Many years ago, property owners could do just about whatever they wanted to do on property that they owned. But every property owner knows that this is no longer true. We expect regulation. There are zoning rules, environmental rules, public health rules, easements, etc., which tell us what we can and cannot do on our property.

But what happens when the government imposes so many rules that a property owner cannot do anything with his or her property? For example, what happens when the government says that you cannot build anything on your property because it contains wetlands that must be protected, or because the property is too close to the ocean?

For years, it has been understood that too much regulation, such that nothing can be done on or to the property to realize benefit from the property, may require compensation from the government. This is called a "taking," because under these extreme circumstances, it is said that the government has effectively taken a private person's property without paying the fair market value for the property.

For the last 20 years, courts all over the United States have wrestled with the question of exactly how much regulation constitutes a compensable taking. Clearly, where regulation eliminates any use on the property, most agree that a compensable taking has probably taken place. But how about when regulation eliminates most of the use and value from a piece of property, but not all use and value. In other words, how much regulation is too much regulation?

Recently, the U.S. Supreme Court heard arguments in a takings case which consider this thorny subject. The name of the case is City of Monterey v. Del Monte Dunes at Monterey, Ltd..

When the Supreme Court's decision is released -- probably some time next spring -- it should provide important guidance as to when land use and environmental decisions cross the line and require the payment of just compensation. The ruling, which arose in California, is likely to have a pronounced impact in states with a strong policy favoring restrictive environmental regulation.

In the Del Monte Dunes, the development process began in 1981 with an application to the city of Monterey to construct a 344-unit residential project on a 37.6 acre ocean front tract.

When that proposal was rejected, the developer redesigned the proposal to reduce the intensity and minimize environmental impacts. In a series of futile attempts to obtain approval, the developer dropped the unit count from 264 to 224, and then to 190, with the final denial coming in 1986.

The city's rejection of the scaled-down plan was challenged with a Civil Rights Act action in the federal courts. The developer alleged that the city committed a "taking" of the property.

However, during the pendency of the litigation, the issues were further complicated by the sale of the property to the state of California for a public park. Not only was there a sale, but the price was $800,000 more than the developer had paid for the property. Despite this fact, the jury found that the city was required to pay the developer $1,450,000.00 in damages for the delay it experienced in proceeding with its plans.

A federal appeals court agreed with the developer's claim that the city's successive obstacles to development made the property commercially unmarketable. The appeals court concluded that the evidence supported the jury's findings that the city's actions denied all economically viable use of the property and that the jury could have concluded that the submission of another less-intrusive application would have been futile.

The city's argument that in the end the developer was able to sell the property was unavailing. The court's response was that the taking claim was not negated by the fact that there was one willing buyer of the subject property, especially where, as here, the buyer was the state government.

The court also considered the amount of damages that the city was required to pay the developer. It concluded that these damages for the delay caused by the city's action were not excessive.

The Supreme Court heard oral argument in this case this past October. Based on news account of the oral argument, it appears that at least one of the justices may be believe that the City's attempt to regulate the property may have crossed the line. In connection with the developer's failed repeated effort in attempting to secure an approval of its plans, Justice Antonin Scalia was reported to have observed: "At some point, you begin to smell a rat."

Hopefully, the Supreme Court will provide guidance on the issue of how much regulation is too much regulation. A bright line test will allow regulators and property owners to carry on with a greater level of confidence.

Published: December 2, 1998

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