January 1, 1900

by Stephen M. Eisdorfer

Within the past several years, New Jersey’s environmental regulations and statutes have dramatically reduced or destroyed the economic value of hundreds of thousands of acres of otherwise developable land. Separately and together, the Highlands Act, coastal zone (CAFRA) regulations, and DEP regulations on stream encroachment, flood hazards, sanitary sewage disposal, and stream classification, have made many properties essentially unusable. Whatever the public benefit these restrictions may provide, members of the public are not sharing equally in their economic burdens. Instead, the economic burdens are being borne selectively by a comparatively small number of individual property owners.

The ultimate legal remedy for property owners affected by these types of restrictions is “inverse condemnation”: a legal proceeding claiming that government has taken all or substantially all the value of the property and must therefore compensate the property owner for that taken value (the payment of “just compensation”). Because there are so many obstacles to obtaining compensation through inverse condemnation proceedings, property owners have historically treated this as the remedy of last resort. In many instances, inverse condemnation proceedings are now the only available recourse.

What Triggers an Inverse Condemnation Claim?

In its recent decision in Mansoldo v. State of New Jersey, the New Jersey Supreme Court has addressed the standard for determining whether an inverse condemnation has taken place. In that case, owners of property zoned for two single family houses sought inverse condemnation because DEP flood plain regulations had restricted the property to use as open space, a park, or a parking lot. The Supreme Court recognized that the regulation is highly beneficial to the general public. It ruled, however, that the regulation’s beneficial character does not avoid the government’s obligation to compensate the property owner for the value taken.

The Supreme Court declared that the courts must ask two questions in such cases. The first question is whether the regulation has denied all economically beneficial or productive use of the land. If the restriction is not quite that severe, the court must then ask a more complicated question: Does the regulation unduly interfere with the legitimate investment-backed expectations of the property owner? This will depend, among other things, upon how the property owner could reasonably have expected to use the property when he or she acquired it, whether that expectation was reflected in the purchase price, what reasonable investments the property owner made in reliance on that expectation, and whether the regulation provides benefits to the property owner as well as burdens.

If an inverse condemnation has occurred, the government must compensate the property owner for the reduction in value in the property caused by the regulation.

Timing of Inverse Condemnation Proceedings

In two recent decisions, the Appellate Division of the New Jersey Superior Court has addressed the question of when a property owner can bring an inverse condemnation case. The first, United Savings Bank v. State, Department of Environmental Protection, involved property affected by DEP’s freshwater wetlands regulations. The second, entitled OFP, L.L.C. v. State of New Jersey, involved property within the Highlands preservation area and restricted by the Highlands Act. In both cases, the courts held that the property owner cannot file an inverse condemnation case until he or she first goes through any available DEP waiver process. The courts can then determine if there has been an inverse condemnation based upon how the land can be used with any waivers the DEP has granted.

DEP’s waiver process is often very burdensome and time consuming. For example, under DEP’s waiver regulations applicable to the Highlands Region, the property owner must not only document his or her investment expectations, but must also do an environmental impact analysis of various scenarios for development of the property, offer the property for sale to governmental entities and non-profit organizations at a price set by the DEP, and attempt to utilize the (non-existent) transfer of development rights program. The DEP may then grant a waiver for the minimum amount of development that it deems will avoid an inverse condemnation. In OFP, the Appellate Division recognized that this process could itself be so burdensome as to constitute a taking of the value of the property, but declined to reach that conclusion until the property owner had actually attempted to go through the process. The New Jersey Supreme Court has agreed to hear this case and may give further guidance as to whether DEP’s burdensome waiver process must be exhausted prior to filing an inverse condemnation proceeding.

Where Such Cases Are Filed

In its decision in San Remo Hotel. v. San Francisco, the United States Supreme Court held that there is no federal court option for inverse condemnation cases. The property owner must proceed first in state court and the only federal court option is appeal from the highest state appellate court to the United States Supreme Court itself. In New Jersey, inverse condemnation cases must be brought in a state trial court where there is a full evidentiary trial both on whether the State regulations (with any waivers granted by DEP) are an inverse condemnation, and how much the State must pay for the taken value of the land.

Persistence Required

Regrettably, land use regulation in New Jersey is often so restrictive that property owners have no choice but to allege that their properties have been “taken” through regulation, with inverse condemnation suits seeking just compensation being the only remedy available. Even if such suits do not result in the government’s payment of just compensation, they can sometimes result in the government’s relaxation of the land use restrictions so as to allow for reasonable development of the affected land. Carrying such proceedings through to ultimate success requires determination, persistence, and the most sophisticated legal advice and representation.

Stephen M. Eisdorfer is also a partner within the Land Use Division of Hill Wallack LLP. He concentrates his practice in land use litigation, including Mount Laurel litigation and litigation involving the civil rights statutes.