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The newsletter of the ISBA’s Section on Real Estate Law

September 2017, vol. 63, no. 3

Regulatory taking: A review of Murr v. Wisconsin

In June 2017, the United States Supreme Court established a new—and potentially unwieldy—test for defining the unit of property subject to an alleged regulatory taking.1 In so doing, the Court moved beyond the parameters of state and local law, the framework by which takings cases had previously been analyzed, and created a standard that includes such factors as the land’s physical characteristics, topography, its prospective value, as well as “whether reasonable expectations” would cause landowners to anticipate how their land holdings would be treated.

Background

The Petitioners’ parents purchased two adjacent lots, Lot E and Lot F, at different times in the early 1960s and built a small recreational cabin on Lot F. They later transferred ownership of Lot F to the family’s plumbing business while holding undeveloped Lot E in their own names.

The Wisconsin property at issue in this case sits along the Lower St. Croix River, a place protected since the mid-1970s under both federal and state laws intended to maintain the natural and recreational qualities of the river and the surrounding areas. Under the state and local rules, landowners may not use or sell adjacent lots under common ownership as separate building sites unless each lot has at least one acre of land suitable for development. Thus, due in part to the topography of the two lots, the amount of land suitable for development on either lot is less than the requisite one acre.

The Petitioners’ parents transferred Lot F to the Petitioners in 1994, transferring the other lot to them about a year later. Although the two parcels came under the Petitioners’ common ownership upon the transfer of the second parcel, the property descriptions in the Petitioners’ deeds remained unchanged, showing the lots as two separate parcels.

The rules prohibiting the separate sale or development of either lot kicked in when the Petitioners sought to sell Lot E. The Petitioners applied for variances, which local officials denied, and the state courts upheld the denial in the ensuing litigation.

In their suit, the Petitioners argued that the regulations deprived them of the use of Lot E. In granting summary judgment to the state of Wisconsin, the trial court explained that the Petitioners had “other options” to enjoy and use their property and that the Petitioners had not been deprived of all economic value of their property. Affirming the lower court, the Wisconsin Court of Appeals determined that the local ordinance effected a merger of the two lots, thereby allowing the Petitioners to sell or develop their property only as a single, combined parcel and that, given the resulting single parcel, no regulatory taking had occurred. Moreover, the Wisconsin Court of Appeals explained that the Petitioners could not have reasonably expected to be able to use the lots separately, given the zoning laws in effect at the time they acquired the second parcel. After the Supreme Court of Wisconsin denied review, the United States Supreme court granted certiorari.

U.S. Supreme Court Decision

Rejecting the Petitioners’ contention that lot lines define the relevant parcel for purposes of this case, the Court stated that the proper focus was the effect of the state and local regulations on the “property as a whole,” i.e. as a single unit.2 In so doing, the Court expanded on its prior takings analyses by introducing additional case-specific factors and “flexibility” into an already murky area of law.

First, in noting that the first step in a regulatory takings case is identifying the specific property at issue, the Court explained that the separation of the lots according to the official boundary lines incorporated into their deeds is only one factor among others to be applied in identifying the relevant property. Second, stressing that flexibility is the “central dynamic of the Court’s regulatory takings jurisprudence,”3 the Court stated that a proper analysis requires consideration of a number of factors that serve to inform a landowner’s reasonable expectations about his property. Those factors include: (1) the land’s characteristics and topography, as well as the physical relationship between distinguishable tracts. . . and the surrounding human and ecological environment; (2) the prospective value of the regulated land, with special attention to the effect of burdened land on the value of other property held by the landowner; and (3) whether objective “reasonable expectations about property ownership would lead a landowner to anticipate that his holdings would be treated as one parcel. . . .”4

Next, the Court explained that the Wisconsin lot-merger rules in this case reflect a legitimate exercise of government power owing to their consistency with historical merger regulations, a “classic way” of gradually reducing the number of substandard lots.5 Rejecting state lot lines as a “standard measure” due to the variation from state to state in lot identification methods and the ease with which landowners may in some jurisdictions alter lot lines (which, in the Court’s view, created a “risk of gamesmanship” in the state land-use arena6), the Court applied its new multifactor test and concluded that the relevant parcel in this case was the single parcel resulting from the merger of Lots E and F. As the Court explained, the new multifactor standard not only shows “respect for state law,” but also “weighs” whether state laws “accord with other indicia of reasonable expectations about property.”7

Possible Impact

The flexible, multifactor standard introduced by this decision seems likely to add to the uncertainty in the regulatory takings area. As the dissenting opinion points out, the definition of “private property” now turns not only on state law, but also considers an elaborate litigation-specific set of factors. In defining the relevant property, the new test appears to conflate the steps involved in the regulatory takings analysis. For example, the Court’s flexible new standard seems to suggest that a determination of the challenged rules’ impact on the value of “the property” is required without a prior identification of the relevant parcel.8 In this instance, in deciding whether Lots E and F should be considered a single parcel, the majority focuses on factors such as the importance of the regulations, and the extent to which the Petitioners may have been harmed or surprised by the application of the rules to their property. These issues, the dissent writes, are to be reserved for deciding if a regulatory taking has in fact occurred, not for defining the property.

In light of the Court’s new standard for analyzing regulatory takings, property owners should consider how the additional factors set forth in Murr may affect their “reasonable expectations” about their property. The flexible, indeed murky, framework presented in this opinion, does little to identify one’s reasonable expectations regarding property rights and may encourage litigants to define the relevant parcel by referencing the reasonableness of applying the challenged regulation to a particular claimant, whose expectations are assessed according to the reasonable government regulation. The test becomes circular.

Questions are bound to arise as a result of this decision, some of which are:

• to what extent can property owners rely on state and local law to define their property rights;

• how should property owners protect their property rights in light of “reasonable expectations” and the other Murr factors;

• how should purchasers take title when multiple parcels are involved; and

• how does Murr affect existing lot merger rules and land-use regulations?

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1. Murr v. Wisconsin, No. 15-214, 2017 WL 2694699 (U.S.S.C. June 23, 2017).

2. Id. at *17.

3. Id. at *7 (citing Palazzolo v. Rhode Island, 533 U.S. 606, 617 (2001), the Court referred to a “complex of factors, including (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the character of the governmental action”).

4. Id. at *11-12 (stating “the inquiry is objective, and the reasonable expectations at issue derive from background customs and the whole of our legal tradition”).

5. Id. at 16.

6. Id. at 17.

7. Id. at *11 (suggesting caution is in order when referencing state law: “defining the parcel by reference to state law could defeat a challenge even to a state enactment that alters permitted uses of property in ways inconsistent with reasonable investment-backed expectations”); id. at *8 (recognizing that state law and land-use customs may form basis for limiting compensation for deprivation of use of property where the challenged rules “inhere . . . in the restrictions that background principles of the State’s law of property and nuisance already placed upon land ownership”). See Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1029 (1992).

8. See id. at *10 (stating “[i]n some, but not all, cases the effect of the challenged regulations must be assessed and understood by the effect on the entire property held by the owner, rather than just some part of the property that, considered just on its own, has been diminished in value”).