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California Court of Appeal Opens The Door to Regulatory Takings Claims

California Real Estate Journal
By: Bradford B. Kuhn
11/03/08

California courts have traditionally displayed little interest in holding cities and other government agencies liable for damages when those agencies over-regulate property. But the California Court of Appeal recently took an unusual interest, holding that a city's moratorium limiting development on unstable property constitutes a regulatory taking, potentially requiring the city to pay the landowners just compensation.
 
The decision has implications for government agencies, landowners and developers throughout California:
  • Cities and other agencies may now face a more palpable risk that their development restrictions constitute a compensable taking;
  • Cities and other agencies may face greater difficulty justifying development restrictions under their powers to regulate nuisances;
  • Cities and other agencies may not succeed in inoculating themselves from liability for a regulatory taking by purporting to allow some limited use or development of properties; and
  • Landowners and developers may not need to go through the entire administrative process before suing for a regulatory taking, particularly if the process is expensive and appears unlikely to result in a different outcome for the developer.
The Decision
 
On October 1, 2008, the California Court of Appeal held in Monks v. City of Ranchos Palos Verdes that the city of Ranchos Palos Verdes' rules preventing development on an area susceptible to landslides constituted a regulatory taking that was not justified by the city's power to regulate nuisances and protect the public interest.
 
The Background
 
Monks v. City of Rancho Palos Verdes involves a two-square-mile area in Ranchos Palos Verdes with a history of landslides dating back more than 100,000 years. In the late 1970s, the City enacted a moratorium on the construction of new homes in the landslide area, and the area was eventually broken down into different zones for purposes of remediation efforts and residential development. The plaintiffs owned 16 undeveloped lots in a zone covered by the moratorium. Each lot was approximately one acre, most with ocean views.
 
In 2002, the property owners applied to the city for an exception from the moratorium, requesting permission to build single-family residences on their lots. While the application was pending, the city approved a resolution that toughened the criteria for anyone in the plaintiffs' zone to obtain an exclusion from the moratorium. Specifically, it required applicants to demonstrate that the entire zone - as opposed to just the applicant's own property - met the city's stability standards. The applicant's cost to obtain such geological data was estimated at between $500,000 and $1 million.
 
With the new enactment, the plaintiffs decided not to pursue their pending application for exclusion, and instead filed a writ of mandate and sued the city for inverse condemnation. The trial court reviewed the administrative record and held that the resolution did not constitute a taking. On an initial appeal, the case was remanded with an order for the trial court to conduct a trial on the plaintiffs' claims.
 
At trial, the property owners' experts testified that it was safe to build the homes and that each of the applicants' properties met the necessary stability standards. The city's experts testified that the zone in general did not meet the stability standards. The trial court sided with the city's experts and concluded that the evidence demonstrated an uncertainty regarding the stability of the plaintiffs' property zone. The trial court held that 1) the moratorium was not a permanent taking since the plaintiffs could seek an exclusion by establishing the necessary stability factor, and 2) the moratorium was proper based on the city's ability to regulate nuisances and protect the public interest.
 
On a second appeal, the Court of Appeal disagreed, finding that 1) the moratorium was, in effect, a permanent taking, and 2) the city's uncertainty as to whether permitting development would pose a significant harm was insufficient to allow the city to prevent development. The court again remanded the case in order for the trial court to fashion an appropriate remedy based on this holding. (We understand the City settled at least some of the plaintiffs' claims while the appeal was pending.)
 
Implications
 
The Court of Appeal's decision has several important implications for government agencies, landowners and developers:
  • Moratoriums that are, in effect, permanent can constitute a regulatory taking. Temporary regulatory takings, such as moratoriums, are traditionally not compensable. In Monks, however, the Court of Appeal recognized that despite the title of "moratorium," the city had already determined that it was never going to permit development on the property owners' lots. As such, the regulation was, in effect, permanent and could constitute a taking.
  • Nuisance law will not justify development restrictions where potential harm is not well established. Through their police powers, cities and other agencies can traditionally regulate activities in order to protect public health and safety. However, the Monks court found that in order for the city's moratorium preventing development to come within these powers, the city must demonstrate a reasonable probability that the construction of homes on the plaintiffs' lots would pose a significant harm to persons or property. Despite conflicting reports of the land's stability, in Monks, the court found that the evidence of such harm was uncertain, and thus insufficient.
  • Regulations allowing limited uses of property may still deprive an owner of all economically viable uses. A long line of cases have held that a regulation must deprive an owner of "all economically viable use" of a property before it arises to the level of a regulatory taking. And in Monks the moratorium allowed the owners of the undeveloped lots to build "temporary minor nonresidential structures" on their properties. But the court found this insufficient, calling the restriction "severe" (it limited the non-residential structures to a maximum of 320 square feet), and finding that the resolution still constituted a taking despite the permitted limited uses.
  • Developers need not seek permit approval when such efforts are clearly futile. Permit applicants normally must "exhaust" their administrative remedies by pursuing their application until it is ultimately denied by the government agency. The court in Monks, however, held that a land owner is not required to continue pursuit of its permit once the permissible uses of the property are known to a reasonable degree of certainty. The court held that the property owners were not required to pursue their applications any further because it was certain that the city was going to deny the applications. Notably, in making its determination the court used as a criterion that the property owners would be required to expend huge amounts of money to continue their pursuit.
The Monks court's rejection of the city's argument that it needed to enact the building restriction in order to protect itself from future lawsuits should a future landslide occur is also notable. According to the Monks court, such "purely speculative" lawsuits cannot justify a regulatory taking.
 
In sum, following the Monks case, cities and other agencies can expect to come under greater scrutiny - and face greater risk of paying damages - when they substantially restrict development of property.
 
Bradford Kuhn specializes in business and commercial litigation with an emphasis on eminent domain, inverse condemnation and other real estate disputes.
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