Starting a business or opening a new office building can be a trying experience.  This is true even before you factor in the possibility of a re-zoning ordinance that will render your business plans fruitless.  When this unsettling scenario comes to fruition, there are some landowners who have fought back, claiming that this action is a regulatory taking requiring just compensation [1] – but can this argument prevail?  With some cases decided and others pending, the picture of re-zoning as a regulatory taking is beginning to take shape, though the view is far from clear.

To illustrate this problem, look at the case of Dianna Reagan who owned a steel services business and decided to build a new office building. [2]  She consequently bought 4.7 aces of land for $134,000 and spent the next two years planning her new facility. [3]  The land that Reagan bought was zoned industrial in 1999 when she purchased it, though much of the surrounding area had changed to residential use over the years and the land itself was sandwiched between two residential subdivisions. [4] Beginning in April 2001 the ball started rolling, and by July 2001 Reagan’s property was re-zoned residential, effectively killing her office plans. [5] Reagan then sold the property for $172,000 and filed a lawsuit, stating that by re-zoning her land, the government had deprived her of her desired use and therefore owed her just compensation. [6] At trial, Reagan argued that she was owed compensation for the decreased property value from the re-zoning. [7] The trial court agreed, awarding her over $60,000, but the Court of Appeals of Missouri reversed the trial court’s judgment. [8]  The case is now on its way to the Missouri Supreme Court [9], and it will be interesting to see the final result.

Looking outside of Missouri, the outcomes have been mixed, though plaintiffs have prevailed in limited instances. New York courts have found that if a re-zoning ordinance destroys investment-backed expectations, the owner of that property is entitled to just compensation.[10]  In both Noghrey v. Town of Brookhaven and Magee v. Town of Orangetown, leading New York cases, the plaintiff property owner prevailed and the court declared the re-zoning ordinance a regulatory taking when a proposed business was killed by a zoning change. [11]  It could be argued that New York is a more business-friendly arena than most areas of the country, making a verdict for the business owner more likely in New York than in other areas of the country.

Other jurisdictions yield different results from those in New York.   In the Supreme Court case ofVillage of Euclid v. Ambler Realty Company, the Court found no taking after a zoning ordinance effectively reduced the value of the plaintiff’s land by 75%. [12]  The Court reasoned that “the exclusion of buildings devoted to business, trade, etc., from residential districts bears a rational relation to the health and safety of the community” and is therefore valid grounds to re-zone an area. [13] Using similar reasoning to that in Euclid, the court in Haas v. City and County of San Franciscoheld that even though a property owner is deprived of the most profitable use of the land, “land use restrictions reasonably related to the promotion of the health, safety, morals, or general welfare” are not regulatory takings requiring compensation. [14]  The means for predicting the outcomes of these cases appear to rest in weighing traditional takings analysis factors, including whether the property has lost all economically viable uses and whether the ordinance has interfered with investment-backed expectations (among other Penn Central Factors).  [15] By reviewing case law it appears that courts are at least amenable to concluding that a re-zoning ordinance constitutes a regulatory taking.

While awarding compensation to the business owner may on its surface seem like the fair and just thing to do, one can not help but think about the public policy implications going forward.  If landowners prevail as a rule in cases such as Reagan, what will the overall effect be?  It has been contended that this kind of direction by courts will have a chilling effect on local governments when deciding to re-zone areas. [16] While on the one hand this may seem like a positive result since governments will think more before they make these important decisions, do we really want the government to tread lightly (or maybe not at all) if the overall effect of a re-zoning ordinance is a greater public good?  Another possible problem with re-zonings deemed as regulatory takings is the probability of abuse. What’s to stop every “victim” of a re-zoning ordinance from bringing suit, claiming that they had grand plans for the property in question, which was effectively quashed by the ordinance? [17] Time will tell if these concerns have merit.

What, then, are the practical implications for prospective business owners?  The answer is two-fold.  First, examine the surrounding area.  If a business owner thinks they have found a great deal in the middle of a residential area, and therefore that business will have an edge with the all-important location, location, location, perhaps more research into the locale is needed.  The re-zoning practices surrounding the area are a good indication of what direction the local government is heading, so one should pay special attention to these signals.  [18]  However, the reality is that the land in question may be first on the chopping block, so one may not have such a clear indication of re-zonings to come.  The best option is to submit development proposals and other paperwork as soon as possible.  Though not a guarantee, courts seem more willing to label a re-zoning as a taking when the landowner has officially begun the project. [19]

Sources

[1] See Scott Lauck, Missouri Zoning Issue goes before Supreme Court, MISSOURI LAWYERS WEEKLY, Jan. 29, 2007.

[2] Id.

[3] Id.

[4] W. Dudley McCarter, Rezoning of Property did not Constitute Unconstitutional Taking, Missouri Municipal League, http://www.mocities.com/default.asp?sectionID=60&pageID=12099&showMenu=3(last visited Feb. 7, 2007).

[5] See Lauck, supra note 1.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Silverberg Zalantis LLP, Jury Awards 1.6 Million for Rezoning of Property, New York Zoning and Municipal Law Blog, http://blog.szlawfirm.net/2005/12/jury_awards_16_million_for_rez.html (last visited Feb. 7, 2007).

[11] Id.

[12] Village of Euclid v. Amber Realty Co., 272 U.S. 365, 391 (1926).

[13] Id. at 392.

[14] Haas v. City and County of San Francisco, 605 F.2d 1117, 1121 (9th Cir. 1979).

[15] Reagan v. County of St. Louis, 2006 Mo. App. LEXIS 990, *6 (Mo. Ct. App. 2006); see alsoSilverberg, supra note 10.

[16] Andrew Harris, Jury Finds Rezoning Amounted to a Taking under Federal Law, N.Y.L.J., (Nov. 29, 2005), available at  http://www.accessmylibrary.com/coms2/summary_0286-11988686_ITM (last visited Feb. 7, 2007).

[17] See Lauck, supra note 1.

[18] Id.

[19] Id.