On June 23, 2017, in Murr v. Wisconsin, the U.S. Supreme Court addressed whether adjacent properties owned by the same owner may be combined for purposes of determining if there has been a regulatory taking without compensation.
The Court ruled that a Wisconsin regulation preventing the owners of two adjacent parcels from selling or developing one of the two parcels did not effect a regulatory taking without compensation of the parcel which could not be sold or developed because takings analysis permitted the adjacent parcels be combined under the facts presented to determine if the regulation went too far. Justice Kennedy wrote the decision for the 5-3 majority decision, and Justice Roberts filed a dissenting opinion arguing there was a taking requiring compensation in which Justices Alito and Thomas joined.
The Constitution does not bar the government from taking private property; it merely requires that it be done for a “public purpose” and that it pay “just compensation” to the owner.[i] For many years, it was thought that the taking clause applied only to direct appropriation of property, or the functional equivalent of a practical ouster of the owner’s possession, like the permanent flooding of property.[ii] In 1922, in Pennsylvania Coal Co. v. Mahon,[iii] however, the Supreme Court recognized that “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Thus, the Mahon Court recognized that a regulation may be so burdensome as to become a taking, but it did not formulate more detailed guidance for determining when this limit is reached.
While subsequent cases dealing with alleged regulatory takings were based on the facts of each case, two guidelines evolved to guide case-by-case analysis:
First, “with certain qualifications . . . a regulation which ‘denies all economically beneficial or productive use of land’ will require compensation under the Takings Clause.” Palazzolo v. Rhode Island, 533 U. S. 606, 617 (2001) (quoting Lucas, supra, at 1015). Second, when a regulation impedes the use of property without depriving the owner of all economically beneficial use, a taking still may be found based on “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.[iv]
Even though the complete deprivation of economic use generally is deemed a “categorical” taking requiring compensation, the relevance of state law and land-use customs can lead to a contrary conclusion. The complete deprivation of use will not require compensation if the challenged limitations “inhere . . . in the restrictions that background principles of the State’s law of property and nuisance already placed upon land ownership.”[v]
The Court in Murr stated that regulatory taking analysis “must reconcile two competing objectives central to regulatory taking analysis.” One is “the individual’s right to retain the interests and exercise the freedoms at the core of private property ownership,” and the other “is the government’s well-established power to “adjus[t] rights for the public good.”[vi] In all instances, the analysis must be driven “by the purpose of the Takings Clause, which is to prevent the government from ‘forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.’” [vii]
This brings us to the issue before the Supreme Court in Muir, stated by the Court to be as follows:[viii]
This case presents a question that is linked to the ultimate determination whether a regulatory taking has occurred: What is the proper unit of property against which to assess the effect of the challenged governmental action? Put another way, “[b]ecause our test for regulatory taking requires us to compare the value that has been taken from the property with the value that remains in the property, one of the critical questions is determining how to define the unit of property ‘whose value is to furnish the denominator of the fraction.’” Keystone Bituminous Coal Assn. v. DeBenedictis, 480 U. S. 470, 497 (1987) (quoting Michelman, Property, Utility, and Fairness, 80 Harv. L. Rev. 1165, 1992 (1967)).
Here are the basic facts presented to the Supreme Court. The petitioners are four siblings who own two parcels along the St. Croix River. This River originates in northwest Wisconsin, and travels 170 miles until it intersects with the Mississippi River, forming a boundary between Wisconsin and Minnesota. The St. Croix expands in southern Wisconsin and forms Lake St. Croix, recognized for its “picturesque grandeur.” In 1960, petitioners’ parents purchased a parcel along the River referenced as “Lot F,” and built a recreational cabin on it. In 1961, petitioners’ parents transferred title to Lot F to the family plumbing business. In 1963, petitioners’ parents purchased adjacent parcel “Lot E” which they took title to in their own names. Lot E has approximately 60 feet of river frontage, and Lot F has approximately 100 feet. Though each lot is approximately 1.25 acres in size, because of the waterline and the steep bank they each have less than one acre of land suitable for development. Even when combined, the lots’ buildable land area is only 0.98 acres due to the steep terrain.
Under the Wild and Scenic Rivers Act, the St. Croix River was designated, by 1972, for federal protection.[ix] The law required the States of Wisconsin and Minnesota to develop “a management and development program” for the river area.[x] In compliance, Wisconsin authorized the State Department of Natural Resources to promulgate rules limiting development to “guarantee the protection of the wild, scenic and recreational qualities of the river for present and future generations.”[xi]
For the area where petitioners’ property is located, the Wisconsin rules prevent the use of lots as separate building sites unless they have at least one acre of land suitable for development.[xii] A grandfather clause relaxes this restriction for substandard lots which were “in separate ownership from abutting lands” on January 1, 1976, the effective date of the regulation.[xiii] The clause permits the use of qualifying lots as separate building sites. The rules also include a merger provision, however, which provides that adjacent lots under common ownership may not be “sold or developed as separate lots” if they do not meet the size requirement.[xiv] The Wisconsin rules require localities to adopt parallel provisions, so the St. Croix County zoning ordinance contains identical restrictions. The Wisconsin rules also authorize the local zoning authority to grant variances from the regulations where enforcement would create “unnecessary hardship.”
The lots remained under separate ownership, with Lot F owned by the plumbing company and Lot E owned by petitioners’ parents, until transfers to petitioners. Lot F was conveyed to them in 1994, and Lot E was conveyed to them in 1995.
A decade later, petitioners wanted to move the recreational cabin to a different location on Lot F, and wanted to sell Lot E to finance the work. Because the lots were then under common ownership, and the lots separately did not meet the minimum size requirements, petitioners sought a variance, but were denied.
Petitioners then sought compensation in State Court, claiming the regulations deprived them of “all, or practically all, of the use of Lot E because the lot cannot be sold or developed as a separate lot.” Appraisals established the following values of the parcels, separately and combined: $698,300 for the lots together as regulated; $771,000 for the lots as two distinct buildable properties; and $373,000 for Lot F as a single lot with improvements and approximately $40,000 for Lot E as an undevelopable lot, based on the counterfactual assumption that it could be sold as a separate property.
Summary judgment was granted the State, and the Court of Appeals affirmed. It found that petitioners could not reasonably have expected to use the lots separately because they were “‘charged with knowledge of the existing zoning laws’” when they acquired the property. Thus, “even if [petitioners] did intend to develop or sell Lot E separately, that expectation of separate treatment became unreasonable when they chose to acquire Lot E in 1995, after their having acquired Lot F in 1994.” The court also discounted the severity of the economic impact on petitioners’ property, recognizing the Circuit Court’s conclusion that the regulations diminished the property’s combined value by less than 10 percent. The Supreme Court of Wisconsin denied discretionary review, and the U.S. Supreme court granted review.
The Supreme Court affirmed the Wisconsin’ court’s finding that there was no taking. It was careful to state, however, that there is no categorical rule that “property rights under the Takings Clause should be coextensive with those under state law.” This view, the majority found, would improperly grant to “States the unfettered authority to ‘shape and define property rights and reasonable investment-backed expectations,’ leaving landowners without recourse against unreasonable regulations.” [xv] In addition, such deference could remove improper State regulations from taking review, the Court said, giving as an example a state law inconsistent with reasonable investment backed expectations by consolidating for purposes of takings analysis all properties owned by the same person, regardless of where they are located.[xvi]
Three factors should be considered by a court: the treatment of the land under state and local law; the physical characteristics of the land; and the prospective value of the regulated land.
First, courts should give substantial weight to the treatment of the land, in particular how it is bounded or divided, under state and local law. The reasonable expectations of an acquirer of land must acknowledge legitimate restrictions affecting his or her subsequent use and dispensation of the property, the Court said.[xvii] While a valid takings claim will not evaporate just because a purchaser took title after the law was enacted, a reasonable restriction that predates a landowner’s acquisition, can be one of the objective factors that most landowners would reasonably consider in forming fair expectations about their property. In a similar manner, a use restriction which is triggered only after, or because of, a change in ownership should also guide a court’s assessment of reasonable private expectations.[xviii]
Second, the Court found, “courts must look to the physical characteristics of the landowner’s property. These include the physical relationship of any distinguishable tracts, the parcel’s topography, and the surrounding human and ecological environment. In particular, it may be relevant that the property is located in an area that is subject to, or likely to become subject to, environmental or other regulation.”[xix]
Third, and perhaps most important with regard to the facts before the Court, the Court said:
[C]ourts should assess the value of the property under the challenged regulation, with special attention to the effect of burdened land on the value of other holdings. Though a use restriction may decrease the market value of the property, the effect may be tempered if the regulated land adds value to the remaining property, such as by increasing privacy, expanding recreational space, or preserving surrounding natural beauty. A law that limits use of a landowner’s small lot in one part of the city by reason of the landowner’s nonadjacent holdings elsewhere may decrease the market value of the small lot in an unmitigated fashion. The absence of a special relationship between the holdings may counsel against consideration of all the holdings as a single parcel, making the restrictive law susceptible to a takings challenge. On the other hand, if the landowner’s other property is adjacent to the small lot, the market value of the properties may well increase if their combination enables the expansion of a structure, or if development restraints for one part of the parcel protect the unobstructed skyline views of another part. That, in turn, may counsel in favor of treatment as a single parcel and may reveal the weakness of a regulatory takings challenge to the law.
The Supreme Court rejected petitioners’ position that the Court adopt a presumption that lot lines define the relevant parcel in every instance, making Lot E the necessary denominator for determining the percent reduction in value caused by a regulation. This position, the Court responded, “ignores the fact that lot lines are themselves creatures of state law, which can be overridden by the State in the reasonable exercise of its power. In effect, petitioners ask this Court to credit the aspect of state law that favors their preferred result (lot lines) and ignore that which does not (merger provision).” Further, “This approach contravenes the Court’s case law, which recognizes that reasonable land-use regulations do not work a taking.” [xx]
The Court concluded that “The merger provision here is likewise a legitimate exercise of government power, as reflected by its consistency with a long history of state and local merger regulations that originated nearly a century ago. *** Merger provisions often form part of a regulatory scheme that establishes a minimum lot size in order to preserve open space while still allowing orderly development.”[xxi]
The Court explained the importance of finding that merger provisions do not per se create a taking for which compensation must be paid:[xxii]
When States or localities first set a minimum lot size, there often are existing lots that do not meet the new requirements, and so local governments will strive to reduce substandard lots in a gradual manner. The regulations here represent a classic way of doing this: by implementing a merger provision, which combines contiguous substandard lots under common ownership, alongside a grandfather clause, which preserves adjacent substandard lots that are in separate ownership. Also, as here, the harshness of a merger provision may be ameliorated by the availability of a variance from the local zoning authority for landowners in special circumstances.
Significantly, although the Supreme Court affirmed the conclusion that the two adjacent parcels owned by the petitioners could be merged for purposes of taking analysis, the Court was careful to state that, “To the extent the state court treated the two lots as one parcel based on a bright-line rule, nothing in this opinion approves that methodology, as distinct from the result.”[xxiii] It thus concluded that the Wisconsin court’s decision that there was no taking in this case should be affirmed, but only because of the facts of the case presented:
Like the ultimate question whether a regulation has gone too far, the question of the proper parcel in regulatory takings cases cannot be solved by any simple test. *** Courts must instead define the parcel in a manner that reflects reasonable expectations about the property. Courts must strive for consistency with the central purpose of the Takings Clause: to “bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” *** Treating the lot in question as a single parcel is legitimate for purposes of this takings inquiry, and this supports the conclusion that no regulatory taking occurred here.
CONCLUSION
The Supreme Court’s ruling in Murr v. Wisconsin provides support for State, County and local laws that employ merger requirements to help protect sensitive properties, or preserve open space. The lesson to be learned is that adjacent parcels should not be owned by the same person or entity. If adjacent properties are owned by different persons or entities, and the laws applicable to those parcels change in a way that renders the parcels substandard, generally, they become legal non-conforming parcels which may be developed. If the adjacent parcels have the same owner, the new zoning or regulation may be fully applicable to the parcels, limiting their economic use.
[i] U.S. Const. 5th Amendment, made applicable to the States though the Fourteenth Amendment.
[ii] Lucas v. South Carolina Coastal Council, 505 U. S. 1003, 1014 (1992).
[iii] Pennsylvania Coal Co. v. Mahon, 260 U. S. 393 (1922).
[iv] Palazzolo v. Rhode Island, 533 U. S. 606, 621 (2001), quoting Lucas v. South Carolina Coastal Council, 505 U. S. 1003, 1024 (1992).
[v] Lucas v. South Carolina Coastal Council, 505 U. S. 1003, 1029 and 1030–1031 (listing factors for courts to consider in making this determination).
[vi] Palazzolo, supra, at 617– 618 (quoting Armstrong v. United States, 364 U. S. 40, 49 (1960).
[vii] Muir v. Wisconsin, Slip Op. at 9.
[viii] Muir v. Wisconsin, Slip Op. at 9 (citations deleted).
[ix] Muir v. Wisconsin, Slip Op. at 2, citing Wild and Scenic Rivers Act, §3(a)(6), 82 Stat. 908, 16 U. S.
- §1274(a)(6) (designating Upper St. Croix River); Lower Saint Croix River Act of 1972, §2, 86 Stat. 1174, 16 U. S. C. §1274(a)(9) (adding Lower St. Croix River).
[x] 41 Fed. Reg. 26237 (1976).
[xi] Wis. Stat. §30.27(l) (1973).
[xii] Wis. Admin. Code §§ NR 118.04(4), 118.03(27), 118.06(1)(a)(2)(a), 118.06(1)(b) (2017).
[xiii] Wis. Admin. Code § NR 118.08(4)(a)(1).
[xiv] Wis. Admin. Code § NR 118.08(4)(a)(2).
[xv] Muir v. Wisconsin, Slip Op. at 11.
[xvi] Muir v. Wisconsin, Slip Op. at 11.
[xvii] Muir v. Wisconsin, Slip Op. at 12.
[xviii] Muir v. Wisconsin, Slip Op. at 12.
[xix] Muir v. Wisconsin, Slip Op. at 12.
[xx] Muir v. Wisconsin, Slip Op. at 14-15.
[xxi] Muir v. Wisconsin, Slip Op. at 15-16.
[xxii] Muir v. Wisconsin, Slip Op. at 16.
[xxiii] Muir v. Wisconsin, Slip Op. at 19.
You’re ready to start a business – congratulations! Before leasing space, hiring employees, or landing your first client, you’ll have to choose an entity type for your new endeavor. C-Corps, S-Corps, and LLCs, to name a few: each entity type comes with its own set of advantages and disadvantages depending on the nature of your business. Learn from a corporate attorney about the features of various common entity types, the pros and cons of each, and how to decide which makes sense for your business. The program will also address why so many businesses incorporate in Delaware and how to know if that option is right for you. Join us and arm yourself with the knowledge you need to build a strong foundation for your business.
By Mitchell H. Pally
In its role as Special Counsel to the 
Scott Middleton
Labor & Employment Update: What Businesses Need to Know
