This article is part of the continuing series of interviews between, published in The Practical Lawyer, Rajiv S. Khanna, principal of The Law Offices of Rajiv Khanna, and leading practitioners across the country, designed to provide personal and professional insights into various areas of the law.
Rajiv: Let’s begin with an introduction of who you are, what you do, how you got here.
Robert: My name is Robert Thomas and I’m a lawyer with the Pacific Legal Foundation, a public interest law firm that represents people for free in court. But I also spend a lot of my time as a law professor. During the fall, I teach property law at the William and Mary Law School in Williamsburg, Virginia.
What is the trajectory of your legal career? Where did you think you were going to go and how did you end up where you are?
In a completely different place than I would have imagined if you’d asked me during law school. I attended the University of Hawaii Law School and got my JD there in the late 1980s. And, yes, attending the University of Hawaii Law School is about as pleasant as a law school can be. When I was going through law school, I imagined that I would be a courtroom lawyer practicing criminal law, but I had the good fortune, during the summer between my second and third years, to clerk for a private law firm in downtown Honolulu where one of the first cases I handled happened to be a property case. I was sure that property was not of interest to me before that, based upon, among other things, my grade in my Real Property class, but also because being a courtroom lawyer doing criminal law seemed really appealing. I had no idea that the practice of property law was so different than the study of it, especially your first-year basic property class. And I was just hooked. So the roadmap suddenly veered off in a 90-degree direction. A majority of my practice ended up being in property, eminent domain, inverse condemnation, land use law, and the related topics. Because I was practicing in a mid-to-small market where it is very tough to specialize in a particular area, I had to do a lot of other things. I was doing appeals, occasional criminal law, voting rights, and election law, but the main focus always remained property. I have a completely unplanned career that somehow seems to be working out pretty well.
What do you like about the practice of property law as opposed to other areas of law that you’ve been exposed to? What makes this special for you?
What’s really nice is when you’re dealing with the property law in the areas I deal with—the question or the relationship between property owners, their neighbors, and the government—there’s a lot of what I would call “running room,” a lot of room to be creative. Modern land-use law only really started coming around about 100 years ago. And while it’s a pretty substantial body of law, there still are a lot of unresolved questions where creative thinking, as well as the constitutional requirements you overlay on top of that, becomes necessary. And so that’s what I appreciate the most out of it. I had a partner early on in my career, a mentor, who told me that if you’re practicing in a place like Hawaii where land is probably the scarcest commodity, you’ll never be out of work. From a very practical matter, that really helped guide me. And he was absolutely right. Despite cycles in the economy in a place like Hawaii, very tied to the tourist economy, the one thing that we were never short of were cases and disputes involving property, land, how land is used, how those resources are allocated, how it interacts with environmental concerns, maybe population and antidevelopment concerns. And yet there are people who need to live in a place where the median home price is hovering just over a million dollars.
That’s a function, of course, of the physical size of the islands. But it’s also due to the difficulty in building a home. The impacts of the regulations that one has to go through in order to build something like a single-family home is something like $200,000, last I checked, which is pretty significant. And that is also accurate for a national practice in land use, as regulation of the private uses of property becomes more stringent.
So to answer your question, it just was an area that was metaphysically kind of fascinating. What does it mean to “own” something is something that I think it doesn‘t take a law degree to understand and yet, at the same time, the layers of what that means are just fascinating to me. To get to put that into practice and to do it every day just makes for very interesting work.
I take it that you are one of the very few at the bar who do not wake up screaming about the rule against perpetuities?
No. I found out as a law professor, when I asked my students who are all 2Ls or 3Ls, if they still study the rule against perpetuities. Surprisingly, a couple of them told me no. And I laughed and asked why not. And they said, “Well, our professor said it was an archaic thing, never used, you’ll never do a case.” One, I understand from some of them who recently took the latest bar exam, that in one jurisdiction at least it was a bar exam question, which is unbelievably cruel on the part of the bar examiners of that state. And then two, that same mentor that I mentioned earlier? He actually argued in the Hawaii Supreme Court a rule against perpetuities case. And he said, “They told me as a student this was completely useless information, but here I am actually arguing what that rule means.” And so I tell people to be careful if you don’t study something like that. It’s going to come up. But yes, thankfully I have avoided that question. I tell the students who are taking wills and trust that they should know it, because that’s where it actually comes into play.
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
Join us for our upcoming program, Eminent Domain and Land Valuation Litigation 2024, either in-person or via live webcast on February 1-3! Hear more from Robert H. Thomas and more experts in the field. Learn more about this upcoming program here.
In State ex rel. Ohio History Connection v. Moundbuilders Country Club Co., the Ohio Supreme Court held that the taking of the Country Club’s lease for the property served a public use.1 The Ohio History Connection, a state agency, sought to extinguish the Moundbuilders Country Club’s lease on the Octagon Earthworks land using the power of eminent domain. The agency wanted to convert the earthworks into a public park and nominate the structures to the World Heritage list as part of the interconnected Hopewell Ceremonial Earthworks. The Country Club objected, arguing that the taking was not in the best interest of the public as a whole.
The Ohio Supreme Court disagreed, holding that establishing the earthworks as a public park will “help preserve and ensure perpetual public access to one of the most significant landmarks in the state of Ohio.”2 In a dissenting opinion, Justice Sharon L. Kennedy argued that Norwood v. Horney,3 (a case most readers will be familiar with) required that the Country Club’s allegations be resolved by the trial court, not disposed of by law-and-motion. The dissent argued that the “contingent and prospective” nature of World Heritage designation did not justify the exercise of eminent domain.4
“Take now, decide later” isn’t a public use
HBC Victor LLC v. Town of Victor is a classically short opinion from the New York Supreme Court. It’s so short that we were tempted to simply post the opinion and let you read it, because it will probably take you just as long to read our summary, but we’re up to the challenge of making our summary even shorter than the opinion, so here goes.5
The town wanted to take property “connected to an enclosed regional shopping center known as Eastview Mall[.]”6 Until Covid-19, the property was occupied by a retail department store, but the store closed permanently in February 2021. The owner tried to get a new tenant but, unsurprisingly, came up short.
Perhaps sensing an opportunity, the Town sought to condemn for redevelopment, but its resolution of taking did not specify why it wanted the property:
The proposed Acquisition is required for and is in connection with a certain project … consisting of facilitating the productive reuse and redevelopment of the vacant and underutilized Proposed Site through municipal and/or economic development projects … by attracting and accommodating new tenant(s) and/or end user(s).7
Even in condemnor-friendly New York, this one should raise a red flag. “In its determinations and findings, the Town stated that ‘no specific future uses or actions have been formulated and/or specifically identified.’”8
When you draft your findings like that, condemning agency, shame on you. (Kudos, however, for your honesty.)
Pointing to a recent similar case by the Second Department, the Appellate Division concluded that “[b]ecause the Town has not indicated what it intends to do with the property, we are unable to determine whether ‘the acquisition will serve a public use.’”9 The court rejected the Town’s argument that the government can take property for redevelopment without a particularized plan. The public use for the taking is determined at the time of the taking, and simply speculating that the taking will produce future public benefits isn’t enough: “In simple terms, the government cannot take your land and then decide later what to do with it without running afoul of the Takings Clause.”
Further, there was no indication or claim that the property here was blighted, even under New York’s notoriously low standards for blight:
To the contrary, the evidence at the public hearing established that petitioner has cleaned and maintained the premises since the Lord & Taylor vacancy and continues to pay property taxes at the assessed value of more than $4,000,000. We do not equate mere vacancy with blight, especially when the vacancy occurs unexpectedly in the midst of a global pandemic.10
Taking invalidated; attorneys’ fees to the owner. Think the Town will have another go at it? If so, think it’ll draft the resolution the same way (or will it heed Justice Scalia’s Lucas11 dictum)?
Waiver of future claims includes reclaim statute
Colton v. Town of Dubois is a good reminder that when you settle a case, you settle the case.
Wyoming is one of those jurisdictions that has “I want it back” provisions, where if property is not actually used for a specified number of X years after it is acquired by the government, the owner may ask for it to be returned. In Wyoming, the term is 10 years:
If a public entity acquires property in fee simple title under this chapter but fails to make substantial use of the property for a period of ten (10) years, there is a presumption that the property is no longer needed for a public purpose and the previous owner or his successor may apply to the court to request that the property be returned to the previous owner or his successor upon repayment of the amount originally received for the property in the condemnation action. A public entity may rebut the presumption created under this subsection by showing good cause for the delay in using the property.12
Back in the day, Craig Colton and the Town of Dubois got into a fight over land apparently needed (or wanted) for the municipal airport. Colton sued for inverse condemnation, and “and sought to prevent the Town from condemning any portion of the property.” 13 After a bench trial, the court rejected Colton’s arguments and concluded that the Town could take 30 acres of property after a determination of compensation.
But peace prevailed before the compensation hearing took place and the parties settled. The Town would pay an agreed-upon amount and would acquire the 30 acres from Colton. Critically, the settlement agreement “contained several terms releasing the Town from all past, present, and future claims related to the disputed 30.17 acres.”14
Ten years passed. Apparently, the Town didn’t make use of the property and Colton wanted it back. He sued, seeking to reclaim it. The trial court granted the Town summary judgment and the Wyoming Supreme Court agreed. The court concluded Colton waived his statutory rights by executing the settlement agreement, even though, yes, the Town acknowledged it had not used the property for the airport. (This is a true waiver situation—not the more usual forfeiture by inaction—since Colton knowingly gave up his right to reclaim.)
The court first accepted that the Town acquired Colton’s property in a way that triggered the statute because it was acquired under the threat of condemnation. Next, the court concluded the statute was in force at the time of the settlement, and therefore Colton is assumed to have known about it. The court also concluded that Colton intended to relinquish his statutory rights because the agreement unambiguously says so in the “Statement of Purpose” and “Release” provisions. There, the agreement notes the agreement is to resolve all claims, including future claims:
The stated purpose of the settlement agreement is to resolve any claims the parties “may have in the future arising out of or in any way related to the above taking[.]” This purpose is further reflected in the terms of the settlement agreement … The release provisions are broad but nonetheless unequivocal in expressing Mr. Colton’s intent to waive “any and all” future claims, “related in any way” to the condemnation action, which would include any claims he had pursuant to Wyo. Stat. Ann. § 1-26-801(d).15
Finally, the court noted that the waiver is in accordance with public policy (an element of waiver under Wyoming law). We like the freedom to contract, and we like settlements, the court concluded.
So, what lessons can we take from this? When you settle, you settle. Done. Finis. Unless you want to hold on to some rights (in which case you don’t agree to language that waives your rights so broadly). But don’t be surprised if the other side really insists on that language. And that points to another option: if you want to retain your rights, don’t settle. The waiver of future rights is just one of those things that parties have to assess the risk of when they are deciding on fight or flight.
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
There are many different types of regulatory takings, each with their own unique rules and body of Supreme Court jurisprudence. Although the Supreme Court has articulated different inquiries based on the type of taking, each of the tests “aims to identify regulatory actions that are functionally equivalent to the classic taking in which government directly appropriates private property or ousts the owner from his domain. Accordingly, each of these tests focuses directly upon the severity of the burden that government imposes upon private property rights.”1
In Penn Cent. Transp. Co. v. City of New York, the Court acknowledged it had been “unable to develop any ‘set formula’ for determining when ‘justice and fairness’ require” compensation for a taking and instead created a flexible standard of review.2 The Penn Central test is an ad hoc determination based upon all facts and circumstances but with particular attention paid to a set of three factors: (i) “economic impact of the regulation on the claimant”; (ii) the extent to which the regulation interferes with “distinct investment-backed expectations”; and (iii) the character of the government action.3 Since then, the Court has provided little guidance on the application of these factors.
Economic impact Economic impact is a factual determination that is relatively simple to measure: an expert appraiser determines the fair market value of the property at its highest and best use before the regulation was enacted, as compared to the fair market value at its highest and best use after the regulation was enacted.
There is, however, an argument to be made that the extent of the economic impact should not be as important. Property rights are defined by state law, not the economic value attached to them. And although property rights do not magically vest at certain price points or certain percentage losses, courts require a significant diminution in value to constitute a taking. For example, in New York, 82 percent is enough of a loss to constitute a taking,4 but 64 percent is not enough.5 How does constitutionality turn on 18 percentage points of value? The answer is that it doesn’t. The difference between those two cases was whether the owner could still use the property for economic benefit.
The reality is that constitutional regulations can sometimes cause large degrees of economic suffering and unconstitutional regulations can sometimes cause very little. The Constitution is about rights; economics are about damages. And thus, what a market buyer will pay for a property that is restricted by a regulation reflects the extent of the regulation (i.e., damages), not whether there was a vesting of a property right.
Reasonable investment-backed expectations
Reasonable investment-backed expectations are an objective determination, not a subjective one. It is not about the impact to a specific person, disconnected from market realities. Rather, it is about the regulation’s impact upon the property, regardless of individual preferences, and grounded in what a reasonable market participant would have expected.6
The determination of reasonable investment-backed expectations is also a before-and-after comparison. The court evaluates the investment-backed expectations of market participants before the regulation was enacted as compared to those same expectations after the regulation was enacted. Thus, reasonable market participants have investment-backed expectations of utilizing a property to its maximum economic potential at its maximum permitted use. Any use other than that is not objectively reasonable. For example, if a regulation precluded all development on a valuable piece of land, the fact that the owner only intended to use it to tend sheep and grow grass does not make that regulation constitutional.
Prior to Palazzolo v. Rhode Island, owners that took title after a regulation was passed often had difficulty in claiming that the regulation was a taking since they had notice of the limitation before the purchase. Courts often found that they had notice of the regulation at the time of purchase.7 However, Palazzolo held that the potential regulatory takings claim runs with the land and is transferable from owner to owner:
Were we to accept the State’s rule, the post enactment transfer of title would absolve the State of its obligation to defend any action restricting land use, no matter how extreme or unreasonable. A State would be allowed, in effect, to put an expiration date on the Takings Clause. This ought not to be the rule. Future generations, too, have a right to challenge unreasonable limitations on the use and value of land.
Nor does the justification of notice take into account the effect on owners at the time of enactment, who are prejudiced as well. Should an owner attempt to challenge a new regulation, but not survive the process of ripening his or her claim (which, as this case demonstrates, will often take years), under the proposed rule the right to compensation may not be asserted by an heir or successor, and so may not be asserted at all. The State’s rule would work a critical alteration to the nature of property, as the newly regulated landowner is stripped of the ability to transfer the interest which was possessed prior to the regulation.8
However, Justice O’Connor’s concurrence differentiated between the right to bring a regulatory takings claim and the ability to win that claim. In accord with the majority opinion, she confirmed that a post-enactment purchaser can bring a takings claim,9 but suggested that with notice of the regulation, a claimant’s reasonable investment-backed expectations may not have been negatively impacted.
Today’s holding 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, it would be just as much error to expungåe this consideration from the takings inquiry as it would be to accord it exclusive significance. If existing regulations do nothing to inform the analysis, then some property owners may reap windfalls and an important indicium of fairness is lost.10
While Justice O’Conner also stated that investment backed expectations are “not talismanic,”11 and are not to be given exclusive significance,12 the damage was done.
Justice O’Connor’s interpretation is both contrary to the majority opinion in Palazzolo and unworkable in practice. If someone buys property with notice of a pre-existing unconstitutional regulation, either the owner can bring a claim, or he can’t. Notice cannot be both a non-factor and a penalizing factor at the same time. Yet, that would seem to be the end result of Justice O’Connor’s concurrence.
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
With $1.2 trillion of federal funds approved under the Infrastructure Investment and Jobs Act to rebuild America’s infrastructure, states will soon be flooded with monies aimed at addressing a slew of road, highway, bridge, railway and dam projects. Electrical and utility projects are also part of the plan, not to mention the $65 billion set aside to upgrade broadband in many of our rural communities.
But whether the work will involve repairing existing structures or building new ones, one thing seems certain: a significant amount of private property and right of way will be needed in order to accomplish the extensive list of projects that are currently being considered. This means that many of the property owners who are currently celebrating the infusion of fresh funds into our crumbling infrastructure, may also find themselves the source of supply for the vast amounts of property rights needed to get the job done.
Click here to continue reading this post by Owners’ Counsel of America.
Prepare for a potential eminent domain taking
Join us for our upcoming program, Eminent Domain and Land Valuation Litigation 2022 either in-person or via live webcast from January 27-29! Explore a full range of cutting-edge issues and hear from experts in the field. Learn more about this upcoming program here.
Of the many things that landlords and tenants are thinking about when entering into a new lease, the possibility that the property might be subjected to eminent domain proceedings is usually very low on the list. But condemnation cases do happen, and it is important for both the landlord and tenant to consider that possibility.
Understanding what rights a tenant has under common law principles, how and when those rights are valued, and how they can be modified by the terms of a condemnation clause in the lease is critical to addressing these things. It is challenging enough to face a taking by a governmental entity and the prospect of litigation that this entails. It is even more challenging to face a second set of litigation problems when the landlord and the tenant cannot agree about how their rights will be affected or who will be compensated. Having a clear and well-understood road map of what will happen if the government comes knocking on the door
is the best way to avoid these problems.
This is the second in a three-part series addressing some of the common questions we hear in our eminent domain practice at Faegre Baker Daniels from our landlord and tenant clients about these issues.
The first article addressed how a tenant’s rights are usually treated under common law condemnation principles. This second article will address how the parties to a lease may modify these common law principles by adding a “condemnation clause” to their agreement. The third article will provide a checklist of considerations when negotiating such a condemnation clause.
Lease provisions can, and often do, change the common law rules about what will happen in an eminent domain case.
Most leases between sophisticated parties, promissory notes with banks, and even some easement documents provide for these issues by adding a “condemnation clause” addressing how their respective interests will be handled in the event of a taking. Sometimes they even include provisions that allocate a portion of the award to a third party, such as a bank.
Unfortunately, most condemnation clauses are given little attention at the time the overall contracts are being drafted and are sometimes plugged in or “cut and pasted” from other documents by real estate or corporate professionals with a limited understanding of the eminent domain process and how it may vary from jurisdiction to jurisdiction. When that happens, such clauses often create more litigation issues than they resolve.
Nonetheless, courts do recognize that parties may contractually determine how condemnation funds are to be distributed, including the waiver of rights to compensation they would otherwise be entitled to under constitutional or common law principles. To waive rights to an award, the language must be clear and unequivocal. This is because the law does not favor clauses forfeiting rights, and courts will construe such provisions to not have that effect whenever they can.
Are there things to look out for in condemnation clauses?
Yes. Sometimes condemnation clauses are drafted in a way that creates traps for the unwary or uninitiated.
Where a lease indicates that it will automatically terminate upon the condemnation of the property and is otherwise silent about allocation of the award, in some states a lessee may be deemed to have waived all rights to compensation. But an automatic termination clause is different than a clause giving the tenant the option to terminate. Such an option doesn’t by itself waive the right to condemnation proceeds, particularly if the option is not exercised. In addition, even in the face of true automatic termination clauses, a tenant may retain rights to share in the condemnation proceeds if additional provisions specifically allow the tenant to do so.
Clauses waiving a right to share in the condemnation proceeds but allowing lessees to pursue separate claims against the condemnor may be interpreted as precluding any right to compensation. This is because, as discussed in our first article, in many jurisdictions there is no right for a tenant to directly pursue separate claims. Thus, some courts will construe such language as a legal impossibility and hold that the tenant has no right to any portion of the award. Others may determine that the language evidences an intent to compensate the tenant, even if poorly drafted, and will allow it to share in the award.
Accordingly, a tenant should not be lulled into believing they have preserved their rights to compensation if the lease provides only for separate awards.
Condemnation clauses addressing how an award is to be apportioned may control the distribution between the parties regardless of how the compensation was determined at a valuation trial or in a settlement with the condemnor. For example, a condemnation clause providing that the tenant will be compensated for the value of its improvements may entitle it to receive those funds in an apportionment hearing even where the condemnation award was based upon the theory that the property would be redeveloped for a more valuable use requiring the demolition of the improvements. Thus, it is important for both the landlord and tenant to recognize that what the condemnation clause provides for may be different than how the value of the property as a whole is maximized, and to plan accordingly for both phases of the case.
Many leases fail to address the rights of other interested parties and how they will interact with any apportionment agreed to between the landlord and tenant. This can lead to all sorts to troubles. For example, most lenders have provisions in their loan documents giving them the first right to any condemnation proceeds. If the landlord has already agreed that the tenant will be entitled to certain compensation, it is possible that the entire award will go to the lender and the landlord will then need to satisfy the tenant’s claims on its own. Or, if there are multiple tenants in a shopping center, it is possible that the overall award will be insufficient to compensate for multiple below market rates, or there may be uncertainty about which tenant is entitled to compensation for damages to common areas that all of them have the right to use.
When there are not enough funds to satisfy all contractual rights to a portion of the award, some jurisdictions have held that each claimant is entitled only to his or her equitable share of condemnation award; not the actual value of the interest when considered alone. In other words, each claimant is entitled to a proportionate share of the award based upon the relative value of its interest in the property, regardless of whether the whole condemnation award is greater than or less than the total of all such claims.
But what if some parties have contracted with respect to apportionment and some have not? Does the fact that a tenant has a contractual right to receive the value of its improvements from the award even if no compensation was paid for them mean that another tenant on the same property is left without any compensation because there is nothing left for the bonus value of his lease? Or should the landlord receive even less money because both tenants’ contractual and common law claims are honored first? And what if a contract provides for the payment of non-compensable items to one tenant — who suffers the shortfall that inevitably must follow because the overall condemnation award does not include money for that non-compensable harm?
These questions demonstrate the difficulties sometimes presented by the undivided basis rule, particularly when multiple respondents are involved and there is not a comprehensive and cohesive set of condemnation clauses addressing these kinds of circumstances.
Consideration of these and other issues when drafting a condemnation clause will be the subject of our final article.
This is the second in a three-part series addressing some of the common questions we hear in our eminent domain practice at Faegre Baker Daniels from our landlord and tenant clients about these issues. You may read the first article by clicking here.
About the Author
Jack Sperber has been representing private owners and condemning entities in eminent domain proceedings for 25 years. He does this work around the country, and has been involved in more than 30 trials, numerous evidentiary hearings, and more than 20 appellate arguments.
Mr Sperber is a planning co-chair for ALI CLE’s Eminent Domain and Land Valuation Litigation 2019 conference.
