on new uses of currently productive property withstand taking challenges. For example, in penn central transportation co. v. new york city (1978), the owner of the profitable Penn Central terminal did not receive compensation, solely because it was prohibited from building a new addition in the upper airspace. The test does not, however, answer the question of whether an owner is deprived of all economic use when the prohibition against further development is applied to buildings that cannot turn a profit under current use. Under current law, the owner is likely to face an uphill battle to gain further rights of development, except in the so-called exaction cases in which the state seeks to condition the grant of a building permit on the surrender of some possessory interest in land, such as a public easement across the property. In these cases the strict compensation requirement of the physical cases is applied, notwithstanding the owner's consent to the bundled transaction that contains both the permit approval and the surrender of the possessory interest.

The economic viability test poses greater problems in evaluating land use restrictions on vacant property slated for private development. Lucas was the easy case for compensation because the state's total prohibition rendered the property worthless. But state and local governments have learned that partial restrictions on land use can slow down and perhaps block development without running afoul of the takings clause. Determined local governments frequently shower individual landowners with boundless due process, which allows (and requires) repeated submissions of new development plans for detailed public examination. The chance that development will be approved allows the state to take advantage of the well-established Court rule that bars a landowner from court until a final adverse judgment has been made on its permit applications. But this tactic raises delicate factual disputes over whether the restrictions imposed are so severe that all economic value has been drained out of the project even if formal permission to build has been or may be granted. The upshot is that expert witnesses must often speculate as to whether any rational builder could turn a profit within established conditions.

Unfortunately, the Court has left it unclear how the cutoff line for viability should be determined. Suppose land costs $100 to acquire and new construction for the best project allowed by the government costs $200. If that project is worth only $150 on completion, then the landowner makes a compelling case that he has lost all economic viability of the land. The owner loses in both respects: the cost of the improvement exceeds its benefit, and nothing is recouped for the cost of the land. Next suppose that the best possible project is worth $250 on completion. Now economic viability is highly contested, because the allowable project permits the landowner to recover his variable costs but requires him to lose some portion of the initial investment in the land. Here it is better to classify the project as nonviable because its total costs exceed total benefits once the regulation is put into place. No one would purchase land unless the initial costs were protected against subsequent state regulation. But the sharp reduction in the capital value of land is a common feature of zoning restrictions, and so it is still unclear as to how a landowner with undeveloped property would fare with this type of claim. It may well be that he has greater chances of success in attacking a denial of a specific permit than a general zoning ordinance, because the individualized determination in the permit case opens up greater avenues of abuse. But the outcome is unclear today.

Nonetheless, it appears that the project is economically viable if an especially advantageous new project—total cost $300—could generate $500 before regulation but only $400 after regulation. In this case, the losses from regulation reduce anticipated profits but do not impose out-of-pocket costs. In effect, the superior opportunities of the astute owner are put at risk under regulation. The same result appears to hold if raw land originally costs $100 but appreciates to $500 before regulation reduces its value back to $100. Now state regulation that reduces its value to its original cost will probably survive constitutional challenge. In effect, the takings clause is read to protect only the original cost, but not the value of property. That result introduces a troublesome asymmetry by allowing the state to capture land appreciation while saddling the owner with its depreciation. Thus if the land had been sold to a new owner for $500 before the regulation was imposed, then value has been converted into cost, increasing the likelihood that compensation must be paid. But why encourage individuals to make useless sales of property in order to insulate themselves from the adverse effects of regulation? In principle, the strongest line is to insist that any reduction in value attributable to land use restrictions be compensable unless it has been justified in light of some legitimate public purpose.

What purposes will justify the state's total destruction of the value in land? Scalia's answer turned to the state law of nuisance (as represented by the Restatement of Torts), which generally allows either the state or private owners to enjoin various forms of discharges (such as pollution) that enter either public lands and waters, or the land or water of other private individuals. This antinuisance limitation is held to be "inherent in the fee simple title," which means in effect that the state has done little more than enforce long-standing limitations on land use that private landowners could enforce in disputes with each other. The great advantage of this test is that it prevents neighbors from resorting to the political process to take interests in land that they (collectively) would have to purchase if acting in their individual capacities. So understood, the legitimate public purpose test failed in Lucas because no one could claim that the construction of a single-family home in keeping with neighboring lots could rise to the level of a common law nuisance.

A broad gap exists, however, between the ordinary single-family home and garden-variety nuisances. It is unclear in individual cases whether state restrictions could be justified on the belief that the public is entitled to a viewing easement over private land; or whether the federal and state governments may refuse to grant dredging and filling permits; or whether habitat preservation of endangered species falls under the Endangered Species Act. Classically, these cases involved government restrictions that provide unquestioned public benefits, many of which extend not only to local landowners, but (as with the preservation of endangered species) to the public at large. At present, some lower courts have shown an erratic willingness to hew to the narrower common law definition of nuisance in these regulatory takings cases. Substantial monetary judgments for individualized burdens have become more common in recent years.

Most recently, the Supreme Court affirmed, in City of Monterey v. Del Monte Dunes (1999), an award of substantial damages to a landowner who had received an endless run-around from local land use regulators about the possible development of its thirty-eight-acre beachfront property site. The case upheld the right of landowners to have jury trials on both key issues in a modern regulatory takings case—did the regulation deprive the landowner of all viable economic use, and was there a state justification for the restrictions it imposed. Monterey also held that the "substantial proportionality" test of dolan v. city of tigard (1994) did not apply to ordinary land use cases. But overall it gave little guidance as to what principles governed or why. The full issue will doubtless return to the Supreme Court for further clarification.

The issue of takings has transmuted itself into the familiar question of what level of scrutiny should be applied to evaluate the state interest in imposing its land use restrictions. The traditional view since the court's decision in euclid v. ambler realty (1926) has used general deference to justify the low rational basis standard of review. The large battle in takings is whether the Court's renewed interest in the area will lead to movement away from deference and toward higher scrutiny of land use decisions.

Richard A. Epstein
(2000)

Bibliography

Coyle, Dennis 1993 Property Rights and the Constitution: Shaping Society Through Land Use Regulation. Albany: State of New York Press.

Epstein, Richard A. 1993 Lucas v. South Carolina Coastal Council: A Tangled Web of Expectations. Stanford Law Review 45:1369–1392.

——1997 Babbitt v. Sweet Home Chapters of Oregon: The Law and Economics of Habitat Preservation. Supreme Court Economic Review 5:1–57.

Farber, Daniel A. 1992 Economic Analysis and Just Compensation: An Anti-Discrimination Theory of Takings. International Review of Law and Economics 12:125–138.

Fischel, William A. 1995 Regulatory Takings: Law, Economics, and Politics. Cambridge, Mass.: Harvard University Press.

Treanor, William Michael 1995 The Original Understanding of the Takings Clause and the Political Process. Columbia Law Review 95:782–887.

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