Just as the State is trying to address its tremendous budget deficit problems, just as municipalities are in throws of their own budget problems largely caused by Trenton’s shortfalls, now emerges another threat which, if not properly addressed, can prove to be very costly.  Regulatory takings.

            A regulatory taking occurs when a government over regulates a piece of real property so much that for all intents and purposes it no longer has any value to the owner.  The most classic kind of regulatory takings in contemporary society are those from the New Jersey Department of Environmental Protection (hereinafter referred to “DEP”).  Wetland laws, Pinelands law, Highlands’s law, have all been at the center of regulatory taking challenges.  People had property that was perfectly developable on one day, and the next day after these regulations become effective, the properties are near valueless.

            While both the US Supreme Court and the New Jersey Supreme Court have made it clear that governments must compensate property owners where regulatory takings have occurred, many cases that have been decided over the last decade at both the federal and state level have indicated a reluctance to expand the number of categories which are compensable.  Indeed, if any thing it is fair to say that government attorneys and regulatory agencies have become more familiar with these cases and have learned how to tailor their regulations and the application of their regulations to avoid regulatory takings to the maximum extent possible. 

            With that in mind, the New Jersey Supreme Court’s recent decision in Mansoldo vs. State of New Jersey, comes perhaps as a bit of a surprise.  That case, decided on June 5, 2006 makes it clear that regulatory taking law is alive and well in New Jersey and that all levels of government must be careful or they may wind up having to purchase parcels of property and that can be a costly proposition.

            The Mansoldo decision is not that much about new case law.  What is interesting in Mansoldo is the Supreme Court’s observation that both the trial level court and the intermediate appeals court got it wrong.   

            This acknowledgement that both levels of court acted incorrectly reflects just how complex an area of law regulatory takings can be.  The Mansoldo decision makes it clear that courts need to look at these issues in one particular way and in the future must they must be careful to follow the matrix set forth by the New Jersey Supreme Court. 

            The facts in Mansoldo are fairly simple.  Mr. Mansoldo purchased a piece of property in New Milford, New Jersey in the 1970’s.  The property is located near the Hackensack River. 

            Years after the purchase, the State of New Jersey, through its DEP adopted flood hazard regulations, which precluded development in flood restricted areas. Mr. Mansoldo’s property was determined, pursuant to the regulations, to be not buildable because it was in the Hackensack River floodway.  But for this determination, Mr. Mansoldo would have been able to construct two houses on the property.

            Mansoldo requested a hardship variance from the DEP which was denied.  Then Mansoldo sought a hearing to review the DEP’s refusal to issue a hardship waiver.  An Administrative Law Judge found that the DEP properly denied the hardship waiver.  Even though the court found that Mr. Mansoldo did not himself create the hardship, Mr. Mansoldo was unable to demonstrate that his situation was not unlike many other people who had property in a floodway and therefore the Administrative Law Judge concluded that it would be improper to grant a hardship waiver.  The DEP commissioner confirmed this decision. 

            After that affirmance, Mr. Mansoldo filed a lawsuit in the Superior Court claiming that his property was the subject of a regulatory taking.  The Deputy Attorney General who argued the case asserted that no taking had occurred because the floodway regulations were a legitimate exercise of the state police power to protect property and persons.  The trial court found that a taking had occurred.  However, instead of determining that the damages were the equivalent of what the value of the property would be with two houses, the trial court found that the damages would be the measure of the property as vacant parkland.  Even though the court acknowledged that the use was relatively valueless.

            Mansoldo then filed an appeal with the Appellate Division.  That Court effectively reached the same conclusion although its reasoning was slightly different.  On review, the New Jersey Supreme Court reversed and sent this case back to the trial court for reevaluation. 

            The Court made it clear that under regulatory takings case law, there is a two prong approach.  First, if the regulation has deprived the property owner of all use of its property, then under a case called Lucas vs. South Carolina Coastal Counsel, the court must pay just compensation unless the use in question would have been prohibited under principles of common law nuisance.

            In the alternative, where the regulation does not deny all economically beneficial use, then the regulation must be evaluated pursuant to another case called the Penn Central Transportation Company vs. New York City.  In that case, the Court held that in deciding whether a regulatory taking has taken place, a factual inquiry must be conducted evaluating several factors including the economic impact of the regulation on the claimant and in particular the extent to which the regulation has interfered with distinct investment backed expectations and the character of the governmental action.

            Thus, if the regulation affects a complete diminution of value, then the answer is simple:  It is generally a taking and generally compensation must be paid.  Where there is some value left, then a fact sensitive inquiry must be undertaken in the Penn Central decision.

            In this case, the Supreme Court found that both the trial court and the Appellate Division failed to properly apply these cases.  And the case was sent back to the trial court for proper evaluation.

            Why did this happen?  This probably happened because government lawyers over the past decade have done everything that they can to stretch the contours of these important decisions to the point where they have no longer become recognizable.  Sophisticated government attorneys have successfully convinced trial courts and intermediate courts of all  kinds of exceptions, variances, and variations of these well established cases should defeat property owners from the right to compensation.  And this has happened for such a long period of time that courts have simply become confused.  But now in the Mansoldo decision, it is clear that the Supreme Court is demanding a back to basics approach on regulatory takings.  And so the word is out.  State and local governments must be aware that if their regulations destroy all or much of the use of a piece of property enjoyed by a property owner, then the government will have to confront a regulatory takings challenge.  And while government attorneys may try to confuse and contort the applicable case law, there is now less of an opportunity for the government to avoid its financial responsibility.