United States: U.S. Supreme Court Establishes New Test For Evaluating Property Rights Under The Takings Clause

Charles L Coleman III is a Partner in our San Francisco office. David Preiss is a Partner in our San Francisco office. Bradley B. Brownlow is a Partner in our San Francisco office.

HIGHLIGHTS:

  • In Murr v. Wisconsin, the U.S. Supreme Court addressed "one of the critical questions" in the law of regulatory takings: how to define the unit of property that is the subject of the alleged taking.
  • The Murr decision arose in the context of Wisconsin's lot merger rules and upheld the Wisconsin Supreme Court's ruling against the common owners of two contiguous lots who were prohibited from using or selling their contiguous lots as separate lots, despite their having been acquired as separate lots.
  • In addressing this question, the Court majority articulated a new standard that moves beyond the limitations of state and local law. The majority stated that courts also must consider other factors, such as the land's physical characteristics and prospective value, as well as "whether reasonable expectations" would lead the land owner to expect that its holdings would be treated as one parcel.

In Murr v. Wisconsin, No. 15-214, 2017 WL 2694699 (U.S.S.C. June 23, 2017), the U.S. Supreme Court, in a majority opinion by Justice Anthony Kennedy, addressed "one of the critical questions" in the law of regulatory takings: how to define the unit of "property" (the "whole parcel" or only a fraction) that is the subject of the alleged taking. This can be crucial because in most cases, the larger the parcel (or the greater the number of merged parcels) attributed to the owner, the less likely a finding of a regulatory taking of any given portion becomes.

In addressing this question, the Court articulated a new standard that moves beyond the limitations of state and local law. The Court explained that: "[b]ecause our test for regulatory taking requires us to compare the value that has been taken from the property from the value that remains in the property", it is essential to determine "how to define the unit of property whose value is to furnish the denominator of the fraction." Murr at *9.

The Court's Opinion

The Court began by acknowledging that, even when a regulation does not deprive an owner of all economically beneficial use, "a taking may be found based on 'a complex of factors,' including: (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with distinct investment-baked expectations; and (3) the character of the governmental action." Murr at *8, citing Palazzolo v. Rhode Island, 533 U.S. 606, 617 (2001) and Penn Central Transp. Co. v. New York City, 438 U.S. 104, 124 (1978).

But in this landmark decision, the Court majority in Murr departed from the traditional approach of looking only to state and local law to define the "private property" rights at issue in a takings case. Instead, the majority stated that ". . . courts must consider a number of factors" including "the physical characteristics of the land", "the prospective value of the regulated land" and "whether reasonable expectations" would lead the land owner to expect that its holdings would be treated as one parcel. The Court also stated that "the reasonable expectations at issue derive from background customs and the whole of our legal tradition." (Murr at * 11.)

The Murr decision arose in the context of Wisconsin's lot merger rules and upheld the Wisconsin Supreme Court's ruling against the common owners of two contiguous lots who were prohibited from using or selling their contiguous lots as separate lots, despite their having been acquired as separate lots.

The dissenting justices had no quarrel with the majority's conclusion that there was no regulatory taking in this case, based on existing Wisconsin law. Instead, the dissenting justices were concerned that the majority's new definition of property rights departs from state and local law, and in the process counts factors such as "reasonable expectations" twice – once as a threshold matter in defining the property at issue and then again in determining whether a regulation has gone "too far" so as to result in a taking. As Chief Justice John Roberts put it in his dissent:

Cramming [the new Murr factors] into the definition of 'private property' undermines the effectiveness of the Takings Clause as a check on the government's power to shift the cost of public life onto private individuals. . . .
In departing from state property principles, the majority authorizes governments to do precisely what we rejected on Penn Central : create a litigation-specific definition of 'property' designed for a claim under the Takings Clause. Whenever possible, governments in regulatory takings cases will ask courts to aggregate legally distinct properties into one 'parcel', solely for purposes of resisting a particular claim. [Murr, dissent at *21, 22.]

State, Federal and Other Amicus Briefs on Both Sides

The significance of this case is reflected in the amicus briefs submitted to the Court. Nine states (including California) submitted an amicus brief in support of the respondent state of Wisconsin in this case, as did the National Association of Counties, Council of State Governments, National League of Cities and the U.S. Conference of Mayors. Nine states (including Nevada, Alaska and Arizona) submitted an amicus brief in support of the Murr petitioners, as did the U.S. Chamber of Commerce. Notably, the United States (Solicitor General's office) submitted a brief supporting Wisconsin, California, et al. in June, 2016. The Court's majority opinion in many respects was consistent with the points argued in the brief for the United States. It is not clear, however, whether the federal government's views as presented in the Solicitor General's 2016 brief (or at the oral argument) represent the current views of the Solicitor General's office under the Trump Administration.

Considerations for Property Investors and Owners

Only time will tell the extent to which the application of the Murr factors in addition to (and possibly in contravention of) state and local property law in takings cases will result in the expansion or the contraction of property owners' previously recognized rights. It does seem likely that this decision will add to, rather than reduce, uncertainty and consequent litigation. Questions, risks and opportunities for property owners and investors include the following:

  • To what extent can property owners continue to rely on state and local law to define the scope of, and limitations on, their property rights, and how might these be affected by the additional factors identified by the Court in Murr?
  • To what extent can or should property owners or investors seek to bolster their property rights (either within or outside existing state and local laws and regulations) by documenting their "reasonable expectations" or other Murr factors in advance?
  • Should property investors revisit how title is taken in multiple parcel transactions?
  • What is the relationship between the Murr factors and existing statutory lot merger rules, such as those in the California Subdivision Map Act (Cal. Gov. Code §§66410, et seq.), and local regulations issued pursuant to those rules?
  • To what extent are property owners' "expectation" interests insured or insurable under title insurance policies against adverse impacts from application of the Murr factors?
  • Does the Court's test for determining property rights extend to contexts beyond regulatory takings, such as zoning and building regulations?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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