The U.S. Supreme Court has long held that land use regulations (e.g. zoning ordinances) can go “too far” and cause a “taking” of property for which just compensation must be paid under the fifth amendment of the Constitution. These cases are known as “regulatory takings.” Less clear is how to establish how far is “too far.”
In one of the leading cases on regulatory takings, Penn Central, the Court set out 3 factors to determine if a regulatory taking had occurred. In practice however, courts around the country seem to either ignore 2 of the factors, or analyze them all under this paramount factor: the extent to which the regulation has interfered with reasonable investment-backed expectations.
One of the issues then becomes: what expectations by the landowner are reasonable? In many cases, state courts have ruled that if the land use regulation was in effect at the time the landowner took possession of the property, then any expectations inconsistent with that regulation are unreasonable. The Supreme Court has phrased this argument as such: “The theory underlying the argument that postenactment purchasers cannot challenge a regulation under the Takings Clause seems to run on these lines: Property rights are created by the State. So, the argument goes, by prospective legislation the State can shape and define property rights and reasonable investment-backed expectations, and subsequent owners cannot claim any injury from lost value. After all, they purchased or took title with notice of the limitation.” Once determining that the landowner’s expectations are unreasonable, the courts have then dismissed the regulatory takings claim.
In an Oregon case decided in 1993 (Dodd), the landowners (the Dodds) purchased 40 acres in Hood River County’s forest zone in 1983. The owners intended to construct a retirement home on the property. At the time of purchase, the zoning allowed construction on a dwelling, but the County was then in the process of revising its comprehensive plan to bring the plan into compliance with statewide planning goals. After the zoning was amended, the ordinance prohibited the construction of a dwelling unless necessary for a forest use.When, in 1990, the Dodds applied to construct a dwelling, the County denied the permit. After an administrative appeal, the Dodds pursued a takings claim. The Oregon Supreme Court denied the Dodds’ claim, noting that the property could still be used productively for timber, and that the Dodds plans to build a dwelling were not reasonable because they had “constructive notice as to the pending zoning limitations.”
In 2001, however, the U.S. Supreme Court decided Palazzolo v. Rhode Island. In Palazzolo, the majority held that unreasonable regulations “do not become less so through passage of time or title.” The Supreme Court held that taking title with notice of regulations does not exempt their challenge under the takings clause and noted that “[f]uture generations, too, have a right to challenge unreasonable limitations on the use and value of land.”
Although Palazzolo seemed to discourage courts from using notice of a regulation as a total bar to a takings claim, state courts have nevertheless applied a Dodd analysis. The confusion may stem from the nature of the Palazzolo majority. Three justices seemed to agree that notice of the regulation was irrelevant to a determination of investment-backed expectations. Justice Scalia, concurring with the majority, stated explicitly that the existence of a regulation at the time the purchaser took title “should have no bearing upon the determination of whether the restriction is so substantial as to constitute a taking,” and that investment-backed expectations “do not include the assumed validity of a restriction that in fact deprives property of so much of its value as to be unconstitutional.” Palazzolo, 533 U.S. at 637, 121 S. Ct. at 2468.
Justice O’Conner, however, stated that the holding of Palazzolo “does not mean that the timing of the regulation’s enactment relative to the acquisition of title is immaterial to the Penn Central analysis.” Indeed, O’Connor went on to state that “the regulatory regime in place at the time the claimant acquires the property at issue helps to shape the reasonableness of those expectations.” O’Connor concluded by saying that pre-acquisition notice of a regulation is a single non-dispositive factor in a Penn Central analysis. Palazzolo, 533 U.S. at 635-36, 121 S. Ct. at 2467.
Nevertheless, when Penn Central applies, “state courts have continued to find the claimant’s investment-backed expectations unreasonable and the claim without merit if the owner was on notice of regulation at the time of property acquisition.” J. David Breemer, Playing the Expectations Game: When Are Investment-Backed Land Use Expectations (Un)reasonable in State Courts?, The Urban Lawyer, Vol. 38 No. 1, Winter 2006. In other words, despite the implicit holding of three Supreme Court Justices and explicit holding of another, state courts are considering pre-acquisition notice as a factor in determining the reasonableness of investment-backed expectations. Not only that, but, seemingly also ignoring Justice O’Connor, state courts are continuing to use pre-acquisition notice of a regulation as a categorical bar to a Penn Central takings claim. Before pursuing any regulatory takings claim, be certain to know how your state treats notice of regulations before acquisition of your property.