Partial Takings and the Contingent "Cost-to-Cure"
By Michael J. McCalley – February 16, 2011
While state budgets shrink, it is no surprise that its agencies look for ways to save a dollar. One way that condemnors may attempt to reduce damages in a partial-condemnation case is to present the possibility of a “cure.” The concept of a cure or “cost-to-cure” in condemnation matters has its roots, at least partially, in the theory of mitigation of damages. If there are mitigating measures that can be taken to reduce the damages caused by the taking, the condemnor is generally permitted to present evidence of such measures for consideration in determining the just compensation to be paid to the property owner.
Unfortunately, the condemnor’s idea of what will cure the damages is rarely one that would be acceptable to a property owner. This can be due to the fact that the condemnor may have no experience running the property and therefore does not appropriately assess the impact a taking may have on the ability of the owner to continue its existing use. Furthermore, it has become increasingly common to see a cure presented that requires local land-use approvals. A cure that is contingent upon permits or approvals from outside agencies may never come to fruition, thereby jeopardizing the constitutionally required “just compensation.” Given the multitude of problems often associated with a cost-to-cure and the fact that the risk associated with such cures is most frequently placed fully on the shoulders of the property owner, courts should exercise a heightened level of scrutiny before permitting such evidence to be heard by a jury.
The concept of a cure is not new, but is seemingly finding its way into more and more partial-taking cases. Again, a cost-to-cure is the method through which the doctrine of mitigation of damages has been applied to condemnation actions. Most cases that have considered mitigation of damages in a partial-taking condemnation action have done so where the cost to cure is based on actions that can be taken by the property owner relating directly to the remaining property; that is, the condemning agency is the sponsor of evidence relating to the cure. The theory authorizes the introduction of evidence that a condemnee can reduce its damages in a partial condemnation by taking corrective measures to improve the remainder property, even though such action need not actually be taken. The cost of implementing the corrective measures is commonly referred to as “cost-to-cure” damages.
Evidence of a cost-to-cure will only be permitted where the cost is less than or equal to the diminution in fair market value for the remainder if the condition caused by the taking is not cured. In this sense, the use of a cure is an alternative measure of damages in partial-condemnation cases. It also must be recognized that a proposed cure may not completely cure the damages caused by the taking. In such a case, the property owner is not made whole unless he or she receives the cost of the partial cure plus damages.
The use of a cure is simple enough when it involves simple measures, such as restriping a parking lot to regain spots lost as a result of a taking or perhaps relocating an identification sign on the remaining property. Quite often, however, a proposed cure to a partial taking is not as simple as grabbing a roller and a bucket of paint. Given the ever-broadening scope of local land-use regulations, cures proposed in response to a taking that involves either reconfiguration of property, reconstruction of improvements, or changes to site features, often require some form of local-agency approval. Accordingly, where the proposed cure is not permissible as of right under local land-use controls, a host of issues can arise. In these situations, where the cure is contingent upon obtaining permits or approvals from outside agencies, one must analyze whether it is appropriate for the court to allow evidence of such a cure to be presented.
The primary issue with a proposed cure in condemnation is the fact that, unless the cure has been accomplished prior to trial, it always includes some degree of speculation. A condemnor proposing a cure that is contingent upon a discretionary approval is speculating that (a) the property owner or a hypothetical purchaser could obtain all approvals necessary to implement the cure; (b) the cure can be implemented for a fixed price; (c) the cure can be achieved within a reasonable time period; and (d) the cure will in fact cure the damages, or at least a portion thereof, created by the taking. Simply stated, any cure that requires a property owner to obtain an approval from a local board or agency to implement the cure can be fraught with issues.
Obtaining a commercial land-use approval is rarely ever a slam dunk. Unless the use is specifically permitted and the property conforms with all bulk requirements, the reviewing authority will have a significant deal of discretion in reviewing any land-development application. Moreover, even if the proposed use or structure is permitted under the existing zoning at the moment, local land-use boards are often given the ability to amend their land-use ordinances even in the face of a pending application. If a variance or an exception from the controlling ordinance is required to obtain the approval, the party seeking relief will usually have a substantial burden to prove that such relief is legally appropriate. Moreover, local boards usually have the authority to attach conditions to such relief, which could impact the value of a property. As a result, a local board can impose any one of a number of obstacles to a property owner’s ability to obtain a land-use approval. Accordingly, whenever a cure requiring local agency approval is required, one should never assume the approvals will be granted.
Furthermore, it is rarely the case that a cure will implicate only one approval from one agency, due to increasingly extensive planning and zoning regulations, which create jurisdiction over development with various local, county, and state agencies. Thus, where a proposed cure has multiple layers of approvals, each required approval adds an additional layer of risk. The layers of possibilities and probabilities associated with whether a property owner or prospective purchaser could obtain each of the myriad approvals needed to secure the cure may, without any further analysis, demonstrate that such a cure is too speculative based on the law of probabilities. That is, while the likelihood of obtaining any one of these approvals on its own may be reasonably probable, the likelihood of obtaining all these approvals in the near future relative to the date of taking is, statistically speaking, far less likely.
In addition to the degree of speculation that attaches itself to each approval needed to achieve a proposed cure, obtaining land-use approvals can require significant investment costs of filing development applications; depositing escrows; hiring professionals to prepare site plans, surveys, and environmental impact statements; and in attending public hearings. While a proposed cure should estimate each of these costs, the time and cost is largely dependent upon the makeup of the local board and their personal schedules and feelings toward an application. In the real world, the costs associated with obtaining a local approval for a commercial use can quickly mount up. Too often, the condemning agency’s estimate of the cost to secure such approvals when presenting a cure reflects a best-case scenario.
Another consideration is whether a condemnor’s cost-to-cure hypothetical is reflected in open-market transactions. There is no question that the taking of private property for public use requires the payment of just compensation. Typically, the measure of just compensation is described as the fair market value as of the date of taking, which has been defined as “the value which would be assigned to the property by knowledgeable parties freely negotiating for its sale under normal market conditions based on all surrounding circumstances at the time of the taking.” Accordingly, proofs in a condemnation must begin with the value of the land as of the date of the taking based upon the condition of the land at that time, and the uses to which the land is adapted and restricted. Thus, local planning and zoning restrictions in effect as of the date of the taking are material and relevant to the issue of usability and have a significant bearing on the commercial value of the land.
The impact of a prospective cure on the fair market value of a property on the date of taking can be difficult to gauge because rarely, if ever, do real-life transactions involve such a scenario. In the real market, few if any buyers would buy a damaged property on the prospect that the damages could be cured, without the purchase being subject to obtaining the necessary approvals. Market purchasers will not bear such risk. Rather, such purchasers are typically subject to obtaining approvals, thereby giving the purchaser the ability to walk away from the deal if and when the necessary permits or approvals are denied. In a condemnation situation, a property owner does not have such a luxury. Thus, when a condemning agency presents a cure in a condemnation matter, it is asking the court to ignore normal market conditions. As a result, a cure that is contingent upon outside-agency approvals places the risk that such approvals will be denied on the property owner and converts just compensation to a mere percentage chance.
Given the fact that cures often, if not always, place the lion’s share of risk on a property owner, those seeking to present evidence of a cure should be held to a higher standard of proof. Not only should a condemnor have to demonstrate that the cure was reasonably probable on the date of taking, but courts should also require the condemnor to present evidence that the cure has a reasonable certainty of achievement.
In most cases where the reasonable probability of relief from a land-use ordinance has been examined, the issue has concerned the impact that such a reasonable probability of a zone change, if it existed, would have had on the value of the property in the situation before the taking. Initially, the trial judge, in his or her role as “gatekeeper” of the evidence, must determine if the evidence is sufficient to warrant a determination that such a change is reasonably probable. A trial court must screen the proffered evidence to ensure that the jury is not presented with speculative or remote possibilities that no reasonable prospective buyer would consider. Only after this threshold is met will the court permit the jury to consider whether the proposed zone change or variance was such a possibility that a hypothetical buyer on the date of taking would take it into consideration in fixing the value of the property. Thus, it is generally agreed that if, as of the date of taking, there is a reasonable probability of a change in the zoning ordinance in the near future, the influence of that circumstance upon the market value as of that date may be shown. The law will ordinarily recognize the truth if the parties to a voluntary transaction would, as of the date of taking, give recognition to the probability of a zoning amendment in agreeing upon the value.
Much like a property owner seeking to present evidence of a potential zone change or variance in the before-taking situation, a condemning agency that proposes a cure has the burden of establishing that the proposed cure is feasible or reasonably likely, and that it will in fact cure the damages caused by the taking. The preliminary burden of demonstrating that the cure was more than just a possibility should not be easy for a condemning agency to overcome. Quite often, as discussed above, when it comes to local land-use approvals, there are no guarantees due to the myriad issues they present. Accordingly, when a condemnor is presenting evidence of a cure that requires multiple variances, the court, in performing its gate-keeping function, should employ a higher standard before permitting the evidence to be heard by a jury.
To allow a condemnor to present evidence of a cure with only a chance of coming to fruition makes just compensation to the property owner contingent upon the granting of the variances. This is especially significant in the majority of jurisdictions that hold that a condemnee has only one opportunity to seek just compensation for the damages to the remainder, present and prospective, which may be known or reasonably be expected to result from the taking. To date, only a few jurisdictions have addressed the issue of whether a condemning agency should be permitted to present evidence of cost-to-cure severance damages premised on speculation that variances would be granted to permit the cure.
Allowing evidence of a cure contingent upon an outside agency approval, permit, and/or variance places all the risk on the condemnee—the variances must be granted or the cure cannot legally be accomplished. In turn, if the variance is denied, “full compensation” to the condemnee is denied. Thus, while costs-to-cure may be admissible for the purpose of establishing just compensation, they do not create individual rights to the cure. Consequently, to proceed with a claim that the damages can be cured, a condemning agency should be required to demonstrate that the cure is reasonably certain.
While the cost- to-cure may be relevant to the issue of damages in a condemnation matter, the trier of fact should not be permitted to assess the cure without reference to the total estimated reduction in fair market value of the remaining property without the cure. While costs-to-cure may be admissible for the purpose of establishing just compensation, they do not create individual rights. Thus, costs-to-cure are only admissible on the issue of just compensation if they are tied to their effect upon fair market value and could reasonably be seen as reducing the damages caused by the taking.
To present the full picture to a trier of fact, the cost-to-cure must be weighed against the damages it seeks to mitigate. To permit a condemning agency to present evidence of a cost-to-cure without fully explaining the damages it has caused only tells half the story and potentially could lead the jury to view the cure as an accomplished fact. Hence, condemnors should be required to testify as to the value of the property without the cure, because the cure is only a possibility, while some degree of damage is certain.
Most jurisdictions have not addressed the issue of whether an award of damages in a partial-taking case may be limited to a cost-to-cure when the proposed cure requires discretionary approvals or permits from a governmental agency. Accordingly, there are few decisions addressing what must be demonstrated to allow evidence of such a cure and who bears the burden of proof with respect thereto. Nevertheless, the constitutional mandate of “just compensation” is jeopardized if a property owner is obligated to seek a permit or an approval when such approval is discretionary. Given the implications and the risk associated with a contingent cost-to-cure, the burden of proof should fall squarely on the party proposing the cure, which is typically the condemnor. Additionally, the party proposing the cure should be required to demonstrate more than a reasonable probability of such a cure. Rather, the proponent should be required to present evidence that the cure is reasonably certain to be achieved.
Michael J. McCalley is an associate in the Philadelphia, Pennsylvania, office of Duane Morris LLP.