The Fine Line Between Conditional Permits and Governmental Takings

By: Erik S. Mroz

Property owners and developers take notice.  The recent U.S. Supreme Court decision in Koontz v. St. Johns River Water Management District (June 25, 2013) has broadened a property owner’s right to bring Constitutional challenges to common conditions found in land-use and development permits.

In Koontz, a property owner sought to develop a 3.7-acre portion of a 14.9-acre tract of land located in Florida.  The property contained wetlands areas making the project subject to the permitting requirements of both the Florida Water Resources Act and the Warren S. Henderson Wetlands Protection Act.  Taken together, these statutes allow the government to impose permitting conditions in order to mitigate the risk of damage to wetlands.  While the permitting requirements at issue in Koontz arise under Florida law, the U.S. Supreme Court’s opinion is not specific to Florida and has national implications.

In 1994, the property owner applied for the requisite permits to begin the project.  To mitigate environmental effects caused by the development, the owner proposed deeding an 11-acre section of the 14.9-acre tract to the government as a conservation easement.  The government responded that the 11-acre conservation easement was inadequate and countered that it would approve the permit only if the owner agreed to one of two alternatives: (1) The owner agrees to reduce the size of the development to 1 acre and deed the remaining 13.9 acres to the government as a conservation easement; or (2) The owner could proceed with the 3.7-acre development with the 11-acre conservation easement, as originally proposed, but only if the owner also agrees to fund improvements to government-owned land several miles away.

The owner rejected the government’s mitigation demands as excessive and filed suit under Florida law, which allows owners to recover “monetary damages” if an agency’s action is “an unreasonable exercise of the state’s police power constituting a taking without just compensation.”  This is a state law variant of the Fifth Amendment’s “takings” clause:

No person shall be … deprived of life, liberty, or property without due process of law; nor shall private property be taken for public use, without just compensation.

Two previous U.S. Supreme Court rulings have defined the permissible scope of land-use conditions under the federal “takings” clause.  In Nollan v. California Coastal Comm’n., 483 U.S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994), the Court held that “a unit of government may not condition the approval of a land-use permit on the owner’s relinquishment of a portion of his property unless there is a ‘nexus’ and ‘rough proportionality’ between the government’s demand and the effects of the proposed land use.”

In Koontz, the U.S. Supreme Court was faced with a different question that was not expressly answered by Nollan and Dolan.  As noted by Justice Alito, writing for the majority:

The [government] believes that it circumvented Nollan and Dolan because of the way in which it structured its handling of a permit application submitted by [the property owner]…  The [government] did not approve his application on the condition that he surrender an interest in his land.  Instead, the [government], after suggesting that he could obtain approval by signing over such an interest, denied his application because he refused to yield.

Despite the government’s attempt to side-step the Constitution, the U.S. Supreme Court found that the government’s action was subject to the “nexus” and “rough proportionality” requirements of Nollan and Dolan.  Again, Justice Alito, writing for the majority:

We have said in a variety of contexts that “the government” may not deny a benefit to a person because he exercises a constitutional right . . . Those cases reflect an overarching principle, known as the unconstitutional conditions doctrine, that vindicates the Constitution’s enumerated rights by preventing the government from coercing people into giving them up.

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Nollan and Dolan “involve a special application” of this doctrine that protects the Fifth Amendment right to just compensation for property the government takes when owners apply for land-use permits.

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Nollan and Dolan . . . allows the government to condition approval of a permit on the dedication of property to the public so long as there is a “nexus” and “rough proportionality” between the property that the government demands and the social costs of the applicant’s proposal.  Our precedents thus enable permitting authorities to insist that applicants bear the full costs of their proposals while still forbidding the government from engaging in “out-and-out . . .  extortion” that would thwart the Fifth Amendment right to just compensation.

In other words, under Nollan and Dolan, a government can require an exaction of property as part of its approval of a land-use permit.  The government, however, must be able to show that there is a nexus between the exaction and the proposed development.  Any exaction must be proportional to the impact of the project.  Otherwise, the permit conditions rise to the level of a Fifth Amendment taking and the government is constitutionally required to provide just compensation.

Koontz broadens the holdings of Nollan and Dolan to situations where the government denies a permit because the owner refuses to accede to the government’s demands:

The principles that undergird our decisions in Nollan and Dolan do not change depending on whether the government approves a permit on the condition that the applicant turn over property or denies a permit because the applicant refuses to do so.

Koontz further broadens the holdings of Nollan and Dolan to situations where the government is demanding a payment of money in lieu of surrendering property:

Such so-called “in lieu of” fees are utterly common place, and they are functionally equivalent to other types of land use exactions.  For that reason . . . so-called “monetary exactions” must satisfy the nexus and rough proportionality requirements of Nollan and Dolan.

Koontz has broadened a land developer’s rights to raise Constitutional challenges to common conditions found in land-use and development permits.  It is unclear how states and local governments might attempt to modify their existing permit systems in light of this decision.  Developers are advised to seek the assistance of an experienced attorney to assist in negotiating permits where the government is demanding an exaction of property or monetary payment in return for a permit approval.

Erik S. Mroz is an attorney with Drewry Simmons Vornehm, LLP and practices in the areas of Environmental Law, Regulatory Matters, Insurance Coverage, and Litigation.  With three offices across the State of Indiana, Drewry Simmons Vornehm, LLP was originally founded as a boutique law firm focusing on the construction industry, including public and private owners, design professionals, general and trade contractors, construction managers, material suppliers, insurers and sureties.  With the growth of the law firm, Drewry Simmons Vornehm, LLP has expanded its legal practice to meet the wide-ranging needs of its clients. To speak with Mr. Mroz or another Drewry Simmons Vornehm, LLP attorney, please call us toll-free at 1 (866) 938-4848.