Regulatory Takings Claim: A Rare Win for Property Owners

Regulatory takings claims are notoriously hard to prove.  Myriad substantive legal obstacles exist to establishing a successful claim.  Even worse for property owners, they often never even get the chance to argue on the merits, as they fail to overcome several procedural hurdles.  As a result, published decisions rarely come down in favor of a property owner; it is even more rare to see a decision upholding a claim based on the U.S. Supreme Court's landmark decision in Penn Central. 

But this is exactly what happened recently in a decision arising from a down zoning in the city of San Clemente.  In Avenida San Juan Partnership v. City of San Clemente, 2011 DJDAR 17887 (4th Dist. Dec. 14, 2011), the appellate court upheld a judgment that ordered the city to choose between rescinding a decision rejecting the owners' applications for development permits or paying the owners damages for a regulatory taking of their property.
 
In reaching this decision, the court concluded that the claim was timely and that the owner had established all of the requirements for a taking under Penn Central's three-prong test.  The court remanded for a redetermination of the damages to be awarded in the event the city elects the second of its two options.
 
The owners purchased the property at issue in 1980, with the intention of building four residences on the 2.85-acre property, a density permitted under the property's zoning.  Shortly after purchasing the property, the owners secured entitlements for just such a development.  Despite securing the entitlements, the owners did not commence construction.

In 1993, the city amended its general plan, creating a new zoning category, RVL (residential, very low), which provided for one residential unit per 20 acres.  In the enabling legislation, the RVL designation was described as being intended for preserving "open space in canyons" by rezoning "significant acreage."  The property at issue is less than three acres and is not located in a canyon.  Despite this, in 1996, the city applied the RVL zoning to the property.  All the surrounding properties remained zoned for four dwellings per acre.
 
Ten years later, the owners submitted new applications, once again seeking the right to develop four dwellings.  In light of the RVL zoning, the applications included requests to change the zoning and general plan.  In 2007, the city denied the applications, concluding that the development plan did not conform to the property's zoning.  The owners sued.

The trial court concluded that the down zoning qualified as an arbitrary and capricious "spot zoning," and it issued a writ of mandate ordering the city to rescind its denial of the owners' applications.  The court also concluded that the city's actions constituted a taking, and it awarded damages of $1.3 million.  Following a new trial motion, the court amended the judgment to make clear that the city had the option either to rescind its decision or pay the damages, pursuant to Hensler v. City of Glendale (1994) 8 Cal.4th 1.  The city appealed. 

In analyzing the propriety of the writ, the appellate court examined the rules related to so-called "spot zoning."  The idea is simple:  If the government targets a specific property for zoning treatment different from other similarly-situated properties, the zoning can be invalidated.  The court held that the city had specifically targeted this property for down zoning, leaving it as an "island" of "minimum lot size zoning in a residential ocean of substantially less restrictive zoning."  This was enough to qualify as "irrational discrimination" under Hamer v. Town of Ross (1963) 59 Cal.2d 776.  The court upheld the writ. 

Next, the court turned to the takings decision.  The city argued that its action fell short of a regulatory taking because the RVL zoning did not leave the owner with no economically viable use of the property, a fatal flaw under Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003.  The court found this view "too limited," explaining that a taking occurs where a regulation goes "too far," even if some economically viable use remains.  (See Palazzolo v. Rhode Island (2001) 533 U.S. 606.)  Where this occurs, courts look to the three-part test established in Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), analyzing: the economic effect on the landowner; the extent of the regulation's interference with investment-backed expectations; and the character of the governmental action.

The court quickly concluded that all three factors "readily appl[ied]" in this case.  In terms of economic effect, it reasoned that the trial court's determination that the damages suffered were $1.3 million established the first prong.  In terms of investment-backed expectations, the court concluded that the owners' reasonable expectation when they purchased the property was that they could develop it in accordance with the property's then-existing zoning – a zoning which predominated the area.  Finally, in terms of the character of the governmental action, it was convinced that the city's motivation was merely to keep the property as open space. 

The court next examined standing, looking both at statute of limitations and ripeness defenses.  The city argued that the owners waited too long to challenge the RVL zoning, which was applied to the property more than 10 years before the lawsuit commenced.  The court disagreed, concluding that the challenge qualified as "as applied," meaning the statute of limitations began to run when the city denied the owners' development applications in 2007.

The city also argued that the claims were too early, failing because the owners did not apply for entitlements to build what the RVL would have allowed them:  a single dwelling.  The court rejected this argument as well, holding that the Supreme Court had rejected almost the exact same argument in Palazzolo.

The court moved to the damages calculations.  The trial court had performed a simple analysis, taking opinions of the value of the property absent the RVL zoning ($2.8 million), and subtracting out the cost the owners would have incurred to build the driveway necessary to support the property's development ($1.5 million).

The court concluded that this methodology was proper only if the taking left the owner with no economically viable use of the property.  In this case, however, a proper damages assessment must take into account the property's residual value.  While this sounds like good news for the city, the court also explained that the trial court may have intentionally "low-balled" the damages figure at a time when it believed the city would have no choice but to pay the award.
 
Finally, the court turned to attorney fees.  The owners complained that the trial court had not awarded fees for one of the owners' time, even though the owner was an attorney.  They also complained that the trial court failed to apply a fee multiplier in recognition of the nature of the case and its risk.  Applying the plain language of Code of Civil Procedure Section 1036, the court noted that fees could be recovered only to the extent they were "actually incurred."  Concluding that the owners incurred no fees for the services of the attorney-owner and no "multiplier" fees, the court rejected both claims. 

The court remanded the case for a redetermination of the damages.
 
Rick E. Rayl is a partner at Nossaman LLP and chair of the firm's Eminent Domain and Valuation Practice Group. He is an experienced trial attorney dealing with inverse condemnation and other real estate disputes. He is editor of the blog, "California Eminent Domain Report." He can be reached at rrayl@nossaman.com or (949) 833-7800.