Eminent Domain Report

Investors and developers scour the Southern California real estate market searching for opportunities to buy dated houses that they can demolish and replace with large, modern homes to sell for much more.  A few individuals likely thought they struck gold after inheriting a small bungalow cottage in Coronado, California with panoramic views of the Bay and golf course nearby. The cottage, built in 1924, was the smallest house on the street with the least-utilized lot; it represented both a great opportunity and a bygone era. These soon-to-be developers turned inverse condemnation claimants teach us that all permitting efforts must be fully exhausted to avoid premature litigation and solidify the foundation for a valid regulatory takings claim.

Background

When the Owners were ready to begin development, they submitted an application for determination of historic significance and a notice of intent to demolish the property.  The Historic Resource Commission (the “Commission”) reviewed the project and deemed the property historic because it met certain distinctive architectural characteristics. The Owners appealed to the Coronado City Council, which upheld the Commission’s decision. They then filed a writ petition that led to a judgment in the City’s favor. In 2018, the Owners filed an inverse condemnation complaint against the City alleging the denial of their notice of intent to demolish the property constituted an unconstitutional regulatory taking.

Following a bifurcated bench trial which ended with an $800,000 verdict in favor of the Owners, the City appealed; the City argued (1) the Owners’ action was not ripe for review because the Commission never reached a final determination on the scope of the proposed development and (2) the mere possibility or probability that the Commission would deny further development applications submitted by the Owners was not sufficient evidence to demonstrate that it would have been futile to proceed. In Young v. City of Coronado (2024 Cal. App. Unpub. LEXIS 2875 (Cal. 4th Dist., Ct. App.)) the Court thoughtfully analyzed the legal principles of ripeness and futility as they apply to inverse condemnation and regulatory takings claims.

Ripeness

Ripeness prevents courts from issuing purely advisory opinions. In the context of inverse condemnation, a regulatory taking claim is not ripe until there has been a final determination regarding how the government entity applies the regulations to the land. Thus, a landowner must submit at least one development proposal that is thoroughly rejected and at least one meaningful application that is finally denied. Requiring final decisions illustrates the application of regulations and informs the court of the scope of the permitted development before requesting adjudication on the constitutionality of the regulations that purport to limit such development. A takings claim is likely to have ripened with a final decision because either the permissible uses of the property are better understood, or it has become clear that no discretion to permit development exists.

Here, the Owners never submitted a historic alteration permit to the Commission for a final decision after their notice of intent to demolish was denied. The Owners actually withdrew their application after learning that the City had never granted a permit to demolish a historic property. Their decision was also influenced by conversations with City staff who outlined the requisite standards for a submittal to succeed. The Owners believed a compliant design-build would not be economically feasible.

Ultimately, the Court found that because the Owners had not submitted a historic alteration permit and gone through the public hearing process or appealed the Commission’s decision, there was no definitive position showcasing the application of the regulations to the property. Absent a final decision and finding the discussions with City staff amounted to mere recommendations, the Court determined that analysis of the issue would amount to an advisory opinion. Therefore, as to the extent of the permissible development, the Appellate Court held the case had not ripened.

Futility

Closely related to the final decision rule is the narrow futility exception. The futility exception arises when a plaintiff can show that the regulatory agency has already declared what its ruling would be and submitting another application or development plan would be an “idle and futile” act. In other words, there is no need to submit additional applications because it is clear nothing will be approved. Precedent shows the futility exception requires a sort of inevitability: “the prospect of refusal must be certain (or nearly so).”

The Owners argued that substantial evidence supported the futility exception in this case, returning to the fact that the City had never granted a permit to demolish a historic property. This fact was unpersuasive, however, as the Owners stipulated that all such applications had been withdrawn before a decision could be rendered. Ultimately, the Court’s analysis was procedural and practical, reasoning the futility exception could not apply because conditions precedent did not occur. To apply the exception, a government agency must first make a final decision thereby explaining the reach of the regulation and creating the inevitability that refusal is certain or nearly so. The final decision carries with it the potential for a regulation to strip a property owner of their economically viable or beneficial plan moving forward. Absent additional evidence and without a final decision on the point, the Court was unwilling to find that additional efforts by the Owners to develop their land would be futile. Whether the Owners can go back, get a final decision, and re-file their inverse condemnation claim is an important question. The Court, however, decided not to tackle this issue as the evidence showed the City’s willingness to approve a development plan that incorporated its requested alterations.

Moving Forward

Determining the extent to which a development will be permitted on a particular lot of land can be subject to the decision of a regulatory body. And determining whether such regulation unfairly or unlawfully impacts your development is a nuanced inquiry.