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U.S. Supreme Court Establishes Multi-Factor Test to Define “Denominator” in Regulatory Takings Cases

On June 23, 2017, the United States Supreme Court in Murr v. Wisconsin announced a new test for defining the proper unit of property whose value is to be measured in determining whether a governmental regulation has gone “too far” and caused a regulatory taking. The majority rejected opposing bright-line tests advocated by the parties in favor of a less predictable but more flexible multi-factor analysis.

Under settled law, government may in the exercise of its police powers regulate the use of property even if such regulation causes a substantial diminution of the regulated property’s value. However, since the seminal case of Pennsylvania Coal v. Mahon, governmental regulation which “goes too far,” causes a regulatory taking requiring payment of just compensation under the Fifth and Fourteenth Amendments. The determination of whether a regulation “goes too far” requires a comparison between the loss in value of the property due to the regulation – the “numerator” – with the value of the property prior to regulation – the “denominator.” The issue facing the Supreme Court in Murr was how the property or parcel “whose value is to furnish the denominator of the fraction” should be defined.

Prior decisional law addressed this question, but only partly. In Penn Central v. City of New York, the Supreme Court ruled on whether a landmarks law which precluded development above Grand Central Terminal in New York City caused a regulatory taking. Penn Central argued that all of its air rights were destroyed by the landmarks law, while the City argued that the landmarks law had not taken all or practically all of the value of the entire Grand Central Terminal, merely the value of some of the strands in the bundle of rights comprising the overall Terminal property. The City also argued that Penn Central’s property holdings in the vicinity of Grand Central Terminal should also be included as part of its property in the denominator. The Supreme Court majority held that the complete destruction of the air rights did not cause a taking because Penn Central retained the existing very valuable use of Grand Central Terminal itself.  The Penn Central majority also rejected considering Penn Central’s additional holdings as part of the “property” for purposes of evaluating whether a regulatory taking had occurred. The Penn Central Court directed reviewing courts to consider the “parcel as a whole” as the denominator in the takings analysis, but gave little direction as to exactly how the “parcel as a whole” should be determined. This became known as the “denominator problem” and was addressed in Murr v. Wisconsin.

In the 1990s, the four Murr children inherited two lots. One had a small cabin and had been owned by the Murrs’ parents. The other lot had been left vacant as an investment property and title was in the name of the parents’ plumbing business. Local zoning imposing minimum lot-size requirements took effect in 1976 which rendered these lots nonconforming. Nonconforming lots held in separate ownership could continue as nonconformities, however the applicable zoning also required that the nonconforming lots be deemed merged into one if they came into common ownership. The lots were deemed merged when they were inherited by the Murr children.

The Murr children sued alleging that the merger provision caused a regulatory taking by depriving them of “all, or practically all” of the use of the vacant lot. The vacant lot – which could no longer be sold or developed individually – would have been rendered worthless if it was the sole property in the denominator of the analysis. However, if the combined lot would comprise the denominator, then there would be no significant reduction in value because the combined lots could still be sold or developed for substantial value.

The petitioners urged that the court adopt a bright-line rule that the lot lines defined the relevant parcel in every instance, making the vacant lot the denominator. Wisconsin argued that the “property” should be defined by the property owner’s objective expectations based on how the “property” is treated under state law. Under its analysis, state law (including local zoning) would cause the combined lots to be the denominator. Justice Kennedy, writing for the majority, rejected both parties’ proposed tests. According to the court, the petitioners’ rule would arbitrarily favor one aspect of state law, the lot lines, over another – the merger provision. Nor could the court accept Wisconsin’s position, as it held that state law alone fails to describe landowners’ reasonable expectations about whether their holdings would be treated as one parcel or as separate tracts.

Instead, the Court adopted a multifactor test to define the denominator based on a prediction about “whether reasonable expectations about property ownership would lead a landowner to anticipate that his holdings would be treated as one parcel, or, instead, as separate tracts.” The court held that three factors are to be used in this determination: “(1) the treatment of the land under state and local law; (2) the physical characteristics of the land; and (3) the prospective value of the regulated land … [with] special attention to the effect of the burdened land on the value of other holdings.”

Applying this test, the Court found that the Murrs’ reasonable expectation should have been that these lots would be considered together as the relevant parcel. First, the lots were treated as one under the merger provision. Second, the lots are contiguous, and their terrain and shape made land-use restrictions predictable. Last, the lots are more valuable together than apart.

Those who were hoping that the Murr v. Wisconsin would result in a bright line test for the denominator will no doubt be disappointed by the Court’s new multifactor test. The net effect of the decision will be to require a case-by-case evaluation of the specific facts and circumstances present in order to determine whether multiple parcels are to be aggregated for purposes of determining the denominator in the takings analysis.

For more information about regulatory takings and how to apply the test enunciated in Murr, please contact Steven Barshov.