Ninth Circuit Provides Further Clarity on the Limits of Regulatory Takings

May 1, 2018

On April 23, 2018, in Colony Cove Properties, LLC v. City of Carson, the Ninth Circuit Court of Appeals reaffirmed the broad leeway local governments have to regulate the use of property without causing a “taking” under the under the Takings Clause of the Fifth Amendment. The court reversed a nearly $8 million jury verdict against the City of Carson based on the City’s application of its mobile home rent control ordinance. SMW represented the city in the appeal.

The plaintiff purchased the rent controlled Colony Cove mobile home park for $23 million, putting $5 million down and financing the remainder. It then applied to the city for a rent increase to pass through its more than $1 million in annual debt service to the park residents. The city granted rent increases, but for far less than the plaintiff had requested. The plaintiff sued, claiming that its inability to recoup its debt service resulted in a taking. A jury agreed, and the city appealed. The court of appeals held that no reasonable trier of fact could find a taking under the three-factor test set forth in the Supreme Court’s decision in Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978).

The Ninth Circuit’s decision is significant in several ways and should provide local governments with greater confidence that the vast majority of their land use and other economic regulations are immune from challenge as a taking; only truly exceptional, egregious regulation will be considered a taking of private property.

First, the court reiterated that a plaintiff property owner must demonstrate that a challenged regulation is the functional equivalent of the exercise of eminent domain. To do so, the owner must show that the regulation has deprived it of the lion’s share of the value of its property. Specifically, the court noted that no court has found a taking where the challenged regulation reduced the value of the property by less than 50 percent. Colony Cove reaffirms that a regulation must come close to a wipe-out of the property’s value before it can be considered tantamount to eminent domain.

Second, a property owner claiming a taking based on a reduction in the income or profit generated by the property must demonstrate that the reduction has a severe effect on the value of the property as a whole. Evidence of lost income or profit, in isolation, is not sufficient.

Third, the case demonstrates that takings claims should go to trial only in rare circumstances. Although successful takings claims are rare, the potential cost of taking a claim to trial can be a significant deterrent for local governments in adopting or applying regulation. The court’s decision in Colony Cove makes clear that trial courts must dispose of takings claims before trial unless the plaintiff can show a truly severe impact on property value.

In sum, the court’s decision should give local governments greater assurance that they can regulate to protect public health, safety, and welfare without running afoul of the Takings Clause.

The Colony Cove decision is available here. For more information, contact SMW attorney Matt Zinn.