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Sliding Into Home

Daily Journal
By: Bradford B. Kuhn
10/17/08

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; face greater difficulty justifying development restrictions under their powers to regulate nuisances; and not succeed in inoculating themselves from liability for a regulatory taking by purporting to allow some limited use or development of properties. Landowners and developers now may not need to go through the entire administrative review 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.

On Oct. 1, 2008, the California Court of Appeal held in Monks v. City of Rancho Palos Verdes, 2008 DJDAR 15265, that the city of Rancho 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 to protect the public interest.

Monks involves a two-square-mile area in the city of Rancho Palos Verdes with a history of landslides dating back over 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, the city 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, viewing the exercise as having no chance of success. Instead they filed a lawsuit against the city, seeking a writ of mandate and damages for inverse condemnation. In hearing that lawsuit, the trial court limited itself to a review of the administrative record and held that the city's actions, as reflected in the record, did not constitute a taking.

On an initial appeal, the Court of Appeal concluded that the trial court should have looked beyond the administrative record and at other evidence the plaintiffs sought to present. The court then overturned the trial court's decision, remanding the case with an order for the trial court to conduct a trial on the plaintiffs' claims.

At the subsequent trial, the plaintiffs' experts focused on the plaintiffs' properties and testified that homes could be safely built on each of the plaintiffs' properties and that the properties met the necessary stability standards. The city's experts, in contrast, focused on the wider zone that included the individual properties. Those experts testified that the zone in general did not meet the stability standards. The trial court ultimately sided with the city's experts and concluded that the evidence demonstrated an uncertainty regarding the stability of the zone containing the plaintiffs' property. The trial court held that the moratorium was not a permanent taking since the plaintiffs could seek an exclusion by establishing the necessary stability factor, and that the moratorium was proper based on the city's ability to regulate nuisances and to protect the public interest.

On a second appeal, the Court of Appeal disagreed, finding that the moratorium was, in effect, a permanent taking, and 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. (The city settled the plaintiffs' temporary takings claim during the course of the case.)

The Court of Appeal's decision has several important implications for government agencies, landowners and developers.

First, 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 essentially determined that it was never going to permit development on the property owners' lots. The Court of Appeal explained that the trial court's finding that the moratorium was not permanent was "erroneous," as the "trial court's express and implied findings prove that the city exacted a permanent taking on plaintiffs' properties."

Second, nuisance law will not justify development restrictions where potential harm is not well established. Through their police powers, cities and other agencies traditionally can regulate activities in order to protect public health and safety. However, the Monks court found that in order for the city's moratorium on 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 people or property. Despite conflicting reports concerning the land's stability, the Monks court found that the evidence of such harm was uncertain, and thus insufficient: "'Uncertainty' is not a sufficient basis for depriving a property owner of a home. The city must establish a reasonable probability of significant harm," as a "permanent ban on home construction cannot be based merely on a fear of personal injury or significant property damage."

Third, regulations allowing limited uses of property may still deprive an owner of all economically viable uses. A long line of cases has 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" that were limited to a maximum of 320 square feet and that did "not increase water usage." But the court found this insufficient, calling the restriction "severe" and finding that the building restriction still constituted a taking despite these limited permitted uses.

Fourth, 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. As the court noted: "[P]laintiffs should not be required to pay between $500,000 and $1,000,000 to conduct a study in an attempt to prove what the city would not believe. Thus, the use of the administrative process was pointless." The court's emphasis on the cost of the administrative process seems likely to be a point developers will come to rely on in future litigation as a reason for shortcutting the administrative review process.

It is also notable that the Monks court rejected the city's argument that the city needed to enact the building restriction in order to protect itself from lawsuits should a future landslide occur. According to the Monks court, such "purely speculative" lawsuits cannot justify a regulatory taking: "[s]peculation does not justify violating the state Constitution and depriving plaintiffs' land of all economically beneficial use."

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 B. Kuhn specializes in business and commercial litigation in Nossaman's Orange County office, with an emphasis on eminent domain, inverse condemnation and other real estate disputes. He can be reached at bkuhn@nossaman.com or 949-833-7800.
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