Eminent Domain and Just Compensation

It has always been an established historical rule that sovereign governments have the power and authority to appropriate land within their own borders for whatever use or uses that they see fit. This governmental power is known as the power of “eminent domain”. In the United States, this power of eminent domain is held by 51 different sovereigns: the federal government and each of the fifty states. The power of each of the states, of course, is effective only within its borders. The eminent domain power of the federal government is effective nationwide. For example:

The State of New Jersey wants to build an extension of the highway I-80 into the city of Hilltown. However, the most convenient way in which to build the extension takes it right through the property of Farmer Joe. Unfair though it may seem, and subject to the limitations discussed below, New Jersey can simply take the land from Joe and turn it into a highway that Joe will have no more right to use than any other person in the country. Of course, the reason behind this rule is that governments should be able to act for the public good even if that sacrifices the convenience of an individual.

Historically, sovereigns would exercise this power in whatever manner they saw fit. However, the Fifth Amendment to the United States Constitution places an important limitation on the power of eminent domain. The Fifth Amendment says, in part: “…nor shall private property be taken for public use, without just compensation.” This part of the Fifth Amendment is known as the “takings” clause. Although the Fifth Amendment technically only applies to the Federal Government, the Supreme Court has ruled that the takings clause applies fully to the states via incorporation to the states by the Fourteenth Amendment (this “incorporation” doctrine is a subject that is discussed in the Constitutional Law course). Therefore, all the states and federal government are bound by the rules discussed in the rest of this subchapter.

The “takings” clause includes (or, more correctly, has been interpreted to include) two elements, which are:

1. Any taking by a government must be for a “public use” to be valid; and
2. Any government that does take property, even for a public use, must fully compensate the owner of the property for the taking.

So, of course, when discussing the takings clause, two issues that must be discussed are:

1. What is considered a public use? and
2. What is considered fair compensation?

Before we discuss those questions, however, first we must discuss the more fundamental question of what constitutes a taking.

What Constitutes a Taking?

In most cases, the fact that a taking has occurred will be obvious. If the government physically appropriates part or all of a property for public use, that obviously constitutes a taking. When the government physically takes property, this is called a “condemnation.” For example:

John owns a house in Oklahoma City. One day, a City official knocks on John’s front door and announces that the City needs some extra room for electricity wires. Therefore, the City is going to condemn the 3 foot wide swath of John’s property adjacent to the sidewalk and run electricity wires along that area. Clearly, this is a taking. Therefore, the City will have to compensate John by paying him the reasonable value of the property that the City is taking.

Permanent physical occupation by the government of a given area within a property is also considered a taking even if the government does not dispossess the property owner of actual ownership of the property.

In the above example, suppose that instead of taking the 3 foot wide swath of property, the Oklahoma City government did not actually condemn any of John’s property. Instead, the official announced to John that the government will be running electricity wires through John’s property, whether John likes it or not. Even though the area still belongs to John, and even though the wires only take up a small amount of space, this is considered a taking. Therefore, the City would have to compensate John for the area that the wires take up. See Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982).

Government regulation of a property, through zoning laws or other administrative rules, on the other hand, is not generally considered to be taking property. However, if a government regulation leaves the owner with no economically viable use of his or her property, then it will be considered a taking. For example:

1. Lucas owns coastal property in South Carolina, on which he is planning to construct beachfront condominiums. He then plans to rent or sell them. However, the government of South Carolina passes a law that forbids the construction of habitable structures on coastal property for environmental reasons. In this case, the Supreme Court said that the law did amount to a taking because it caused the property to be valueless to Lucas. Lucas only bought the property for one economic purpose and now, that economic purpose has been eliminated. Therefore, it is a taking and South Carolina has to pay Lucas for the property. See Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992).
2. Steve owns a farm in Indiana that runs along Interstate-70. Steve puts up a huge billboard on his land that is clearly visible from the highway. He rents out the billboard to commercial advertisers and makes a lot of money doing so. However, Congress passes a law outlawing billboards that are visible from interstate highways. Even though this law deprives Steve of most of the economic use of that part of his property, the law will probably not be considered a taking. Steve can still use the property as farmland, just as he uses the rest of his farm for that purpose. The law does not deprive Steve of all economic use of the property. Therefore, it is not a taking.

What is considered a “public use”?

As we discussed earlier, a government taking must be for “public use” for it to be valid. That is, even if just compensation is paid to the owner, a taking is invalid if it is not for a public use. The public use requirement is not obvious from the language of the Fifth Amendment (“nor shall private property be taken for public use, without just compensation”). In fact, a strict reading of the Amendment might lead to the conclusion that the just compensation clause only applies to takings for public use, whereas other takings do not require any compensation. Nevertheless, the Amendment’s language has been interpreted to impose upon any governmental taking the condition that it must be for the public use to be valid.

The courts have interpreted the public use requirement very broadly. A government taking will be upheld as long as the taking is “rationally related” to any conceivable public purpose. This means that the “public use” requirement does not mean that the government must actually allow the public to use the property (it does not have to be for a park or a road etc.). Rather, the government can seize land and appropriate it for a private person or entity or even sell the property to a private person, so long as the purpose behind the seizure is public in nature.

Because of its history as a monarchy, at one point, the land in Hawaii was owned almost entirely by a small number of people. The Hawaiian government forced a sale of some of that land to other people. The Supreme Court allowed this, rationalizing that the elimination of the evil of having a few people own most of the land in the state was enough to justify the action as a “public purpose.” See Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984).

Courts have upheld almost anything that can be seen as benefiting the public as constituting a “public use.” Property takings that were for the purpose of alleviating unemployment, stimulating the local economy and preserving scenery were all considered to be for the public use. Even a taking that was designed to keep a professional football team from moving to another city was considered to be a public purpose. See City of Oakland v. Oakland Raiders, 32 Cal.3d 60 (Cal. 1982). Essentially, the “public use” limitation has been all but eliminated by the courts’ expansive interpretation of what constitutes a public use.

What constitutes “just compensation”?

Assuming that there is a taking and that the taking is for a public purpose, the only question that remains is how much the government has to pay the property owner to compensate for the taking. The general rule is that “just compensation” means that the government must pay fair market value for the property that was taken. Fair market value is not the same thing as the value that the owner places on the property or the amount that the property is actually worth to the owner. For example:

1. Bob’s ancestors have lived in his house for four generations and Bob considers his house to be priceless because of its sentimental value. On the open market, Bob’s house would command about $150,000. If the government condemns Bob’s house, they will only have to pay Bob $150,000, regardless of the fact that Bob would not agree to sell his house even for $1,500,000.
2. Jane’s house is worth $250,000 on the open market. However, Jane runs a business that produces revenue of $500,000 per year. For whatever reason, Jane cannot transfer her business to a different location. Nevertheless, if the government takes the house, its liability will be limited to $250,000.

However, the “market value” of the land can be influenced by the possibility of future uses for the land. If the land owner can show that his or her land has possible future uses that a buyer would pay more for, the owner can get greater than the apparent market value of the property from the government. For example:

Jerry owns a lot in Toledo that is worth about $100,000. The government condemns the lot. Jerry shows that because Toledo is the odds-on favorite to host the 2012 Olympics, property values in Toledo are about to skyrocket. Jerry also shows that, because of the proximity of his lot to the location of the future Olympic stadium, Jerry had buyers who were willing to pay him $500,000 for the lot. In this case, Jerry would probably be able to collect more that its “list price” of $100,000.