By Lewis Wiener, Victor Haley and Rikki Stern

Law360 (May 18, 2020, 6:06 PM EDT) --

Lewis Wiener

Victor Haley

Rikki Stern

State and local governments across the U.S. have shuttered nonessential businesses, and ordered residents to stay at home with very limited exceptions for essential activities.[1] Others have prohibited seasonal, nonpermanent property owners from accessing their vacation or second homes.

Amid this massive and unprecedented closure of retail businesses, personal services businesses, restaurants, gyms and other businesses across America and the varying restrictions on property use raises the question of whether these state orders, local regulations and restrictions amount to compensable temporary taking of property in violation of the Fifth Amendment, for which just compensation is due.

Although in 2002 the U.S. Supreme Court held in Tahoe-Sierra Preservation Council Inc. v. Tahoe Regional Planning Agency[2] held that temporary prohibitions on the use of property do not constitute per se compensable takings under the Fifth Amendment, the closure of businesses and restrictions on property uses under state and local orders enacted in response to the COVID-19 pandemic, coupled with the inability to recover losses sustained during the orders, may be reason to revisit the Supreme Court's holding in Tahoe-Sierra.

In Tahoe-Sierra, property owners along the shores of Lake Tahoe sought compensation for an alleged temporary taking resulting from application of moratoria issued by the Tahoe Regional Planning Agency on new development to permit the study and promulgation of a comprehensive land-use plan.

The effect of these temporary moratoria was to prohibit all development subject to the jurisdiction of the TRPA for almost three years. Petitioners argued that these moratoria "denie[d] a property owner all viable economic use of her property," and thus gave "rise to an unqualified constitutional obligation to compensate her for the value of its use during that period."[3]

The court disagreed with petitioners and found that the moratoria did not deny petitioners all viable economic uses of their property. Writing for the 6-3 majority, Justice John Paul Stevens reasoned that petitioners' property was not "rendered valueless by a temporary prohibition on economic use, because the property will recover value as soon as the prohibition is lifted."[4] Accordingly, the court found that no compensable taking occurred.

Motivating the court's decision in Tahoe-Sierra was, according to Justice Stevens, a longstanding distinction between physical and regulatory takings.[5] Physical takings occur "[w]hen the government physically takes possession of an interest in property for some public purpose," and involve "a categorical duty to compensate the former owner … regardless of whether the interest that is taken constitutes an entire parcel or merely a part thereof."[6] Regulatory takings, on the other hand, "prohibit a property owner from making certain uses of her private property," and do not automatically entail an obligation to provide just compensation under the Fifth Amendment.[7]

In reaching this conclusion, the court declined to establish a categorical rule on temporary regulatory takings. The court, however, recognized that temporary regulatory takings could qualify as compensable takings under the Fifth Amendment depending on the circumstances.[8]

The unprecedented nature and scope of the laws and regulations enacted by state and local authorities in the wake of the COVID-19 pandemic are precisely the type of extraordinary circumstances that make the court's regulatory takings jurisprudence and its holding on temporary regulatory takings in Tahoe-Sierra ripe for review and reconsideration.

First, while local and state orders are (hopefully) temporary in nature, similar to the moratoria imposed on the property owners in Tahoe-Sierra, the deprivation here — and certainly the damage in some cases — is arguably permanent. In contrast with the property owners in Tahoe-Sierra, whose property values the court assumed would recover when the moratoria were lifted, some businesses ordered to close under stay-at-home orders may never reopen and others will never be able to make up for the lost products and services that they were unable to sell as a result of compelled physical closures.

Second, state and local orders restricting the use of property are tantamount to physical possession. Many state and local orders direct residents to stay at home, with limited exceptions for essential activities. Others prohibit nonpermanent residents from accessing their property. Owners and employers of nonessential retail and professional service businesses are prohibited from physically going to their properties, other than for carrying out minimum basic operations unrelated to economic activity (i.e., security and mail).

Although the government has not taken physical possession of these properties, stay-at-home orders effectively prevent business owners and their customers as well as certain property owners from entering or using the properties for any economic use. The practical effect is physical dispossession for which just compensation is owed.

Third, stay-at-home orders are not the type of ubiquitous regulations that "impact property values in some tangential way—often in completely unanticipated ways" that motivated the court's holding in Tahoe-Sierra.[9] The court in Tahoe-Sierra was concerned that treating such regulations as per se takings "would transform government regulation into a luxury few governments could afford."[10]

However, stay-at-home orders and access restrictions are not ordinary government regulations with unintended and incidental consequences. They are sweeping and unprecedented directives with a clear and intentional impact on property rights: their express terms require many businesses to close their storefronts.

Thus, the similarity between physical takings and the practical effects of stay-at-home orders and other land use restrictions passed in the wake of the COVID-19 pandemic suggest that the court's holding in Tahoe-Sierra is ripe for reconsideration. Affected property owners may be able to challenge these measures as compensable regulatory takings in court against state and local governments in an effort to recover their losses arising out of government-mandated closures and land-use restrictions.

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Lewis Wiener is a partner at Eversheds Sutherland and co-chair of the firm's global financial services disputes and investigations practice group.

Victor Haley is a partner at the firm, co-head of the firm's global real estate and planning practice group, and head of the firm's timber and forest products group.

Rikki Stern is an associate at the firm.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] "See Which States and Cities Have Told Residents to Stay at Home," NYTimes, (April 20, 2020), available at https://www.nytimes.com/interactive/2020/us/coronavirus-stay-at-home-order.html.

[2] Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency , 535 U.S. 302 (2002).

[3] Tahoe-Sierra, 535 U.S. at 320.

[4]Tahoe-Sierra, 535 U.S. at 332.

[5] Tahoe-Sierra, 535 U.S. at 323.

[6]Tahoe-Sierra, 535 U.S. at 322.

[7] Tahoe-Sierra, 535 U.S. at 321-22.

[8] Even if a court were to reject a categorical rule requiring just compensation for temporary takings, potential claimants are not without redress under the Fifth Amendment. Property owners affected by regulations enacted in the wake of the COVID-19 pandemic may be able to demonstrate a compensable taking requiring just compensation. See Penn Central Transp. Co. v. New York City , 438 U.S. 104, 124 (1978) (setting forth a three-factor analysis for regulatory takings involving: (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).

[9] 535 U.S. at 324.

[10] Id.

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