Eminent Domain in a Declining Market: Precondemnation Damages vs. De Facto Takings
The use of eminent domain in a declining real estate market presents a number of unique issues. I often receive calls from property owners who are frustrated with the government's timing of condemnation proceedings, and want to know how they can get market-peak-values for their property.
This issue was the hot topic of a previous IRWA seminar I chaired, Property Acquisition, Appraisal, and Relocation in an Upside Down Market. And a recent blog post by the Weiss Serota Helfman law firm, Eminent Domain Valuation in a Falling Market Poses Questions for Condemning Agencies, triggered some thoughts I felt worthwhile to pass along.
If a government agency has been long-planning to acquire a property, but the proposed project does not go forward for several years, property owners are typically left in limbo with a "cloud" of condemnation hanging over their property. Sometimes, the agency's actions go too far, and result in liability. When liability attaches in a rapidly declining real estate market, who bears the burden of the market decline: the agency, or the property owner? The answer depends on whether the agency is liable for (i) a de facto taking or (ii) precondemnation damages (or "Klopping" damages).
- De Facto Takings: Under a de facto taking claim, the landowner must demonstrate that a government agency’s particularly oppressive acts result in a taking of the property either through a physical invasion or through a direct legal restraint. In assessing damages, the property is to be valued on the date that the “taking” occurs, and all decline in value after that date is to be borne by the condemning agency. Since the taking is said to have occurred at this earlier date, damages would include those losses wholly unrelated to the precondemnation activity, such as losses due to a general decline in market value in the area.
- Precondemnation Damges: Under a precondemnation damages claim, the landowner must demonstrate that the agency has acted unreasonably in issuing precondemnation statements, either by excessively delaying in bringing the eminent domain action, or by other oppressive conduct. In assessing damages, the landowner is entitled only to those losses caused by the agency’s announcements, and not any decline in market value that is caused by general conditions unrelated to the activities of the condemning agency (i.e., the agency is not liable for any general market declines).
Both claims can be difficult to prove, a de facto takings claim more so. But in a rapidly declining real estate market, understanding the nuances between the two claims is important, as it can make a significant difference on the amount of just compensation.
