Eminent Domain Report

When a governmental agency improperly denies a permit application for a new development, and the proposed development is thereby delayed, does this result in a regulatory taking?  As we've seen in some prior cases, such improper governmental actions can trigger liability, but it is uncommon.  A recent Court of Appeal decision, Bottini v. City of San Diego (Sept. 18, 2018), highlights just how difficult it is for a property owner to pursue a regulatory taking due to a delay caused by a city's improper denial of a development application.

Background

Bottini concerns the Windemere Cottage, a late Victorian-era beach bungalow in La Jolla.  The owners submitted a preliminary review application to verify whether the Windemere was eligible for historical designation to "determine the constraints on future development" of the property.  The Historical Resources Board concluded the Windemere was not a historical structure, but the State Office of Historic Preservation California later indicated the property was eligible for the Register of Historical Resources.

The owners thereafter obtained a determination that the Windemere's unsafe condition rendered it a nuisance, which required demolition.  After demolishing the Windemere, the owners then sought a Coastal Development Permit to construct a new single-family home, and sought a CEQA exemption for the construction of a single-family home.  The local planning association objected, claiming the owners improperly "split" their project for purposes of CEQA, and the demolition should have been considered as part of the project.  The City Council agreed, and concluded that the demolition of the Windemere would have a significant effect on the environment under CEQA because it would result in the adverse change of a historical resource.

Litigation

The owners filed a lawsuit, seeking to overturn the City Council's decision regarding the requirement to undertake a full environmental analysis under CEQA.  The owners also sought to recover for inverse condemnation, claiming that the City's improper decision, and the resulting delay, resulted in a regulatory taking.  The Court of Appeal agreed with the owners that the proposed development was exempt from CEQA, as the demolition of the potentially historic resource was pursuant to a separate nuisance abatement action, and the only "project" was the new construction.  However, the Court rejected the owners' takings claim.

The Court walked through a lengthy history of takings law, and debated whether the proper analysis involved (1) a Penn Central balancing test or (2) a Landgate "substantially advances" legitimate government interests test.  The Court explained:

To date, no published authority of which we are aware has expressly analyzed whether . . . the "substantially advances" formula remains a valid test by which to determine whether a regulatory taking has occurred under the takings clause of the California Constitution . . . .  We now answer that question in the negative and conclude that the Penn Central test . . . and not the "substantially advances" formula—applies to ad hoc regulatory takings claims that arise under the California Constitution.

The Court then discussed the Penn Central standard, which requires an examination of three factors to determine whether a regulatory taking has occurred:  (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with the claimant's reasonable, distinct investment-backed expectations; and (3) the character of the government action.

1. With respect to the first factor, the Court concluded that the City's decision had an adverse economic impact on the owners, as they could not use the property and had to pay a mortgage for their existing home and an empty lot due to the delay associated with the City's erroneous decision.
2. With respect to the second factor, the Court concluded that the City's decision did not interfere with reasonable, investment-backed expectations, as the owners should not have expected to be able to demolish the structure and build a new residence without undertaking any environmental review, and no representations were made to the contrary.  In fact, at the time of purchase, the owners knew the Windemere was up for designation as a historical resource.
3. With respect to the third factor, the Court explained there was no physical invasion, but was instead simply an improper application of a public program.

Primarily because of the lack of a distinct investment-backed expectation, the Court concluded it was proper to deny the owners' inverse condemnation claim.

Conclusion

Bottini helps clarify regulatory takings law in California and the applicability of the Penn Central test as opposed to the Landgate test.  It also serves as an important reminder as to the uphill battle property owners face when seeking to recover for damages due to delay associated with development permitting applications.  Absent a truly unreasonable action or false representations by the local government, property owners should expect to experience some reasonable delays with permitting, and it is therefore difficult to demonstrate Penn Central factors of interference with distinct, investment-backed expectations and improper governmental action.