U.S. Supreme Court Addresses the 'Denominator Problem'

In Penn Central, the Court applied what has come to be known as the Penn Central balancing test to uphold New York City's refusal to approve an office tower atop Grand Central Terminal. Although no one factor was dispositive in the Court's decision, the Court did indicate that the regulation's effect on the owner's reasonable investment-backed expectations was an important factor in determining whether the regulation constituted a taking. In the context of Grand Central Terminal, the Court indicated that takings analysis should not focus on the air rights above the terminal, but on the parcel as a whole.

Measured against the parcel as a whole, the regulation did not unduly interfere with Penn Central's investment-backed expectations because it did not prevent Penn Central from earning a reasonable return on the train station. If, on the other hand the Court had used a smaller denominator, focusing on air rights alone, the regulation's impact on investment-backed expectations would have been more severe.

In Lucas, the Court carved out an exception from the Penn Central balancing test: If a regulation prevented the landowner from making any productive use of the land, the regulation constitutes a per-se taking. When a landowner raises a Lucas takings claim, the denominator is absolutely critical: If the denominator includes any land the state has not regulated, the takings claim will fail. Palazzolo v. Rhode Island, 533 U.S. 606, illustrates the problem. There, the landowner owned a waterfront parcel and an uplands parcel. Because the state regulation permitted construction of a residence on the uplands parcel, the Court rejected the landowner's Lucas claim and remanded for analysis under Penn Central.

The Murr Case

The Murr case involves a fairly standard application of the merger doctrine that applies in most states, including New York. The Murrs purchased two adjacent lots along a Wisconsin river, but held one in the name of a family business and the other in their individual names. They built a cabin on the lot owned by the business. More than a decade later, when the river was designated for federal protection, Wisconsin enacted regulations requiring a minimum of one acre of buildable land for any building site. Neither of the Murr lots met the one-acre minimum, but the regulations grandfathered substandard lots held in separate ownership from abutting lands. The regulations also included a merger provision eliminating the exemption for pre-existing substandard lots if abutting substandard lots came into common ownership. Long after the Wisconsin regulations were enacted, the Murrs, for some unknown reason, transferred both lots to their children, triggering the merger provision in the regulations.

More than a decade later, the Murrs wanted to expand the cabin, and to sell the adjacent vacant lot to finance the expansion. The merger provision precluded sale of the vacant lot for development purposes, so the Murrs sought a variance, which the local board of adjustment denied. After the Wisconsin courts upheld the variance denial, the Murrs brought an action contending that the state and county regulations had worked a taking of the vacant lot because it could no longer be sold or developed as a separate lot. The Wisconsin courts held that the two lots together constituted the relevant denominator for takings purposes, and held that the regulations did not constitute a taking because they diminished the combined value of the land by less than 10%. The Supreme Court granted certiorari.

The Court's Opinion

In holding that the Wisconsin regulations did not take the Murrs' property, a 5-3 majority of the Court rejected the Murrs' contention that the vacant lot should constitute the denominator for their takings claim. But the Court's majority also rejected the state's contention that the merged lot should constitute the denominator simply because the state had defined the two lots as a merged parcel. Instead, Justice Kennedy emphasized that “flexibility” had been the hallmark of the Court's takings jurisprudence, and indicated that a balance of factors should determine the denominator. Among those factors are treatment of the land under state and local law, the physical characteristics of the land, and the prospective value of the regulated land. He concluded that the denominator should reflect “whether reasonable expectations about property ownership would lead a landowner to anticipate that his holdings would be treated as one parcel, or, instead, as separate tracts.”

Within the context of that balancing test, the Court concluded that the state courts had properly treated the merged parcel as the denominator, especially because the Murrs' voluntary conduct had brought the lots under common ownership. Once the Court concluded that the merged parcel was the denominator, it was not difficult for the Court to conclude that there had been neither a Lucas taking nor a Penn Central taking.

Chief Justice Roberts, dissenting for himself and Justices Thomas and Alito, was not troubled by the majority's “bottom line conclusion” that the Wisconsin ordinance did not effect a taking. His concern was the majority's departure from the principle that “[s]tate laws define the boundaries of distinct units of land, and these boundaries should, in all but the most exceptional circumstances, determine the parcel at issue.” The Chief Justice concluded that the case should be remanded to the Wisconsin courts for a determination of the relevant property using principles of Wisconsin property law. He then conceded that even if, under Wisconsin law, the two parcels were separate, the court might find no Lucas taking if use of the vacant parcel as recreational space or as a valuable addition to the neighboring lot were sufficient to provide the Murrs with some economically beneficial use.

Conclusion

The result in the Murr case was pre-ordained. If the Murrs had suffered a taking, the merger statutes and ordinances of every state and locality would have been in jeopardy, even though, in all but the most unusual circumstances, merger can occur only when the landowner takes voluntary action to combine ownership of multiple lots. But the opinions may signal that owners claiming a Lucas taking face an uphill battle — especially because even the Chief Justice signaled that a landowner might not fall within the Lucas ambit if the government can show that a parcel whose development it has prohibited retains value as an addition to a neighboring lot.

***** Stewart E. Sterk, Mack Professor of Law at Benjamin Cardozo School of Law, is the Editor-in-Chief of New York Real Estate Law Reporter.