A regulatory taking is an entirely different scenario. First, a regulatory taking never involves a physical invasion of property like the example of a roadway expansion where the government actually physically appropriates private property. If the government physically invades private property for a public purpose, then there is a per se taking and just compensation must be paid. Second, where a regulatory taking exists, the government presumes the regulation it enacts is valid and that just compensation is not owed. Thus, the government does not provide just compensation in accordance with the Fifth Amendment.
Early case law
Regulatory takings were first recognized in the landmark United States Supreme Court decision, Penn Coal v. Mahon, 260 U.S. 393 (1922). The Pennsylvania Coal Company (Penn Coal Co.) conveyed certain property that the Mahons acquired and upon which their house existed. The deed conveyed the surface rights to the property but expressly reserved the right to the Penn Coal Co. to remove all the coal beneath the surface. The State of Pennsylvania later enacted a statute that prohibited the mining of coal in such a way as to threaten the stability of any residence. The Penn Coal Co. challenged the constitutionality of the statute. The Supreme Court held the statute was an unconstitutional taking, stating "while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking." Id. The Supreme Court reasoned that the cost to protect the public must be borne by the public and not the individual or individual few. The public cost in Penn Coal would have been satisfied had the State of Pennsylvania paid the Penn Coal Co. for the property the State sought to take by preventing Penn Coal Co. from mining it.
The determination of a taking is made on a case-by-case basis and not by a set formula. In Penn Central Transp. Co., et al. v. New York City, et al., 438 U.S. 104 (1978), the Supreme Court identified several factors to consider to determine whether a regulatory taking exists. The Court stated, "In engaging in these essentially ad hoc, factual inquiries, the Court's decisions have identified several factors that have particular significance. The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are . . . relevant considerations. So, too, is the character of the governmental action." Id.
Penn Central involved the application of a landmark preservation ordinance. New York City adopted a landmark preservation ordinance and designated Grand Central Station a landmark. Under the landmark preservation ordinance, an owner that sought to alter a designated landmark had three alternatives: (i) apply for an order that the alteration will not change or affect any architectural feature of the landmark and will be in harmony with it; (ii) apply for a certificate of appropriateness that finds the construction would not unduly hinder the protection, perpetuation, and use of the landmark; or (iii) owners can transfer development rights to other parcels on the same city block. Penn Central Transp. Co., the owner of Grand Central Station, leased airspace above Grand Central Station to a tenant who sought to build an office tower above the train station. New York City denied the application for permission to construct the office tower. Penn Central Transp. Co. then filed suit contending that the application of the landmark preservation ordinance to its property was a taking without just compensation in violation of the Fifth and Fourteenth Amendments.
The Supreme Court upheld the application of the landmark preservation ordinance to Grand Central Station. The Court reasoned that the primary investment-backed expectation for Grand Central Station was as a train station. The landmark preservation ordinance did not have any impact on the use of the property as a train station. The Court also recognized that Penn Central Transp. Co. was not entirely being denied the right to build in its airspace. Instead, New York City was only objecting to the size and scale of the office tower Penn Central Transp. Co. submitted for construction. A lesser proposal was never presented for consideration. Further, Penn Central Transp. Co. could get a return on its investment by transferring development rights to other properties. Penn Central stands for the proposition that not every regulation that diminishes property values results in a taking but that a factual inquiry must be made on a case-by-case basis to determine if the impact of the regulation is so severe as to require just compensation. In Penn Central, the impact was not of sufficient severity to require just compensation.
Although the majority of takings cases require an ad hoc, factual inquiry, there is established precedent for certain cases--per se takings cases--that do not require such an inquiry. The first per se takings category is the kind described above, when the government actually physically invades property (i.e., roadway expansions and railroad rights-of-way). The second per se takings category is when a property owner is denied all economically viable uses of land. In Lucas v. South Carolina Coastal Commission, 505 U.S. 1003 (1992), the Supreme Court held that when a government enacts a regulation that denies all economically viable use of land, the government is only exonerated from paying just compensation if the new regulation was previously grounded in the background principles of state property law and nuisance. In other words, a new law must do no more than what could have been achieved in the courts under a State's common law of property or nuisance laws.
Mr. Lucas purchased two lots on a barrier island off the coast of South Carolina for the purpose of constructing single-family homes. South Carolina later enacted a coastal protection statute which prohibited any habitable structures on coastal properties and Mr. Lucas filed suit contending his property had been taken without just compensation. Significantly, in Lucas the Court recognized that it seemed unlikely that common law principles would have prevented the erection of any habitable or productive improvements on land, such as the construction of single-family homes. The Court remanded the case to determine whether any principles of state property or nuisance law permitted the taking.
Conclusion
There is no dispute that "[t]he question of what constitutes a 'taking' for purposes of the Fifth Amendment has proved to be a problem of considerable difficulty." Penn Central Transp. Co., et al. v. New York City, et al., 438 US 104 (1978). However, since 1922, the Supreme Court has held that a regulation can go too far and result in a taking. The Supreme Court subsequently held that the denial of all economically viable use of property constitutes a per se taking unless the regulation is grounded in a state's property or nuisance law.
Practitioners should familiarize themselves with the aforementioned cases, paying particular attention to Penn Central Transp. Co. v. New York City, where the Supreme Court set forth several factors to consider when determining if a regulatory taking exists where less than all economically viable use of land is denied. The struggle to determine at what point a less than total denial of economically viable use of property rises to a total taking remains unanswered. Stay tuned to the Supreme Court's future takings decisions for the answer.
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Robert L. Gamrath III is a senior associate with the law firm of Quarles & Brady in Chicago.
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