Taking Leases
Ever since Justice Oliver Wendell Holmes announced that a government regulation that went “too far” was a taking that required just compensation, the Supreme Court has grappled with the appropriate analytical framework for determining when the government has effected a regulatory taking. In most cases, the question turns on whether the Court should apply a per se rule or a balancing test.
Generally, the Court chooses to follow the balancing test established in Penn Central Transportation Co v New York City. Courts applying the Penn Central test analyze a few factors to determine whether the government action amounted to a taking. Occasionally, however, the Court will determine that a certain regulatory action always leads to a taking. In Lucas v South Carolina Coastal Council, the Supreme Court established a per se rule that any government regulation that completely eliminates the value of a person’s property is a taking.
Lucas left many questions about the scope of its new rule unanswered. The Court revisited this issue in Tahoe-Sierra Preservation Council, Inc v Tahoe Regional Planning Agency, holding that a moratorium that eliminated the use of property for six years was not subject to the Lucas rule. The Court ruled that the Lucas approach comes into play only when the deprivation of value is permanent. Thus, in situations in which the government regulation only temporarily eliminates all beneficial value, courts are to apply the Penn Central balancing test to determine whether there has been a taking.
While Tahoe-Sierra dramatically narrowed the Lucas rule, it did not resolve whether Lucas applies only to the permanent economic devaluation of a fee simple or whether there are other scenarios in which a Lucas claim may arise. One unresolved question is whether a leaseholder may assert a Lucas per se takings claim because the lease expires during a moratorium. This scenario has been mentioned numerous times in the academic literature, and most scholars at least assume that a Lucas claim is possible.
The choice of whether to apply the Lucas per se rule or the Penn Central balancing test when a lease expires during a moratorium has real consequences. Choosing the Lucas rule would benefit leaseholders, who would need show only that their lease lost all value to prevail on their takings claims. However, this could make beneficial land-use regulations, such as building moratoria, very costly, as the government would need to compensate more leaseholders. Moreover, automatic compensation could encourage government officials to end a moratorium as quickly as possible in order to minimize the amount they would have to pay. This could damage the effectiveness of the moratorium, which would not be in the public interest. By contrast, the Penn Central test would allow courts to address the specific facts of a takings claim and to take the nature of the temporary taking into account. However, this would make it more difficult for leaseholders to receive just compensation.
The choice is also important to the future of the Lucas rule. While Lucas was originally seen as a potentially significant shift in regulatory-takings jurisprudence, the ruling in Tahoe-Sierra tempered Lucas’s significance and reinstalled the Penn Central balancing test as the dominant approach. If leases subsumed by moratoria are found to be amenable to the Lucas per se test, this could spur renewed interest in per se regulatory-takings rules. If the correct avenue is Penn Central, then the significance of Lucas is even more limited; it would exist merely as a minor exception to the general regulatory-takings framework that favors the Penn Central balancing test to per se rules.