Supreme Court Decision: When Does the Government Need to Pay a Property Owner for “Taking” Property by Regulation

The Supreme Court issued an important regulatory taking decision on the last day of the term. Murr v Wisconsin (June 23, 2017). The Fifth Amendment of the Constitution prohibits the government from taking property without compensating the owner. Regulations often reduce the value of a property and such regulations do not result in a claim for compensation. Regulatory taking is the phrase used for situations in which regulation has taken enough of the value from the owner so that compensation should be provided. The basic standard for a regulatory taking is that compensation will be required when a regulation “denies all economically beneficial or productive use of land.” Lucas v South Carolina Coastal Council, 505 US 1003, 1015.

The Murr case arose out of a local law in Troy, Wisconsin, that barred separate sale or development of adjacent lots that are under common ownership, unless each has more than an acre suitable for development. Petitioners acquired adjacent parcels separately and intended to transfer one parcel to fund an improvement on the other parcel. However, because neither parcel had more than an acre suitable for development, local law prohibited transfer of either parcel separately.

The owners claimed that this regulation deprived them all beneficial use of the second of the two parcels. The Supreme Court disagreed, reasoning that the parcels should be viewed as one and the regulation reduces the value, but does not reduce the value sufficiently to amount to a taking.

The issue before the Court was really, what property do we look at when asking whether a regulation has taken all economic benefit from a property? To reach that conclusion the Court examined a number of factors including: (1) how does local law view the property, (2) do physical characteristics suggest one property or two, and (3) does one property enhance the value of the other. Here, local law viewed the parcels as one, physical characteristics suggested that they were one and the second enhanced the value of the first. Thus, the Court concluded that the Petitioners had one large parcel at issue (not two) and that regulation had not taken all the value of it.

The lesson for property owners when taking title to contiguous properties is the consider the possible impact of regulation and think about whether regulation suggest holding title to contiguous properties in different entities to avoid the problem faced by the Murr family.

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