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Second Avenue Subway and Judicial Takings

We read with interest the MTA’s press release that the construction of that part of the Second Avenue Subway, which ends at 63rd Street, is scheduled to be completed in 2016. Of course, that is only the latest in a series of pronouncements setting a timetable for completion, the earliest being for 2012, acknowledged in the press release itself. That is not good news for the retail tenants in that part of Second avenue affected by the ongoing construction, which has been described as a retail dead zone because of the subway construction. According to Crain’s New York Business of June 21-27, 2010 “since construction began three years ago, nearly 18 businesses have shuttered, ranging from wine shops and diners to drugstores and kitchenware shops.” We have been asked from time to time what remedies there are, if any. Our response has been that we believe, they should have redress but believe it may very well take the Court of Appeals to say so, as standing in the way is the Court of Appeals decision in Culver Contracting Corp. v. Humphrey, 268 N.Y.26 (1935).

This case, while not directly involving the issue, sets forth the then law as to such claims. As is set forth in the Appellate Division decision (241 App. Div. 825), a claim was made by abutting property owners for the damages caused by construction of a subway in the street on which they faced. The suit was for the damages caused by the construction “to property not acquired or extinguished in the proceeding.” The theory on which it was based was the impairment of access to the abutting owners. During the trial to fix damages, a suit was brought for a Writ of Prohibition by the subway contractor, which was contractually responsible to the City for such damages if the City was required to pay for them. We assume that part of the claim was the alleged negligence of the contractor. The Court held that the Condemnation Court did not have the jurisdiction to determine such a claim which would have denied the contractor a jury trial to which it was entitled and issued the writ. The Court did note that such a claim could be raised in an independent action. The property “extinguished,” as noted by the Court, appears to refer to the claim of a taking of the easement of access in the street by reason of the work being done to build the subway. However, it is in the statement by the Court of what constitutes such a claim which has relevance today.

That language has a direct impact on the present situation where the complaint is the construction taking place on Second Avenue has destroyed or seriously impaired the businesses of the retail tenants by impairing the access to these stores resulting in diminished business, vacancies and/or reduced rents.

While the Court acknowledged the continuing right to consequential damages to the remainder of property by reason of the use of the portion of the property acquired, it stated:

“Not all damages which flow from the use to which the condemned property is put can be recovered in condemnation proceedings. It is only for the taking by way of fee or easement that payment must be made in condemnation. If the property taken is to be used in such manner as permanently to interfere with or diminsh the value of the remaining property as in South Buffalo Ry., Co. v. Kirkover (126 N.Y. 301), where a steam railroad was to run over the strip taken, or in the elevated railroad cases in New York City (Story v. N.Y. El. R.R. Co., 90 N.Y. 122; Kane v. N.Y. El. R.R. Co., 125 N.Y. 164; Bohm v. Met. El. Ry. Co., 129 N.Y. 576; Amsterdam Bank Note Co. v. N.Y. El. R.R. Co., 129 N.Y. 252) where the easements of light air and access appurtenant to the abutting houses and property were cut off amounting to a deprivation of property within the meaning of the constituion, then the use to which the property taken is to be put must be considered in ascertaining the damages in the condemnation proceedings. (emphasis added)

The distinguishing word in this paragraph is the word “permanent.”

The Court then quoting from the Kirkover decision (90 N.Y. 122) noted that in the Story case that property fronting on a street had easements of light air and access in the street which were appurtenant to the land and were compensable property if taken or injured. The Court then went on to qualify that right to where it was “by reason of the permanent use to which the part taken was put.” Again, the key word here is “permanent.”

While the elevated railroads in the cited cases were for the “permanent” injury to the light air and access, one probably cannot say the same for the construction of a below ground level subway in the street. The impairment to the easement appurtenant of access is temporary, lasting only during construction. While the subway is now not scheduled for completion until 2016, it is not permanent as there is an end point, even if later than 2016.

That there is an interference with the easement of access during construction is evident. That it causes damage to the abutting properties to which that easement is appurtenant is at least claimed. While New York does not recognize loss of business as a claim in a condemnation proceeding, it does recognize loss of rental value by reason of a taking. Further, while temporary proper and necessary work in a street which interferes with access to abutting properties has been ruled to be damnum absque injuria, that is not true to a non proper street use (Story, supra). We assume that if an elevated railroad is not a proper street use it similarly applies to a subway. There are cases applying to at grade street railways where the Court did not grant damages, not because it constituted a proper street use, but because it did not interfere with the Claimant’s access to his property in a meaningful way (People v. Kerr, 27 N.Y. 188 (1863) Kellinger v. Forty-Second St. etc., R.R. Co., 50 N.Y. 206 (1872).

But if you read carefully the language of Culver Contracting, it several times qualified the nature of the interference with access which was compensable in that it had to be “permanent”. On that basis, we assume the Courts would deny compensation if the taking was not at least a permanent taking and would not recognize a ten year construction period in the street as worthy of compensation. At least that has been the assumption ever since that case.

However, we have had a sea change in taking cases since Culver Contracting by reason of cases such as First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, 482 U.S. 304 (1987) as regards the necessity for a “permanent” taking to secure compensation. That was a case sounding in inverse condemnation. The Supreme Court reversed the California courts’ holding that the only remedy in an inverse condemnation claim was the setting aside of the offending regulation and not the awarding of damages. The same rule had been applied in New York in Fred F. French Investing Co., 39 N.Y. 2d 587 (1976). In New York, both Culver Contracting and Fred F. French appear to rest upon the “permanent taking” concept. The Supreme Court in first English held (482 U.S. at 305) that “where the government has ‘taken’ property by a land-use regulation, the landowner may recover damages for the time before it is finally determined that the regulation constitutes a “taking” of his property.” The Court went on the say;” ‘temporary’ regulatory takings which, as here, deny a landowner all use of his property are not different in kind from permanent takings for which the Constitution clearly requires compensation.”

New York has accepted this concept as is evident by Seawall Associates v. City of New York, 74 N.Y. 2d 92 (1989) and ANBE Realty Co., et al. v. City of New York, 223 A.D.2d 416, 636 N.Y.S. 2d 767 (1st Dept., 1996); Similarly, Manocherian v. Lenox Hill Hospital, 84 N.Y. 2d 385 (1994) found a state statute ( Ch. 940 of Laws of 1984) unconstitutional as a regulatory taking citing, Seawall. As the Court specifically held, there are no different taking tests “dependent on whether the takings were purely regulatory or physical.” As such, it sent the case back “to resolve rights and remedies.” This was accomplished by a suit in the Court of Claims, in which damages were fixed (See 520 East 81st Street Associates v. State of New York, 19 A.D. 3d 24, 799 N.Y.S. 2d (1st Dept., 2005). Seawall, in footnote 5, recognized the change in the law when it stated: “(2) even if the local law be viewed as a temporary provision, it results in a deprivation of the owners quintessential rights to possess and exclude and, therefore, amounts to a physical taking. Under First Lutheran Church v. Los Angeles County (482 U.S. 304) where, as here, the governmental action resulted in a per se taking, the offending action constitutes a taking for whatever time period is in effect.” In Anbe, supra, damages for the temporary period were granted.

Thus, it appears that the retail tenants, if not the property owners who house them, may wish to explore whether Culver Contracting Corp. v. Humphrey represents the state of the law today and whether that case is ripe for review as applies to what is going on in Second Avenue.

Judicial Taking

In our August 25, 2009 column, we discussed a case then being briefed in the U.S. Supreme Court which posed the question of whether there could be such a thing as a “judicial taking.” As we discussed above, the Courts have long recognized “regulatory takings,” that is takings occasioned from the use of the police power by the other two branches of government other than the judiciary. The contention in Stop the Beach Renourishment Inc. v. Florida DEP, decided June 17, 2010 was that in finding facially constitutional a Florida act, Florida’s highest Court overturned long established real property law and by so doing took the petitioner’s real property without compensation. We noted in that column that as a result of the case, we would find out if there was such a thing as a judicial taking. We were wrong.

All of the Justices found there was no factual predicate for the contention in that the Florida Supreme Court correctly found the statute was constitutional. Only eight justices sat on this case, Justice Stevens having recused himself. Four of the justices, led by Justice Kennedy, found there was no reason to decide the issue of whether there could be a judicial taking under the circumstances. In an opinion by Justice Scalia, joined by Justice Roberts, Thomas and Alito, it was strenuously argued that not only was the issue necessarily to be resolved in order to reach the question of the constitutionality of the statute, but that there could indeed be a “judicial taking” for the same reasons there could be a regulatory taking. The test the decision would apply is “that there is no fair and substantial basis” for the ruling complained of and “a property right is not established if there is doubt about its existence.” As the decision states, “if a legislature or a Court declares that what was once an established right of private property no longer exists, it has taken that property no less than if the State had physically appropriated it or destroyed its value by regulation.” (emphasis in original)

While this decision is not a majority decision, five of the Justices having not considered the issue, we are certain the next case on this issue will probably follow in due course. It appears apparent to us that this case was taken for review to establish this principle and particularly so in view of the intensity of Judge Scalia’s opinion. And, if so, one has to think through the implication of the observation in Matter of New York City Housing Authority v. Muller, 270 N.Y. 333, although written in another context:

“They have found here, as elsewhere, that to formulate anything ultimate, even though it were possible, would in an inevitably changing world be unwise, if not futile, lacking a controlling precedent we deal with the question as it presents itself on the facts at the present point of time. The law of each age is ultimately what that age thinks should be the law.”

Reprinted with permission from the July 8, 2010 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

United States v. Miller – The Most Misunderstood Condemnation Case

United States v Miller, 317 U.S. 369 (1943) is the most misunderstood condemnation case ever decided. The facts of the case were fairly simple; the United States condemned a strip across property owners’ land for tracks of a railroad that had to be relocated because of prospective flooding of the old right-of-way. The project had been recommended in 1934 with funding authorized in 1937. The property owners had purchased and subdivided the property in question in 1936 and 1937. After the condemnation in 1938, claimants sought direct and severance damage. The court held that:

If a distinct tract is condemned, in whole or in part, other lands in the neighborhood may increase in market value due to the proximity of the public improvement erected on the land taken. Should the government at a later date, determine to take these other lands, it must pay their market value as enhanced by this factor of proximity. … The question then is whether the respondent’s lands were probably within the scope of the project from the time the government was committed to it. If they were not, but merely adjacent lands, the subsequent enlargement of the project to include them ought not to deprive the respondents of the value added in the meantime by the proximity of the improvement. If, on the other hand, they were, the government ought not to pay any increase in value arising from the known fact that the lands probably would be condemned.

The Supreme Court subsequently affirmed the scope of the project rule in U.S. v Reynolds:

[T]he development of a public project may also lead to enhancement in the market value of neighboring land that is not covered by the project itself. If that land is later condemned, whether for an extension of the existing project, or for some other public purpose, the general rule of just compensation requires that such enhancement in value be wholly taken into account, since fair market value is generally to be determined with due consideration of all available economic uses of the property at the time of the taking.1

1. 397 U.S. 14, 16-17, 90 S. Ct. 803, 805, 25 L.Ed.2d 12 (1970).

Basically, the Miller Rule holds that when determining the value of the property taken, a condemnee may not receive an enhanced value for its property where the enhancement is solely due to the property’s inclusion within the very public improvement for which it was condemned, i.e., the value cannot be predicated upon a use made only possibly by use of the power of eminent domain. As stated in U.S. v Sage, 239 US 57, “the City is not to be made to pay for any part of what it added to the land by this uniting it with other lots if that union would not have been practicable or have been attempted, except by the intervention of eminent domain.” As is stated in Nichols on Eminent Domain (3d ed), Sec 12B-17(1) at page 202: “The general rule is that any enhancement in value that is brought about in anticipation of and by reason of a proposed public improvement, is to be excluded in determining the market value of the land.” (emphasis added).

But the rule is often misinterpreted. Two examples present themselves. In a recent condemnation in Yonkers, New York, the condemnor Yonkers Industrial Development Agency found fault with the condemnee ConEdison’s appraisal. Because of the unusual configuration of the strip of land taken which was used for a road, condemnee’s appraiser concluded to a highest and best of “road access and utility purposes,” the purpose for which the taking occurred. Condemnor’s counsel argued:

ConEd’s valuing of the property “after the taking” as its highest and best purpose being for “road access” unambiguously violates New York State law. The ConEd Appraisal wrongfully considers the value of the taken property as “road access” to the Ridge Hill Project in disregard for established New York State precedent that does not permit valuation to consider the increased value of the property after the taking by reason of the project for which the condemnation occurs. This fundamental New York State law is known as the “Scope of the Project Rule.” Confirming this fundamentally flawed Con Ed analysis in valuing the property as “road access,” is when the ConEd appraisal states the “highest and best use” is being considered only as “road access.”

But this was not the case. First, as will be explained more fully in the next paragraph, having a highest and best use which is the same as the purpose of the taking does not violate the Miller Rule. Specifically, in the Yonkers case, the condemnor could not point to evidence that the valuation presented by claimant’s appraiser had anything to do with the scope of the project. When the appraiser for condemnor was asked if the claimant’s comparables were close to the project, he agreed they were not. More importantly, he agreed that the project had no influence on the consideration in claimant’s sales. The condemnor’s appraiser, when asked how one would develop a long strip of land that was only sixty feet wide, could not conclude to any other development other than a roadway which was the highest and best use found by claimant’s appraiser.

The leading case on the subject is Monogahela Navigation Co v United States, 148 U.S. 312 (1893), although the case is most often cited for its ruling that “the Constitution has declared that just compensation shall be paid, and the ascertainment of that is a judicial inquiry, not a legislative question. But the Monogahela Navigation also stands for the proposition that there is every right to use the government’s purpose for the condemnation as the owner’s highest and best use of the property taken. In Monogahela Navigationthat purpose was for a lock and dam. There are other examples, Matter of City of New York (New General Hospital), 280 App Div 196 (1st Dept 1952) affd 305 NY 835, 114 N.E.2d 38 involved the taking of a dwelling for a hospital. The dwelling was to be used as a residence for one of the medical superintendents. The court held that if the special adaptability of the land would increase its value in the open market, apart from the needs of the particular taker, the owner may be entitled to such increase as part of its market value. Another example is Matter of Town of Esopus (Gordon), 162 AD2d 829 (3rd Dept 1990) lv den 77 NY2d 801, where the court found the highest and best use was as a landfill, the purpose for which it was condemned. The land had been leased to the Town before the condemnation and used by the Town as a landfill in general. See in general, 51 NY Jur Sec 194.

The misconception of the Miller Rule finds its application improperly attempted in other condemnation cases. Frequently, Miller is incorrectly applied to highest and best use analysis which involved zoning change propositions. It is a given that in condemnation the subject property must be valued on its highest and best use regardless of its actual use. St. Agnes Cemetery v State of New York, 3 NY2d 37, 41 (1957). “Even though the owner may not have been utilizing the property to its fullest potential when it was taken.”Matter of Town of Islip (Mascioli), 49 NY2d 354, 360. This includes the ability to a claimant to establish a reasonable probability of rezoning. Masten v State of New York, 11 AD2d 370 (3rd Dept 1960) affd 9 NY2d 796 (1961).

Condemnors also incorrectly oppose rezoning valuation contending it must only be based on current or past zoning since often zoning is changed for the project. There is no reason why a condemnee could not establish that the rezoning could reasonably be established had there been no condemnation. This ability to establish a reasonable probability of rezoning is not lost merely because the property is rezoned for the project. Further, even though the property is rezoned as part of the project, its genesis may have begun long before the project as part of community planning.

It is axiomatic that in order for the Miller Rule to apply, the enhancement or diminishment in property value complained of must be “attributable to the project itself.” U.S. v Reynolds, 397 U.S. 14, 16-17 (1970); Matlow Corp v State of New York, 36 A.D.461, 463 (4th Dept 1971). Accordingly, if the rezoning would have occurred regardless of whether or not the Project proceeded forward, the resulting enhancement in value cannot be excluded in condemnation.

Examples of the Miller Rule or scope of the project rule application are found in New York case law. In Latham Holding Co v State of New York, 16 NY2d 41 (1965), New York’s highest court held that real property appropriated could not be valued on sales which occurred after the appropriation when they were adjoining the new project. Latham is better known as the case which precludes the averaging of comparable sales.

In Andrews v State of New York, 19 Misc2d 217, affd 11 AD2d 599, affd 9NY2d 606, 608 (1961). The Court of Claims would not allow the application of the Miller Rule holding that since the project before the court was subsequently enlarged, the rule required payment of the market price as enhanced by the factor of proximity to the public improvement.

A more recent case involving the rule is 815 Associates, Inc v State of New York, 271 AD2d 398 (2d Dept 2000). Here the Appellate Division increased an award that was limited by the trial court based on the court’s application of the Miller Rule. The Court stated, “even if the appropriation of the claimant’s property had been contemplated in 1962, the lapse of thirty-one years before the actual appropriation in 1993 warrants payment by the State of the enhanced value of the land by virtue of its proximity to the highway. (See, United States v 320 Acres of Lands, 605 F2d 762). In the absence of any evidence to support the application of the ‘scope of the project’ rule, or the State’s theory, the claimant is entitled to compensation for the enhancement in value which resulted from the 1962 appropriation….”

The Miller Rule does not allow simplistic application. Rather, it is factually driven.

Reprinted with permission from the April 29, 2010 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Atlantic Yards Case: Blueprint for Delaying Condemnation

Justice Abraham Gerges on March 2, 2010 signed an order of condemnation in Matter of New York State Urban Development Corp. 32741/09 and directed its filing in the county clerk’s office together with the taking map accompanied by an 82 page decision. It dealt not only with a motion made by potential condemnees to dismiss the petition on a variety of grounds, but 14 affirmative defenses and three counter-claims seeking substantially the same relief as in the motion. (We represent various claimants in the condemnation proceeding as to their ‘just compensation.’)

The ruling ended the latest legal hurdle for developer Bruce Ratner’s Atlantic Yards project in Brooklyn by dismissing renewed claims by opponents that the $5 billion plan violates the state’s eminent domain law.

As the decision states, the Atlantic Yards project was conceived in 2002 and was publicly announced in December 2003. It has taken over six years since its announcement to actually start a condemnation proceeding. Since a variety of challenges by different parties took place over this extended period of time, it is only when they were recited in the decision of Justice Gerges that one could appreciate the tenacity of the opponents to the project, as well as those who defended against them.

Even though one would expect that, with title now having passed to New York State Urban Development Corporation d/b/a Empire State Development Corporation (UDC), this is the end of the line for the opposition, one should not be surprised, solely based upon the history of this project, if we find there are further legal challenges, although what they might be is beyond our ability to imagine.

A review of the issues raised and dealt with in this decision is a road map for others seeking to, at a minimum, delay a condemnation proceeding, assuming they have deep enough pockets to pay for the numerous challenges. Using the court’s decision as a guide, we set them forth, because listed together it is impossible to appreciate what has gone on since 2003.

On Jan. 5, 2007 a challenge was launched to the 2006 determination and findings made pursuant to EDPL §207 in U.S. District Court decided against the challengers, without prejudice to a state court challenge.

The decision was appealed and, on Feb. 1, 2008, the Second Circuit Court of Appeals affirmed the lower court decision.

The U.S. Supreme Court denied certiorari in 2009. On Aug. 1, 2008 there was a challenge in the Appellate Division to those same determination and findings on various grounds including an allegation of no ‘public use.’

On May 1, 2009, the Second Department denied the challenge and on Nov. 24, 2009, the Court of Appeals affirmed the Appellate Division decision.

On Feb. 18, 2010, the Court denied a motion to reargue.

Meanwhile, an Article 78 proceeding was decided on Feb. 13, 2006, involving a number of issues, including an attempt to stay demolition of a property previously bought without condemnation.

On April 26, 2007 another Article 78 proceeding was decided denying a stay of the demolition of other properties.

On Jan. 11, 2008, the Supreme Court denied a challenge to the project pursuant to State Environmental Quality Review Act.

On Feb. 26, 2009 that decision was affirmed by the Appellate Division. On Dec. 1, 2009, the Court of Appeals denied a motion for leave to appeal. On Feb. 16, 2010, the Court denied a motion to re-argue.

On May 22, 2007, Justice Walter Tolub, in a declaratory judgment action in the Supreme Court, decided against a challenge of the right to condemn multiple dwellings with rent stabilized tenants.

On Oct. 16, 2007 that decision was affirmed by the Second Department.

On Nov. 7, 2007, the Second Department denied an EDPL §207 challenge based on a failure to make a specific finding that there existed a feasible method for relocation of tenants in violation of the UDC Act. Leave to appeal that decision was denied by the Court of Appeals in 2008.

On Sept. 23, 2008, there was another unsuccessful Article 78 proceeding by two rent regulated tenants seeking to void a funding agreement with the developer, dated Sept. 12, 2007, on the ground it permitted the acquired property to remain vacant for 10 years, among others issues.

On Dec. 15, 2009, an Article 78 proceeding unsuccessfully sought to challenge the approval of the sale of the rail yards in the project area by MTA to the developer on the ground it violated the Public Authorities Law in failing to get an appraisal of the property before the approval and there being no competitive bidding.

All of these preceded the challenge to the petition to condemn and were recited by Justice Gerges in his decision, albeit in greater detail. Believe it or not there is still one unresolved issue and that is only because it became moot before it was decided and thus that part of the decision is dicta.

One of the affirmative defenses to the court signing the order of condemnation was that the proceeding challenging the right to condemn had not been finally decided. EDPL §401(A)(3) provides the condemnor may commence proceedings to condemn up to three years after, ‘(3) entry of the final order or judgment on judicial review pursuant to section two hundred seven of this chapter.’ At the time of the petition to condemn, there was pending a motion to reargue in the Court of Appeals in the EDPL §207 challenge. The claim was that while that was undecided, the ‘judicial review’was not final.

In re UDC, 193 Misc.2d 280, 295 (NY Supt. Ct. 2002, Schoenfeld, J.) held that pursuant to CPLR §5611 when the Appellate Division order disposes all the issues in the action its order shall be considered a final one. The occasion for that decision was an application to stay the vesting of title in Site 8 of the 42nd Street condemnation proceeding because a notice of appeal to the Court of Appeals had been filed. Prior to the motion, a stay had been sought in the Court of Appeals and denied without an opinion. Despite the pendency of that appeal, Justice Martin Schoenfeld signed an order of condemnation and title vested in the condemnor (the same UDC, as here). The court noted that there appeared to be no dispositive case law as to EDPL §207 on the subject.

The appeal to the Court of Appeals in that case never get to first base. The New York Times building now sits on that site. Thus, we never got to find out how you unwind a vesting of title in a condemnation proceeding. Even though the almost certainty was that the appeal would go nowhere it would be an interesting scenario if it did not work out that way. How would you restore an owner to a demolished building?

Justice Gerges was faced with a similar scenario, with even longer odds that the Court of Appeals would even hear the case. At the time of the petition to condemn, the Court of Appeals had already ruled against the challenge.

However, there was extant a motion to reargue in the Court of Appeals and sometimes the unthinkable does happen. Judge Gerges after reciting Judge Schoenfeld’s decision and quoting parts of it, stated:

The Court finds the holding in In re UDC (193 Misc.29 290), that a decision of the Appellate Division denying respondent’s EDPL §207challenge to a petitioner’s proposed taking can be characterized as a ‘final order, or judgment on judicial review’ for purposes of EDPL §401 to be persuasive. The court, however, respectfully disagrees and adopts petitioner’s contention that the three-year period provided by EDPL §401(A) in which to commence a vesting proceeding begins to run from the date that the Court of Appeals hands down its decision under circumstances such as these where the decision rendered by the Appellate Division was promptly appealed. This holding is necessary to avoid the possibility of the Court of Appeals invalidating a decision to take property in a condemnee’s EDPL §207 challenge after title has already vested in the condemnor.

We find this language confusing, when the court found Justice Schoenfeld’s reasoning ‘persuasive.’ Because of the last sentence, we take it to mean title could not vest until the decision on the motion to reargue, despite Justice Schoenfeld’s reasoning being ‘persuasive.’ However, we will not get to know if that is the correct interpretation as, prior to this decision, the Court of Appeals denied the application to reargue and this part of the decision became moot and is only dicta.

When EDPL was adopted and a substantive challenges to the taking was limited to a 30 day window of opportunity, the whole idea was to create a certainty to the process so that a condemnor would know that having gotten past that 30-day challenge period there would be no uncertainties or delays. This case shows what really determined objectors can do to delay a condemnation, if we had not already seen it in the first taking in the 42nd Street project which suffered a similar delay.

Reprinted with permission from the March 24, 2010 edition of the New York Law Journal © 2011 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Summary Judgment in Tax Cases; Reverse-Inverse Condemnation in New Jersey

Summary judgment is, we all know, a drastic remedy which should only be granted if it is clear that no material issues of fact have been presented. Issue finding, rather than issue determination, is the court’s function. The application will be denied if there is any doubt about the existence of a triable issue of fact or if a material issue of fact is arguable. It is rare to see summary judgment in a real estate valuation case. Yet, in Matter of Barnett v Assessor, Town of Carmel (Index No. 1612/2006), NYLJ, Jan. 27, 2010, P. 30, Col. 3, the Honorable John R. LaCava granted a petitioner in a tax assessment case summary judgment where the taxpayer alleged that the Town selectively reassessed the residential property in question from $150,000 to $240,000.

Selective Reassessment

Judge LaCava noted that where a petitioner alleges a change in assessment in a tax year in which there is no municipal-wide reassessment the assessor is required to provide an explanation of both the change in assessment on petitioner’s parcel and his assessment methodology in general. He noted that “this court has also frequently examined municipal re-evaluations and found that the assessor’s explanations of the changes were either lacking, or non-existent.” The court found that the Town failed to raise material issues of fact with respect to the change made to assessment or a description of its own general assessment methodology. What was provided by the assessor was nothing but varying explanations of who observed the improvements to the property without support from the property card or any other documents, or the assessor’s own first hand knowledge.

Recent Purchase Price as Evidence of Value

In another example of awarding summary judgment, in an Article 7 Real Property Tax Law case, the same court awarded judgment to a property owner of an industrial warehouse building. The premise for the application was a recent arm’s length purchase for $3,500,000 which was taxed when the equalization rate was applied as if it had a $13,000,000 market value. The court stated, “here, the petitioners allege that the 2007 and 2008 assessments simply, and significantly, exceed the fair market value of the subject premises, when calculated by application of the 2007 and 2008 equalization rates to the sale price of the property in 2006. It has indeed consistently been held that a petitioner may establish its entitlement to summary judgment by showing that the recent sale price of the property was the best evidence of the value of the property.” (See JB Park Place Realty, LLC v Village of Bronxville, 50 AD3d 689 (2d Dept 2008). This court has held similarly – – “Amongst the recognized valuation methods “[t]he best evidence of value, of course, is a recent sale of the subject property between a seller under no compulsion to sell and a buyer under no compulsion to buy.” JB Park Place Realty, LLC v Assessor of Village of Bronxville, 13 Misc3d 1233(A) (Supreme Court, Westchester County, 2006, citing Matter of FMC Corporation v Unmack, 92 NY2d 179, 189 (1998); see also Matter of 325 Highland, LLC v Assessor of the City of Mount Vernon, 5 Misc3d 1018 (Supreme Court, Westchester County, 2004).”

It was not helpful to the assessing agency that the sole rejoiner to issue of probative value of the sale was to offer nothing on personal knowledge and only the sheerest speculation that the sale price was motivated by factors such that it represents a distress sale.

The court concluded,

The Court thus finds, regarding petitioners’ motion, that, at the outset, petitioners have met the initial burden, by demonstrating entitlement to judgment as a matter of law, based on the arm’s length nature of the sale, the recent nature of the sale, and the price at which the property was sold. When viewing respondents’ properly submitted proof in a light most favorable to them, and upon bestowing the benefit of every reasonable inference to them (Boyce v Vasquez, 249 AD2d 724, 726 (3d Dept 1998), based on the abject failure of respondent to impugn the arm’s length nature of the transaction, material issues of fact do not exist as to the property assessed value of the subject premises in the tax years at issue. Matter of Application of TBS Realty Management, LLC v Village of Hillburn (Index No. 3034/07), Rockland County, December 22, 2009, J. LaCava.

The Rule is the Same in Condemnation

The same rule applies in a condemnation case. The fundamental proposition is that an actual sale of the subject property at arm’s length is the very best of evidence, because directly reflective of market value, if recent in time, and not explained away as abnormal in any fashion. Plaza Hotel Associates v Wellington Associates, Inc., 37 NY2d 273 (1975). Other courts have stated that such evidence is not conclusive and does not provide an absolute standard of value, but becomes only one of the factors to be considered. J.C.W. Realty Corp v State of New York, 44 AD2d 618, (3rd Dept 1974). The party also may “explain” away the recent purchase price.

New Jersey’s Reverse-Inverse Condemnation Case

The New Jersey Supreme Court has before it a most unusual case, Klumpp v Borough of Avalon (Docket No. 64, 722). It appears that the Klumpps lost their home in a 1962 storm which caused substantial damage along the New Jersey shoreline. In the aftermath of the storm, the Borough passed a series of resolution purportedly authorizing the construction and maintenance of sand dunes along the shoreline. The Borough removed debris and constructed sand dunes on the property. In 2003, the Klumpps applied for a permit to build a house. The permit was rejected because they could not demonstrate that they had access to their property. It seems the Borough had closed the only street servicing the property. The property owners petitioned the Borough to reopen the road, then filed suit alleging their right of private access to their property.

The Borough defended, alleging “title by operation of law” and under the common law doctrine of adverse possession. The trial court found that the Borough “stole” the property. Even though it found that there was a continuing trespass, it applied a six year statute of limitations and dismissed the claim. On appeal, the Appellate Court found that the Klumpps were entitled to prosecute a claim for access to their property, but that it was an open question as to whether the Borough could allow access in light of its regulatory scheme and obligations with regard to the dunes it constructed.

On remand, the trial court determined that the Borough could not allow access to the property. The court also remarkably determined that Avalon had taken the property through “inverse condemnation” in 1962. As a result, the lack of access had no prejudicial effect.

Inverse Condemnation

We have written on this subject before on September 24, 1992, we wrote a column devoted to Lucas v South Carolina Coastal Council. Another column followed at N.Y.L.J. P. 3, Col. 3, on December 23, 1993. As we stated there, in substantive due process inverse condemnation analysis, two distinct tests have evolved; one applicable to physical takings and the other to regulatory types. “A ‘taking’ may not readily be found when the interference with property can be characterized as a physical invasion by government, than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.” (Penn Cent Trans Co v New York City, 438 US 104, 124 98 S Ct 2646, 2659, 57 Led2d 631, supra (citation omitted). Physical invasion cases are special because of the nature and quality of the governmental intrusion on a private party’s property rights. A simple bright line rule applies: “any permanent physical occupation is a taking.” (Loretto v Teleprompter Manhattan CATV Corp, 458 US 419, 432, 102 S Ct 3164, 3174, 73 LE2d 868, supra (emphasis added). [W]hen the “character of the governmental action” is a permanent physical occupation of property, (the Supreme Court’s) cases uniformly have found a taking to the extent of the occupation, without regard to whether the action achieves an important public benefit or has only minimal economic impact on the owner.”

Element of Trespass

In truth, inverse condemnation has all of the elements of trespass. It is believed by some that the concept was invented for the purpose of relieving municipalities of the requirement of paying treble damages. In Clempner v Town of Southold, 154 AD2d 421, 546 NYS2d 101, (1989) holding that there was no inverse condemnation (or any other cause of action), the Appellate Division, Second Department, said.

Inverse condemnation, or de facto appropriation, is based on a showing that “the government has intruded onto the citizen’s property rights to such a degree that the conduct amounts to a constitutional taking requiring the government to purchase the property from the owner.” Village of Tarrytown v Woodland Lake Estate, 97 SD2d 338, 343, 468 NYS2d 513, quoting from O’Brian v City of Syracuse, 54 NY2d 353, 357, 445 NYS2d 687, 429 NE2d 1158; See, Borntrager v County of Delaware, 76 AD2d 969, 970, 428 NYS2d 766). “Inverse condemnation, rather than trespass, is the appropriate theory for granting damages to an injured landowner where the trespasser is cloaked with the power of eminent domain.” (Tuffley v City of Syracuse, 82 AD2d 110, 116, 442 NYS2d 326). A cause of action sounding in inverse condemnation is not found in tort, and, therefore, compliance with the notice of claim provisions of General Municipal Law §50-e is unnecessary.

As we see it, the error of the New Jersey courts was applying a taking rule in the Klumpps case. Government cannot take property through inverse condemnation. Rather, it is a cause of action where the property owner is seeking compensation for a de facto taking of the property. It is an assertion that the challenged governmental action is actually an exercise of eminent domain for which the governmental entity has failed to commence de jure condemnation procedures. Thus, conceptually, an inverse condemnation is clearly not one and the same as a taking. In this case, the courts have allowed the offensive use of inverse condemnation to divest property owners of their rights. Furthermore, an inverse condemnation cannot occur without an affirmative act on the part of the property owner. This did not happen, or ripen until the Klumpps were denied the right to build on their property. See Palazzolo v Rhode Island, 533 US 606, 620 (2001) holding that a regulatory taking claim is ripe only when it becomes clear to what extent a property may be used.1

1 The amicus brief of the Pacific Legal Foundation written by David G. Evans, presents an excellent discussion of the facts and law.

Reprinted with permission from the October 27, 2009 edition of the New York Law Journal © 2009 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Proposed Condominium Condemnation

The chickens are coming home to roost. We had previously written in our Law Journal column about what we believed to be an unfortunate result coming from the interpretation of a condominium’s by-laws in the partial taking of a gated community on Long Island, (“Just and Not So Just Compensation”, NYLJ 2/3/05) preceded by another column by us on the problems inherent in valuing condominiums and cooperative housing units in condemnation proceedings (“Valuation of Condominiums and Cooperatives”, NYLJ 4/28/04). The problem was not with the Court’s decision, but with the condemnation clause in the by-laws which led to the decision. We predicted more problems yet to come. The chickens that are coming home to roost are in the condemnation clauses in by-laws in condominiums affected by partial takings of both common elements and individual units for the new Second Avenue Subway.

In the February, 2005 article, we wrote about the case of Murphy v. State of NY, 14 AD3d 127, 787 NYS2d 120 (2d Dep’t., 2004) where the condemnation clause in the by-laws reads as follows: “In the event all or part of the common elements are taken in condemnation or eminent domain proceedings, the award from such proceedings shall be paid to the insurance trustee if the award is more than $40,000 and to the Board of Managers if the award is $40,000 or less to be distributed in accordance with Section 3 of Article VII (governing reconstruction after a casualty) but in the following amounts: (a) so much if the award as is applicable to unrestricted common elements to the home owners pro rata according to the respective common interest appurtenant to the homes owned by such home owners; (b) so much of the award as is applicable to irrevocably restricted common elements to the home owners having general use of such common element . In such eminent domain or condemnation proceeding, the Board shall request that the award shall set forth the amount allocated to unrestricted common element and to each irrevocably restricted common element…”.

In that case, the taking was of part of the unrestricted common elements which caused consequential damages to four individual units in significant amounts. The balance of the units were not similarly affected. The Appellate Division, based upon the above language, held the four unit owners had no right to make an individual claim and the claim for damages had to be made by and paid to the Board of Managers, even though those same by-laws did not provide for paying those special damages to those few owners who actually suffered the damage.

The language in those by-laws was not an aberration. In fact, most by-laws we have seen were similar. In another set of by-laws for a condominium apartment house we have seen, the language reads as follows: “In the event of a taking in condemnation or by eminent domain of part or all of the common elements, the award made for such taking shall be payable to the Board of Managers if such award amounts to $1,000,000 or less, and to the insurance trustee if such award amounts to more than $1,000,000.” It is included as a separate paragraph in a clause dealing with casualties.

In the same by-laws, it also provides that the exterior walls and slabs in the ceilings and floors as well as other parts are common elements, some general and some restricted (restricted common elements were not defined). Thus, in the event of a taking, in whole or in part, we are left to define the intent (if there was even any thought given to have an intent) of the parties to such clauses. At least as to the unit itself we know who the owner is and its right to be paid for the unit, at least if and until someone takes the position that all claims are those of the Association. Nichols on Eminent Domain (3d ed) makes reference to such a position by some, as difficult as it is to justify same.

We have seen an even worse clause. It states, in essence, that in the event of any condemnation, whether of a unit or a common element, the award is to be paid to the Board of Managers with no direction to the Board of Managers to pay it to the party who owned the unit. In that particular case, while the taking is planned to be mostly of common elements, there is a planned taking of a part of a commercial unit. We wondered when we read that clause if anyone ever took the time to read the clause when they bought their unit. We know the owner of that commercial unit was not aware of the language, until we pointed it out. Was it possible that the drafter of that instrument, much less the Attorney General’s Office which reviewed it, intended that if a part of the building was condemned, the owners of the units taken were to forfeit the value of those units to be shared with the owners of all of the other units? That is what it literally provides.

Let us tell you now the problems that we see unresolved by these condemnation clauses, particularly as most of the proposed takings are of the common elements and all or parts of commercial units. Where individual units are involved, there is also involved takings of “common elements” within those units such as outside walls and interior structural elements of the building such as columns, beams in floors and ceilings. One can anticipate conflicting claims by reason thereof. Then there will be takings by the MTA of common elements and the building of ancillary facilities, such as exhaust towers, or any other use within them and adjacent to particular units which may have an impact in their values. That is not to mention the taking of all or part of particular units where it is provided the award for same is payable to the Board of Managers.

So why do we bother? Because the problems show up in the condemnation proceedings when the language of the condemnation clauses must be applied. How does one explain to a court that the language used does not mean what it appears to so clearly say? How does one explain to an owner that the damages to his unit are being paid to the Board of Managers or Condominium Association to be shared with all of the other unit owners?

We are not skilled draftsmen of legal documents but we decided to give a try to writing a condemnation clause for condominium by-laws in the hope it would come to the attention of those who draft such documents. We believe that with the change of a few words, it probably could be made applicable to a cooperative building. While the cooperative owner holds a leasehold, plus a stock interest in the cooperative corporation rather than a fee estate in his unit, it is, for practical purposes, a distinction without a real difference. The cooperative owner is just as much a fee owner as is the condominium owner; the units are marketed, bought and sold as if they were. He pays no rent for his leasehold other than common charges and the term of his lease is so long as it amounts to a fee. It is inextricably tied to his ownership of the stock in the cooperative corporation. As we had occasion to previously write, a cooperative defies traditional descriptions of real property. It is treated differently for different purposes. One of our partners just bought a cooperative apartment. Examination of the proprietary lease indicated it had no condemnation clause and it has a very long expiration. That lease is being rewritten, to correct that deficiency, as are the other leases. He, in effect, bought a fee, as far as he and the other stock owners in the cooperative corporation believe.

The following is our perception of what the condemnation clause in condominium by-laws should read (with apologies to more adept draftsmen).

“Should all or part of one or more condominium units be taken or damaged by right of eminent domain and/or a regulatory taking, any award or damages paid for same shall be paid directly to each unit owner, each of whom shall have the right to make a separate claim for same. The award shall include the taking of the unit’s restricted common elements, whether within the limits of the unit or outside of same, as well as all of the common elements included within the limits of the unit (walls, floors, ceiling, utilities) and the Condominium Association waives any claim against the award to the unit owner for any such taking. The Condominium Association shall, however, retain the right to claim and receive compensation for the taking or damage to all other common elements outside of the limits of the unit as well as the cost to cure damages caused by the taking of common elements within any taken unit.

In the event the taking is of common elements other than those described above and/or where the damages are equally applicable to all units, the award made shall be payable to the Board of Managers. However, the unit owners retain the right to make a separate claim and be paid the award for consequential and/or severance damages to their individual units arising from the taking of any common element, restricted or general, outside of the limits of the units, where such damages are not general to all units and are special to those particular units.

Should all of a unit be taken, the unit owner shall be relieved of the obligation to pay common charges and the Condominium Association shall have the right to make claim for any damages by reason thereof. Should a part of a unit be taken, the common charges shall be reduced in the same proportion the square footage of the part taken bears to the square footage of the whole unit and both the Association and the unit owner shall each have the right to individually make claim and be paid for their damages by reason thereof.

Should, for any reason, a court direct payment to the Condominium Association of the award which should be paid to a unit owner by reason of the provisions herein, the Association shall promptly pay same to the unit owner.”

The reference to the common elements is occasioned by the fact that although each unit is spatially defined, it is impossible to separate it from the structural elements making up part of it where they are defined as common elements, some described as restricted and others not. The Condominium Association owns nothing gainful in such common elements—they merely being necessary to support each of the individual units. It is to the benefit of the individual units that the Association owns same, since it then has the obligation to maintain and repair same as a common charge. There is no corresponding benefit to the Association. It is similar in concept to the value of a street. Whatever value there is to the land in a street is reflected in the abutting properties for which it provides light air and access which is why, when a street is taken, the land in the street is deemed to have but nominal value; so too with the common elements. While some by-laws use the term restricted common elements without defining it, others make plain that to which it refers are those common elements that have no value to other than particular units. An example that comes to mind is a driveway leading to the garage of a particular unit which lies outside of the limits of the structure which makes up the unit and its use is restricted to that unit.

The reason for retaining in the Association the right to damages from the taking of common elements inside of a taken unit other than the value of that particular unit is for such cases where the taking of a unit may sever a utility line going to other units or common areas which must be replaced or some similar circumstance. The retention of the right to damages for the other common elements is where a taking affects all units equally, such as an outside garden or any other amenity available for the owners of all units to use.

We also attempt to make clear that in the event of the taking of all or part of a unit, there is no residual obligation to continue to pay common charges for the area taken. However, this may have the result of increasing the common charges for all other units and, thus, there is reserved the right of the Association to seek to recover as damages from the condemnor those damages on behalf of all of the other unit owners.

While we have no doubt our draftsmen efforts are far from perfect, we believe it is better than the by-laws we have seen.

Reprinted with permission from the September 25, 2009 edition of the New York Law Journal © 2009 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Revocation of a Tax Exemption

When an assessor revokes a real property tax exemption, the tax payer must file a petition under Article 7 of the Real Property Tax Law challenging the revocation. While generally termed a tax certiorari proceeding, Article 7 actions are clearly delineated not as traditional certiorari (i.e. quasi-appellate or appellate) proceedings, but trials de novo on the issue of valuation or exemption. (“A proceeding under RPTL Article 7 is in the nature of ‘a trial de novo to decide whether the total assessment of the property is correct and if it is not to correct it'” – – Town of Pleasant Valley v New York State Bd. of Real Property Services, 253 AD2d 8 (2d Dept 1999), citing Matter of Katz Buffalo Realty v Anderson, 25 AD2d 809 (4th Dept 1966). Thus, it is to be expected that the proof at trial might differ from that presented in an admittedly informal administrative proceeding such as one before an assessor or a Board of Assessment Review. A recent decision by the Honorable John R. LaCava in Matter of Southwinds Retirement Home, Inc. v The City of Middleton 1 dated June 9, 2009, _____ NYLJ____ provides an interesting and thorough explanation of the applicable law.

The decision indicates that the petitioner was a not-for-profit corporation founded 125 years ago as a charitable corporation for the operation of a retirement home for the aged. The properties under review consisted of 2 parcels: a warehouse parcel, a former warehouse on an approximately 1.6 acre sized plot, was purchased by petitioner in 1999; and a retirement home parcel, located on a plot approximately 4.6 acres in size directly across from the warehouse parcel on Fulton Street. The latter, acquired in 1990, was a former hotel/motel/catering complex. The warehouse had an improved area of over 20,000 square feet, of which approximately 4,000 square feet was leased to The State University of New York’s Empire State College in the tax year at issue, with the remainder devoted, according to petitioner, to storage in support of the retirement home. The retirement home parcel contained some 84,000 square feet of improved space, of which, in the tax year at issue, 3,738 square feet was leased by an associated not-for-profit corporation, Homemaker Service of Orange County, Inc. (Homemaker), for the operation of an adult day care facility. In addition, 520 square feet was leased to Rhonda Dundish to operate a hairdressing salon, and the 1,827 square foot main dining hall was periodically leased to several not-for-profit institutions for luncheon and dinner meetings.

For many years, and during the period immediately prior to the tax year at issue, the parcels were in possession of tax exemptions from the City, with petitioner operating as a charitable provider to the community of, inter alia, nursing and medical services, rehabilitative care, social services, and congregate dining.

Burden of Proof

At the outset, Justice LaCava held that, while the burden of proof lies with a petitioner who seeks an initial property tax exemption (See People ex rel. Watchtower Bible & Tract Soc v Haring, 8 NY2d 350 (1960), where a petitioner is the subject of a revocation of an existing tax exemption, the burden of proof is on the municipality to justify the revocation. (See New York Botanical Garden v Assessors of Washington, 55 NY2d 328 (1982); Watchtower Bible & Tracts Soc v Lewisohn, 35 NY2d 92 (1974). Thus, here the burden of proof is on the Town to establish that the revocation of the exemption previously granted to petitioner was proper.

Thus, the burden of proof was upon the City to demonstrate, pursuant to RPTL § 420-a(1), that:

1. The real property at issue here is not owned by a corporation or association organized or conducted exclusively for religious, charitable, hospital, educations, or moral or mental improvement, of men, women, or children purposes, or for two or more such purposes; or

2. The owning corporation did not use the real property exclusively for carrying out thereupon one or more of such purposes.

In the course of its opposition, the City sought to contest certain factual issues by alleging what was observed on two unauthorized visits onto the premises. The court would not consider anything gained by the visits, stating,

This court has ruled in Schlesinger v Town of Ramapo, (Supreme Court, Rockland County, Dickerson, J., January 24, 2006), that an entry upon a premises by an assessor, for the purpose of gaining information to prepare an assessment, without the permission of the owner, or a court order, is an unauthorized search as contemplated under the United States and New York State Constitutions. (See also Camara v Municipal Court, 387 US 523 unauthorized entry is, at the very least, suspect.

The court stated that, there has been no evidence presented by the respondent that the premises is not owned by Southwinds, a not-for-profit corporation organized and conducted exclusively for charitable purposes, including the moral or mental improvement of men, women, or children, and hence the court finds that the City has failed to meet its burden on that issue.

Further, where it is alleged that the property was leased to another charitable institution, the burden of proof is upon the City to demonstrate, pursuant to RPTL § 420-a(2), that:

The real property at issue, while not so used by the corporation, is not leased or otherwise used by another corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes; or the property (or a portion of it) is not devoted to such exempt purposes; or the monies paid for the use of the property exceed the amount of the carrying, maintenance and depreciation charges of the property or portion thereof.

The court held that as a matter of law Southwinds could avail itself of the exemption provided for pursuant to RPTL § 420-a(2) for the portion of the warehouse parcel leased to the State University of New York (SUNY), since the City has failed to demonstrate that the use to which the SUNY portion of the premises has been put is not exclusively for educational purposes , and that the corporation or institution leasing that portion of the property (SUNY-Empire State College) is not a New York State Agency operated for educational purposes. Indeed the record established both.

The court further determined that the City failed to demonstrate that the income from the SUNY lease exceeded the carrying, maintenance and depreciation charges of the property as set forth under RPTL § 420-a(2).

Since the remainder of the warehouse parcel was retained by Southwinds for its use in conjunction with the retirement parcel, application of RPTL § 420-a(1) rather than (2) is appropriate here. Consequently, the issue was whether the City has demonstrated that petitioner has not used the remainder of the warehouse parcel exclusively for carrying out one or more of its non-profit purposes.

The court further held that as a matter of law that Southwinds may also avail itself of the exemption provided for pursuant to RPTL § 420-a(2) for the 3,738 square feet of the retirement home premises which was leased by the petitioner to the associated not-for-profit corporation Homemaker for an adult day care facility, since the respondent City has failed to demonstrate that the use to which the Homemaker portions of the premises have been put is not those associated with a retirement home, and that Homemaker is not a not-for-profit corporation operated for charitable (adult non-residential care) purposes.

Court of Appeals Recent Case

The Court of Appeals recently decided a similar tax assessment revocation case, Matter of Lackawanna Community Development Corporation v Krawkowski, ____NY3d____ (June 11, 2009). In Lackawanna, the property was owned by a local development corporation organized under the not-for-profit corporation law. The property had been exempt from taxes but the assessor concluded that the real property was not entitled to an exemption because it was leased by the Development Corporation to a for-profit corporation that carries out for-profit manufacturing activities on the property. The Court of Appeals held,

It is the actual or physical use of the property that the Real Property Tax Law is concerned with when it exempts from taxation property “used exclusively for carrying out thereupon one or more” exempt purposes (RPTL § 420-a(1) [emphasis added]; See Matter of Adult Home at Erie Sta., Inc. v Assessor & Bd. of Assessment Review of City of Middletown, 10 NY3d 205, 216 (2008) (the “issue is…whether the property is ‘used exclusively'” for an exempt purpose, and property used to provide housing for the indigent and property used to provide housing for people “while they participate in social work programs” is “used” within the meaning of the statute).

Chief Judge Lippman stated,

We find no support in the Real Property Tax Law or the Not-for-Profit Corporation Law for LCDC’s argument that the 100 Ridge Road property is “used” by LCDC because LCDC is leasing it in furtherance of LCDC’s purpose of spurring economic development. There is no question that local development corporations formed under the Not-for-Profit Corporation Law for the “charitable or public purposes of relieving and reducing unemployment…bettering and maintaining job opportunities, instructing or training individuals to improve or develop their capabilities for such jobs,” and “encouraging the development of, or retention of, an industry in the community or area,” among other purposes (N-PCL 1411 (a)), are pursuing laudable goals that better the State’s communities, and LCDC is no exception. Not all laudable activities, however, entitle the actor to a property tax exemption, and we decline LCDC’s invitation to read the Real Property Tax Law together with the Not-for-Profit Corporation Law in such a manner as to establish a “tax loophole” where one would not otherwise exist (See Sisters of St. Joseph v City of New York, 49 NY2d 429, 441 (1980).

It is clear that in order for a tax exemption to continue, property must be “used” within the meaning of RPTL § 420-a (1) for an exempt purpose.

1 The decision and others are available on Justice LaCava’s webpage, www.nycourts.gov/courts/9jd/taxcert.shtml.com

Reprinted with permission from the June 24, 2009 edition of the New York Law Journal © 2009 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

 

Condemnation, Tax Certiorari – Determining Functional Utility

Sometimes a condemnor does not take all of an owner’s property. A partial taking is a frequent occurrence in a street widening. But it may also occur in takings for sewer lines, electrical transmission lines, or gas lines.

As a general rule, the measure of damages in a partial-taking case is the difference between the fair market value of the whole property before the taking and the fair market of the remainder after the taking. Acme Theatres Inc. v. State of New York, 26 NY2d 385 (1970); Diocese of Buffalo v. State of New York, 24 NY2d 320, 323 (1969).

The fact that there was a partial taking does not automatically mean that there has been damage to the remainder. ‘It is widely accepted that a partial taking does not itself cause a consequential loss***. Damages for such a loss must be based upon either the opinion of an experienced, knowledgeable expert*** or an actual market data showing a reduction in the value of the remainder as a result of the appropriation.’ Zappavigna v. State of New York, 186 AD2d 557, 560 (2d Dept. 1993).

Two-Step Appraisal

What is then done is to perform a two-step appraisal process. First, the entire property is valued based on its highest and best use on the date of the taking, regardless of whether the property is being put to such use at the time. Chemical Corp. v. Town of East Hampton, 298 AD2d 419, 420 (2d Dept 2002). Then direct damages are calculated by valuing the property which was acquired. The next part of the formula is valuing the remainder which results after the partial taking. This is where the appraiser will determine whether or not the remainder has sustained consequential damages which are damages occasioned to the property remaining (the remainder), not only by reason of the direct taking, but also by virtue of the use to which the appropriated property is put by the condemnor. Some decisions use the term consequential damages for all damages suffered by the remainder. Technically, these damages are consequential or severance and can be both.

Severance damages are damages that occur simply because the property acquired is no longer a part of what was once the whole property, it has been severed. The property may have been improved with a structure which may have been partially demolished. Obviously, the part not taken has lost value, probably all of its value. A taking may cause the remainder to be of a size that no longer can be used under zoning laws for its highest and best use, or it may have been left with unsuitable access to a street for its highest and best use.

In Priestly v. State of New York, 23 NY2d 152 (1968) at p. 156, the court defined ‘suitable’ as meaning ‘that which is adequate to the requirements of or answers the needs of a particular object. The concepts are not mutually exclusive and, therefore, a finding that a means of access is indeed circuitous does not eliminate the possibility that the same means of access might also be unsuitable in that it is inadequate to the access needs inherent in the highest and best use of the property involved.’

A partial taking may decrease the amount of available parking spaces essential for a shopping mall. One of the surest guides in measuring damages occasioned by a partial taking is the diminution in rental value resulting there-from. Humble Oil Refining Co. v. State of New York, 12 NY2d 861 (1962). Further, a deterioration of the quality of the income in the after situation merits the award of substantial consequential damages. Star Plaza Inc. v. State of New York, 79 AD2d 746 (3rd Dept 1980). True consequential damages on the other hand come from the manner or use that the property directly taken is put to by the condemnor, some examples: South Buffalo R. Co. v. Kirover, 176 NY 301 (1903) (railroad use); Dennison v. State of New York, 28 AD2d 28, aff’d 22 NY2d 409 (1968) (damages to remainder caused by loss of view and noise); Criscuola v. Power Authority of the State of New York, 81 NY2d 649 (loss of value to remainder caused by high voltage power line).

Judge Joseph Bellacosa wrote in Criscuola that ‘Evidence of fear in the marketplace is admissible with respect to the value of property taken without proof of the reasonableness of the fear.’

New York Court of Appeals

In the key holding, the New York Court of Appeals ruled:

  1. There should be no requirement that the claimant must establish the reasonableness of a fear or perception of danger or of health risks from exposure to high voltage power lines.
  2. Whether the danger is a scientifically genuine or verifiable fact should be irrelevant to the central issue of its market value impact.

A claimant, however, is not relieved from giving any proof to establish his claim and just compensation damages. Criscuola v. PASNY, mandates that a claimant must still establish some prevalent perception of a danger emanating from the objectionable condition. The Court of Appeals stated, ‘No witness, whether expert or nonexpert, may use his or her personal fear as a basis for testifying about fear in the marketplace. However, any other evidence that fear exists in the public about the dangers of high voltage lines is admissible.’

Building Block

The Dennison case was an important building block for the Court of Appeals’ decision in Criscuola. In Dennison, the Third Department and Court of Appeals affirmed a Court of Claim award which considered the loss of privacy and seclusion, the loss of view, the traffic noise, lights, and odors as factors causing consequential damage to the remaining property. The proof of such damages was not based on scientific proof, but an appraiser’s objective opinion of the effect of the taking on the remainder. This has been further defined to include loss of enhancement due to the location and aesthetic qualities of a property. See City of Yonkers v. State of New York, 40 NY2d 408, 413 (1976), Cummings v. State of New York, 62 AD2d 1084 (3rd Dept 1978), loss of a buffer zone, and loss of setback which concerned potential future use of the land for shrubbery and landscaping. Monser v. State of New York, 96 AD2d 702 (3rd Dept. 1903).

Obviously, there are many other situations which create consequential damages. One for example is a partial taking for a new sewer line. In an assay of damages, the claimant’s appraiser would note the effects of the taking. The remainder parcel may be rendered nonconforming as to zoning because there was the elimination of a required side yard. The existing building floor area was oversized for the remainder lot. Access along the property line of the remainder to its rear yard could have been eliminated. The partial condemnation may have caused a partial loss of required off-street parking. These will be factual issues for determination by a trial court. Whether a partial taking results in a change of value of the remainder presents a credibility issue for the trial court. Chemical Corp. v. Town of East Hampton, 298 AD2d 419 (2d Dept 2002).

Consequential Damages

In determining consequential damages caused by the use to which the property directly taken is put, there are two considerations which must be made. First, the property must be valued and the right to damages must be set as of the date title vests in the condemnor. Wolfe v. State of New York, 22 NY2d 292 (1968). Second, damages must be determined not necessarily on what the condemnor plans to do but what it has the right to. Kravec v. State of New York, 40 NY2d 1060 (1976).

Thus, if the state’s appropriation of highway-abutting land (true frontage on a street), or the physical construction of the improvement itself so impairs access to the remaining property that it can no longer sustain its previous highest and best use, then the state must pay consequential damages to the owner. Priestly v. State of New York, 23 NY2d 152, 155-157 (1968).

If the appropriation results in the loss to the claimant of its right to enter and exit its property, it will be entitled to consequential damages. Pollack v. State of New York, 41 NY2d 909, 910 (1977). Legal access is required and damages are to be fixed on point of the taking. But, note that the state could provide access by appropriating a neighbor’s property for suitable access to the subject remainder, or by providing a specific reservation of suitable access in the appropriation maps, provided this is done prior to or contemporaneously with the appropriation. Lake George Associates v. State of New York, 7 NY3d 475 (2006).

‘Cost to Cure’

But note, that the condemnor cannot offer later to fix the problem. While dealing with consequential damages, one should be mindful that there is a duty to mitigate damages. In condemnation, the mitigation is called ‘cost to cure.’ There are limits to the concept. The ‘cost to cure’ cannot exceed the amount of consequential damages. An owner cannot be made to look outside the limits of the subject property to find a ‘cost to cure.’ Matter of County of Suffolk (Sills Road), 63 AD2d 673 (2d Dept. 1978).

In St. Patrick’s Church, Whitney Point v. State of New York, 30 AD2d 473 (3rd Dept. 1968), the condemnee actually cured the problem by purchasing land adjacent to the appropriated property 14 months after the appropriation and the state offered the price paid for the land as the ‘cost to cure.’ The Appellate Division, Third Department said, ‘We are not here dealing with any mitigation of damages by something that occurred or could occur upon the property remaining after the appropriation as in Mayes Co. v. State of New York, 18 NY2d 549, where the ‘cost to cure’ theory was allowed because the cure was to occur within the bounds of the claimant’s lands.’

Sound reason requires that the theory cannot be used in cases of subsequent acquisitions of lands outside the bounds of the appropriated property; nor should a condemnee’s right to compensation be made to depend upon whether adjacent land could easily be purchased. These established principles are clearly recognized in 4 Nichols, Eminent Domain (3d ed.) (S 14.22, p. 525) where, in referring to the rule of cost of restoration, it is stated that ”the restoration must be possible without going outside the remaining portion of the tract in controversy,’…That the adoption of the novel theory advanced by the State, illogical in its foundation, might well lead to confusion and havoc in the use of well-reasoned and judicially founded principles of providing just compensation for the taking of a citizen’s lands, is all too evident.’

A condemning authority may argue that a claimant should have taken a specific action to mitigate damages. But to pursue this effort to reduce consequential damages, the condemnor must present evidence that it would be reasonably accomplished. Fodera Enterprises v. State of New York, (2d Dept 2000).

A partial taking may consist of a small taking, yet may cause substantial damage to the remainder.

Reprinted with permission from the December 24, 2008 edition of the New York Law Journal © 2011 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

A Partial Taking: Major Damages to Remainder Are Not Automatic

Sometimes a condemnor does not take all of an owner’s property. A partial taking is a frequent occurrence in a street widening. But it may also occur in takings for sewer lines, electrical transmission lines, or gas lines.

As a general rule, the measure of damages in a partial-taking case is the difference between the fair market value of the whole property before the taking and the fair market of the remainder after the taking. Acme Theatres Inc. v. State of New York, 26 NY2d 385 (1970); Diocese of Buffalo v. State of New York, 24 NY2d 320, 323 (1969).

The fact that there was a partial taking does not automatically mean that there has been damage to the remainder. ‘It is widely accepted that a partial taking does not itself cause a consequential loss***. Damages for such a loss must be based upon either the opinion of an experienced, knowledgeable expert*** or an actual market data showing a reduction in the value of the remainder as a result of the appropriation.’ Zappavigna v. State of New York, 186 AD2d 557, 560 (2d Dept. 1993).

Two-Step Appraisal

What is then done is to perform a two-step appraisal process. First, the entire property is valued based on its highest and best use on the date of the taking, regardless of whether the property is being put to such use at the time. Chemical Corp. v. Town of East Hampton, 298 AD2d 419, 420 (2d Dept 2002). Then direct damages are calculated by valuing the property which was acquired. The next part of the formula is valuing the remainder which results after the partial taking. This is where the appraiser will determine whether or not the remainder has sustained consequential damages which are damages occasioned to the property remaining (the remainder), not only by reason of the direct taking, but also by virtue of the use to which the appropriated property is put by the condemnor. Some decisions use the term consequential damages for all damages suffered by the remainder. Technically, these damages are consequential or severance and can be both.

Severance damages are damages that occur simply because the property acquired is no longer a part of what was once the whole property, it has been severed. The property may have been improved with a structure which may have been partially demolished. Obviously, the part not taken has lost value, probably all of its value. A taking may cause the remainder to be of a size that no longer can be used under zoning laws for its highest and best use, or it may have been left with unsuitable access to a street for its highest and best use.

In Priestly v. State of New York, 23 NY2d 152 (1968) at p. 156, the court defined ‘suitable’ as meaning ‘that which is adequate to the requirements of or answers the needs of a particular object. The concepts are not mutually exclusive and, therefore, a finding that a means of access is indeed circuitous does not eliminate the possibility that the same means of access might also be unsuitable in that it is inadequate to the access needs inherent in the highest and best use of the property involved.’

A partial taking may decrease the amount of available parking spaces essential for a shopping mall. One of the surest guides in measuring damages occasioned by a partial taking is the diminution in rental value resulting there-from. Humble Oil Refining Co. v. State of New York, 12 NY2d 861 (1962). Further, a deterioration of the quality of the income in the after situation merits the award of substantial consequential damages. Star Plaza Inc. v. State of New York, 79 AD2d 746 (3rd Dept 1980). True consequential damages on the other hand come from the manner or use that the property directly taken is put to by the condemnor, some examples: South Buffalo R. Co. v. Kirover, 176 NY 301 (1903) (railroad use); Dennison v. State of New York, 28 AD2d 28, aff’d 22 NY2d 409 (1968) (damages to remainder caused by loss of view and noise); Criscuola v. Power Authority of the State of New York, 81 NY2d 649 (loss of value to remainder caused by high voltage power line).
Judge Joseph Bellacosa wrote in Criscuola that ‘Evidence of fear in the marketplace is admissible with respect to the value of property taken without proof of the reasonableness of the fear.’

New York Court of Appeals

In the key holding, the New York Court of Appeals ruled:

  1. There should be no requirement that the claimant must establish the reasonableness of a fear or perception of danger or of health risks from exposure to high voltage power lines.
  2. Whether the danger is a scientifically genuine or verifiable fact should be irrelevant to the central issue of its market value impact.

A claimant, however, is not relieved from giving any proof to establish his claim and just compensation damages. Criscuola v. PASNY, mandates that a claimant must still establish some prevalent perception of a danger emanating from the objectionable condition. The Court of Appeals stated, ‘No witness, whether expert or nonexpert, may use his or her personal fear as a basis for testifying about fear in the marketplace. However, any other evidence that fear exists in the public about the dangers of high voltage lines is admissible.’

Building Block

The Dennison case was an important building block for the Court of Appeals’ decision in Criscuola. In Dennison, the Third Department and Court of Appeals affirmed a Court of Claim award which considered the loss of privacy and seclusion, the loss of view, the traffic noise, lights, and odors as factors causing consequential damage to the remaining property. The proof of such damages was not based on scientific proof, but an appraiser’s objective opinion of the effect of the taking on the remainder. This has been further defined to include loss of enhancement due to the location and aesthetic qualities of a property. See City of Yonkers v. State of New York, 40 NY2d 408, 413 (1976), Cummings v. State of New York, 62 AD2d 1084 (3rd Dept 1978), loss of a buffer zone, and loss of setback which concerned potential future use of the land for shrubbery and landscaping. Monser v. State of New York, 96 AD2d 702 (3rd Dept. 1903).

Obviously, there are many other situations which create consequential damages. One for example is a partial taking for a new sewer line. In an assay of damages, the claimant’s appraiser would note the effects of the taking. The remainder parcel may be rendered nonconforming as to zoning because there was the elimination of a required side yard. The existing building floor area was oversized for the remainder lot. Access along the property line of the remainder to its rear yard could have been eliminated. The partial condemnation may have caused a partial loss of required off-street parking. These will be factual issues for determination by a trial court. Whether a partial taking results in a change of value of the remainder presents a credibility issue for the trial court. Chemical Corp. v. Town of East Hampton, 298 AD2d 419 (2d Dept 2002).

Consequential Damages

In determining consequential damages caused by the use to which the property directly taken is put, there are two considerations which must be made. First, the property must be valued and the right to damages must be set as of the date title vests in the condemnor. Wolfe v. State of New York, 22 NY2d 292 (1968). Second, damages must be determined not necessarily on what the condemnor plans to do but what it has the right to. Kravec v. State of New York, 40 NY2d 1060 (1976).

Thus, if the state’s appropriation of highway-abutting land (true frontage on a street), or the physical construction of the improvement itself so impairs access to the remaining property that it can no longer sustain its previous highest and best use, then the state must pay consequential damages to the owner. Priestly v. State of New York, 23 NY2d 152, 155-157 (1968).

If the appropriation results in the loss to the claimant of its right to enter and exit its property, it will be entitled to consequential damages. Pollack v. State of New York, 41 NY2d 909, 910 (1977). Legal access is required and damages are to be fixed on point of the taking. But, note that the state could provide access by appropriating a neighbor’s property for suitable access to the subject remainder, or by providing a specific reservation of suitable access in the appropriation maps, provided this is done prior to or contemporaneously with the appropriation. Lake George Associates v. State of New York, 7 NY3d 475 (2006).

‘Cost to Cure’

But note, that the condemnor cannot offer later to fix the problem. While dealing with consequential damages, one should be mindful that there is a duty to mitigate damages. In condemnation, the mitigation is called ‘cost to cure.’ There are limits to the concept. The ‘cost to cure’ cannot exceed the amount of consequential damages. An owner cannot be made to look outside the limits of the subject property to find a ‘cost to cure.’ Matter of County of Suffolk (Sills Road), 63 AD2d 673 (2d Dept. 1978).

In St. Patrick’s Church, Whitney Point v. State of New York, 30 AD2d 473 (3rd Dept. 1968), the condemnee actually cured the problem by purchasing land adjacent to the appropriated property 14 months after the appropriation and the state offered the price paid for the land as the ‘cost to cure.’ The Appellate Division, Third Department said, ‘We are not here dealing with any mitigation of damages by something that occurred or could occur upon the property remaining after the appropriation as in Mayes Co. v. State of New York, 18 NY2d 549, where the ‘cost to cure’ theory was allowed because the cure was to occur within the bounds of the claimant’s lands.’

Sound reason requires that the theory cannot be used in cases of subsequent acquisitions of lands outside the bounds of the appropriated property; nor should a condemnee’s right to compensation be made to depend upon whether adjacent land could easily be purchased. These established principles are clearly recognized in 4 Nichols, Eminent Domain (3d ed.) (S 14.22, p. 525) where, in referring to the rule of cost of restoration, it is stated that ”the restoration must be possible without going outside the remaining portion of the tract in controversy,’…That the adoption of the novel theory advanced by the State, illogical in its foundation, might well lead to confusion and havoc in the use of well-reasoned and judicially founded principles of providing just compensation for the taking of a citizen’s lands, is all too evident.’

A condemning authority may argue that a claimant should have taken a specific action to mitigate damages. But to pursue this effort to reduce consequential damages, the condemnor must present evidence that it would be reasonably accomplished. Fodera Enterprises v. State of New York, (2d Dept 2000).

A partial taking may consist of a small taking, yet may cause substantial damage to the remainder.

Reprinted with permission from the December 24, 2008 edition of the New York Law Journal © 2011 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Temporary Regulatory Takings

We admit to being puzzled by the recent decision of Friedenburg v. State of New York, 2008 N.Y. Sup. Ct. 05882 decided by the Appellate Division, Second Department on June 24, 2008. The issue was the valuation date of the taking. The State contended it was a 1995 date when the New York State Department of Environmental Conservation (“DEC”) denied an application for a permit to build a one family house on waterfront property by reason the Tidal Wetlands Act (ECL §25.0101 et seq.) and the Appellate Division in a prior proceeding had determined that the denial constituted a “taking”. Claimant contended it was the 2005 date when the DEC filed its acquisition map and title vested in the State of New York. Claimant had brought an action, after denial of its application for a permit, to compel the DEC to either issue the requested permit or commence a condemnation proceeding as is provided in the Tidal Wetlands Act. In Friedenburg v. New York State Department of Environmental Conservation, 3 A.D.3d 86, 767 N.Y.S.2d 451 (2d Dept., 2003), the Appellate Division affirmed the lower courts finding that “The denial of the permit was a compensable taking”.

So what puzzles us? The loose use of terms when a taking was adjudicated. Both decisions used the same words to describe something different. When the State was seeking a valuation date of 1995, it was contending that there was a taking in fee on that date. When the Appellate Division rejected that as the date of title vesting, it was saying a fee title first passed ten years later when there was a de jure appropriation. Then what was the “taking” in 1995 and what about the period between the denial of the permit which the Court had termed a “taking” and the de jure appropriation. What is clear is that there were two takings, each of a different interest. That first taking was what is called a temporary regulatory taking. While it becomes clear what was meant by the decision when one reads the briefs, unless you do so and not rely on the decision alone there is bound to be confusion. Claimant was quite clear in making the distinction. We assume all will be made clear when the issue of compensation is before the Court.

Case law indicates that a regulatory taking, as distinct from a physical invasion of the property, results not in a taking in fee but in a temporary taking. Thus, in First English Evangelical Church of Glendale v. County of Los Angeles, 482 U.S. 304 (1987), in an action for an inverse condemnation alleging a temporary taking by reason of an interim ordinance which prohibited constructing a building on the property involved, the Court held, contrary to the holding by the California courts, that the county had to pay damages for the period the property was, in effect, made sterile. As the Court said: “temporary takings which, as here, deny a landowner all use of his property are not different in kind from permanent takings, for which the constitution clearly requires compensation _ _ _ . The United States has been required to pay compensation for leasehold interests shorter than this _ _ _. While this burden results from governmental action that amounted to a taking, the just compensation clause of the Fifth Amendment requires that the governmental pay the landowner for the value of the use of the land during this period _ _ _ invalidation of the ordinance or its successor ordinance after that period of time, though converting the taking into a “temporary” one is not a sufficient remedy to meet the demands of the just compensation clause.”

Prior to this time, when an ordinance, statute or action was deemed equivalent to a taking, no damages were awarded, there merely being a declaration of the invalidity of the offending act (see Fred F French Investing Company, Inc. v. City of New York, 39 N.Y.2d 587, 595, 385 N.Y.2d 510 (1976).) This is exactly what the California Courts had done in this case, holding there could be no claim for damages unless, after the court had ruled and ordered a cessation of the acts, it continued anyway.
Later, the Supreme Court went back to the theme of regulatory takings in Lucas v. South Carolina Coastal Council, 565 U.S. 1003 (1992) in which Judge Scalia, writing for the majority of the Court, described the two instances where the balancing of interests discussed in Penn Central Transportation Co. v. City of New York, 438 U.S. 104, 98 S. Ct. 2646 (1978) did not apply, thus a per se taking. They are physical invasion of property and “where regulation denies all economically beneficial or productive use of land.” Of interest in the context of what we are discussing here involves the ripeness issue in that case. Subsequent to the initiation of the law suit, which was to declare a per se taking, the offending statute was amended to make it possible for the claimant to secure a building permit. Because the lower court declined to find the case not ripe for disposition on the merits, the Supreme Court also dealt with the case on the merits noting that even if a permit was later granted there still was a right to compensation for the temporary takings between the enactment of the regulation and its amendment.

Thus, it was to be expected, with the Supreme Court speaking definitively on this subject, that the New York Court of Appeals would reverse course from Fred F. French Investing, supra and follow its lead. We find this expressed, in Manocherian v. Lenox Hill Hospital, 84 N.Y.2d 385 (1994). In this case, the court invalidated a statute which required the property owner to offer renewed leases to Lenox Hill Hospital for apartments occupied by some of its employees. Without going into the reasoning, the Court struck down the statute as a regulatory taking without just compensation citing, Seawall Associates v. City of New York, 14 N.Y.2d 92, 107, cert. den. 493 U.S. 976, Nollan v. California Costal Comm., 483 U.S. 825 (1987) and Lucas v. South Carolina Coastal Council, supra, among others and remitted the case to the New York State Supreme Court “to resolve rights and remedies among the parties” In Seawall the Court deemed the offending Local Law the equivalent of a physical taking (as well as a regulatory taking) and thus a per se taking meaning no balancing test was required. In a footnote it, related it to “a taking, for whatever time period it is in effect.” This brings us back to what the cases have deemed a “temporary taking” until the offending regulation or statute or act is invalidated.

What followed was a claim against the State of New York in the Court of Claims for the regulatory taking in which the Court of Claims, affirmed by the Appellate Division, awarded damages “equal to Claimant’s loss in operating the subject apartments as rental units over this nine year period”, in addition to other damages 520 East 81st Street Associates v. State of New York, 288 A.D.2d 67, 732 N.Y.S.2d 407 (1st Dept., 2001), mod. in part and affirmed in part 49 N.Y.2d, 43 750 N.Y.S.2d 51 (2002).
It is to be noted that the previously mentioned Seawall case had resulted in a successful claim against the City of New York for lost profits during the period the Local Law was in effect, grounded in it being a temporary regulatory taking. Aube Realty Co. v. City of New York, 223 A.D.2d 416, 636 N.Y.S.2d 767 (1st Dept., 1996).

This brings us back to Fridenburg v. State of New York, supra. That case had been preceded by Fridenburg v. New York State Department of Environmental Conservation, 3 A.D.3d 86, 767 N.Y.S.2d 451 (2d Dept., 2003) in which the refusal to issue a permit to build on the land was deemed a “taking” and directing, pursuant to the statutory provisions, that either the permit be granted or a condemnation proceeding be started. The Appellate Division affirmed the lower court finding that “the denial of the permit was a compensable taking.” The case which generated this column was in the condemnation proceeding itself where the State claimed that the “taking” described in the earlier decision was of a fee title, which was why it sought to fix the valuation date when the permit was denied. The Appellate Division found the fee title was taken when the de jure appropriation was accomplished ten years later in 2005. But, since there was a “taking” in 1995, as found by the Appellate Division in the earlier case and as there could not be two fee takings, the “taking” in 1995, by definition, was a “temporary regulatory taking” for the ten year period between 1995 and 2005. The problem in these decisions is that the courts use the term “taking” in a general sense and do not say of what. The consequences from a fee taking and a temporary regulatory taking are different. In the former one is paid damages, while in the latter, one is paid the value of the property.

While in the cases we have discussed, we have seen separate actions for damages following temporary regulatory takings, none of them was followed by a de jure taking of a fee title. What is missing from the Friedenburg decision is how compensation is to be made for the ten year temporary regulatory taking. However, that issue was not before the Court. That is yet to be determined. Is it to be included in the damages to be fixed in the condemnation proceeding or does it require a separate action. Judicial economy would suggest the former as part of the Claimant’s just compensation. In Friedenburg v. State of New York Department of Environmental Conservation, supra, the Court said:

“The Petitioners’ arguments inter alia, as to the type and extent of damages recoverable because of such purported taking need not be addressed at this juncture. Those arguments need not be determined until such time, if at all, that the issue of compensation becomes relevant.”

Let us assume it is to be adjudicated in the condemnation. The problem is in finding precedent. There are similar cases, such as Ley v. State of New York, 28 A.D.2d 945, 281, N.Y.S.2d 685 (3d Dept., 1967), aff’d. 25 N.Y.S.2d 887 (1969), which is not helpful as it was decided prior to the U.S. Supreme Court cases discussed herein (we were Claimant’s attorneys). There, work was done by the State blocking off the only road leading to a Carvel stand followed seven months later by an appropriation of the property. In the interim, the unoccupied building was destroyed by vandals. Claim was made for the rental value during the two periods, as well as the value of the destroyed property. The Court stated there could only be one “taking” and picked the earlier date as the one and awarded payment for the destroyed building and fixtures plus interest from that date.

We know of another case, unreported, which also dealt with fixing damages between the date of a temporary regulatory taking and the date the State appropriated the property. (see Turiano v. State of New York, Ct of Claims, Nadler J., July 7, 2000). We were attorneys for the property owner. Coincidentally, the Tidal Wetlands Act was involved. This appropriation also was prior to the within discussed Supreme Court cases.

In 1972, prior to the Tidal Wetlands Act, the property owner, pursuant to conditions contained in Letters Patent he had received from the State of New York to marshlands in Little Neck Bay, sought to improve the property. The City wishing to build a park rescinded his work permit. Litigation ensured which was adjourned waiting a condemnation which was to follow. In 1978, the owner received a letter from the DEC that it, not the City, which had run into financial difficulties, wished to acquire the property for a park and that pursuant to ECL §25-0403(2) that this letter notice was sufficient ground “for denial of any permit for any activity regulated by the Tidal Wetlands Act”. It further stated “This advice intends to indicate that the State does not wish to have you engaging in development activities on the property.” However, it took the State until 1984 to appropriate the property while the owner was hung out to dry and to be in violation of the conditions in the Letters Patent, which required work to be done in the wetlands. In the condemnation, the State unsuccessfully challenged the title of the owner for failing to comply with the conditions in the Letters Patent, (see Turiano v. State of New York, 519 N.Y.S.2d 180 (Ct. of Claims, Rossetti, J., 1987). In that proceeding, a claim was made for damages for the period from the State’s letter in 1978 to the date of the appropriation. The Court found “a defacto taking” by the State in 1978 (what we now call a temporary regulatory taking”) and awarded interest on the award from 1978 as the damages for same while fixing the value of the property appropriated as of 1984, the date of the appropriation. Since interest is awarded as a substitute for the use of the property, interest was used as a substitute for rental value. Since the case was not appealed, it remained undisturbed. While there may be other cases involving a temporary regulatory taking followed by a full fee taking, we are not aware of any. We are curious as to how it will be handled in the instant case.

Reprinted with permission from the August 4, 2008 edition of the New York Law Journal © 2008 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Condemnation Blight and De Facto Takings – De Laus v. State of New York, a Recent Application

The issue of condemnation blight raises very serious concerns for property owners. The phenomenon occurs when property values decrease because of a cloud of condemnation. Indeed, the mere specter of a condemnation proceeding can have a significant impact on property values. This is because property owners are often unable to sell or lease property that may be affected by a condemnation proceeding; it also results from a reluctance to repair or invest in property that is likely to be acquired.

Condemnation blight is different from a de facto taking even though the concepts are very similar. In a de facto taking, the property at issue will be valued as of the date of the taking. Blighted property, on the other hand, will be valued as of the date of the actual orde jure taking. With blighted property, one is supposed to assess the true value of the property as if it had not been the victim of the debilitating effect of the cloud of condemnation. City of Buffalo v Clement Co., 34 AD2d 24 (1970), mod 28 NY2d 241 (1971), infra.

Recently, M. Robert Goldstein, one of the regular authors of this column, was asked to comment on a March 31, 2008 Court of Claims decision rendered in De Laus v State of New York, 2008 NY Slip Op 50991(U), a case where the issue of condemnation blight was central to the court’s decision on the issue of just compensation. “Condemnation ‘Blight’ Applied to Appraisal,” NYLJ, May 15, 2008 at 14, col 3. The effect of condemnation blight on just compensation is an issue that arises infrequently, so the decision, which was written by the Hon. Philip J. Patti, was particularly noteworthy.

In the De Laus case, Judge Patti concluded that the subject property’s value had been diminished by a cloud of condemnation that first arose when a newspaper article was published on October 1, 1998. The article discussed the State’s interest in acquiring the subject for a street widening and realignment project. The actual or de jure date of the taking did not occur until May 25, 2000.

The claimants in the De Laus case successfully persuaded the court that the value of the subject property was lessened by the prolonged period of time from the announcement of the acquisition to the date of taking. The decreased value resulted from an inability to lease the property and from the owners unwillingness to make repairs. The Judge explained that his findings took “into consideration the effect of condemnation blight on the subject throughout the time preceding the subjects ultimate acquisition….” De Laus v State of New York, supra at 8. And, in explaining why he relied on certain sales as opposed to others, Judge Patti wrote that “all occurred at a time preceding or within a reasonable proximity of the State’s incipient acknowledgement of the scope of its…project and the evolved intent to acquire all or a part of the subject.” Id. at 7. It appears that Judge Patti either disregarded sales that occurred after a 1999 public hearing or made adjustments to other sales so they would not take into consideration the blight. The court cited City of Buffalo v Clement Co. 34 AD2d 24 (1970), mod 28 NY2d 241 (1971) for the proposition that it should determine the true value of the property as if the property had not been the victim of the debilitating effect of the cloud of condemnation.

The Clement Co. case is the seminal case in New York on the issue of condemnation blight. The Court of Appeals decision provides a thorough explanation of the difference between the related concepts of blight and de facto takings. In Clement Co., both the trial court and the Appellate Division, Fourth Department, initially found that the condemnor’s acts in 1963 constituted a de facto taking even though the property at issue was not condemned until 1967. But the Court of Appeals ultimately decided that delay created condemnation blight rather than a de facto taking.

The claimant in Clement Co. was a major publisher of nationally circulated magazines. It received a letter from the condemnor advising that an acquisition would be imminent. The claimant relocated its publishing business because of that letter and because of the condemnor’s other miscellaneous acts. At trial, evidence was presented to show that the subject property fell into disrepair and that property values were drastically reduced by the threat of condemnation proceedings. On appeal, the Appellate Division, Fourth Department, affirmed the trial court’s decision and decided that there was a de facto taking despite a physical invasion or direct legal restraint. The Appellate Division believed that there was a taking because “the condemning authority has so interfered with the use of the subject property that essential elements of ownership have been destroyed….” Id. 34 AD2d at 32. The matter was subsequently appealed to the Court of Appeals. That Court decided otherwise. It held that “there was no appropriation which would permit an award of damages prior to the de jure taking.”

Id. 28 AD2d 257.

The Court of Appeals explained that the mere announcement of an impending condemnation coupled with a substantial delay did not translate into an exercise of dominion and control over the property. The Court explained the difference between a de facto taking and condemnation blight as follows:

[A] de facto taking requires a physical ouster of the owner, a legal interference with the physical use, possession or enjoyment of the property or a legal interference with owner’s power or disposition. On the other hand, ‘condemnation blight’ relates to the impact of certain acts upon the value of the subject property. It in no way imports a taking in the constitutional sense, but merely permits of a more realistic valuation of the condemned property in the subsequent de jure proceeding.

Id. at 255

The Court stated that, in situations where the condemnor’s acts cause a diminished property value, the property at issue should be valued as of the date of the de jure taking without considering the loss of value caused by the threat of condemnation. This was more thoroughly explained as follows:

In such cases where true condemnation blight is present, the claimant may introduce evidence of value prior to the onslaught of the ‘affirmative value-depressing acts’ of the authority and compensation shall be based on the value of the property as it would have been at the time of the de jure taking, but for the debilitating threat of condemnation. This, in turn, requires only that there be present some proof of affirmative acts causing a decrease in value and difficulty in arriving at a value using traditional methods.

Thus, when damages are assessed on the claim for the de jure appropriation, the claimant’s property should be evaluated not on its diminished worth caused by the condemnor’s action, but on its value except for such “affirmative value-depressing acts” of the appropriating sovereign. This, it appears, would provide adequate and just compensation.

Id. at 257-58 (citations omitted).

The mere threat of a condemnation proceeding will not entitle a condemnee to claim that property was condemned at a date earlier than that of the de jure taking. But if a party with the power of eminent domain prevents a claimant from deriving a beneficial use from property, then there will be a de facto taking.

In Matter of Keystone Assoc. v Moerdler, 19 NY2d 78 (1966), a statute created a de facto taking when it interfered with a property owner’s right to build or improve property. In that case, the property owner and its tenant were precluded from demolishing and constructing a new office building on property that formerly housed the Metropolitan Opera Association. The preclusion derived from a statute that was passed with the sole intent to preserve the opera house. The statute delegated the power of eminent domain to a private corporation. It also permitted the New York City Superintendent of Buildings to refuse a demolition permit for 180 days if the private corporation deposited $200,000. The Court of Appeals affirmed the lower court decisions that held that the deprivation constituted a taking of property for which just compensation must be paid. It also concluded that the statute improperly sought to place a limit on the amount of just compensation.

In a more recent case, Ward v Bennett, 214 AD2d 741 (1995), the Appellate Division, Second Department, decided that a landowner established a prima facie de facto taking by the City of New York when the City refused to grant the owner a permit to build a one-family home. Under General City Law 35, the City had ten years to condemn certain property after it filed a map in 1944 outlining the lines of a street. If it did not initiate condemnation proceedings to create that street within that time, it was required to grant a building permit. A prima facie de facto taking was established because the City did not grant a building permit fifty years after the filing of the map.

One should be aware that a de facto claim should be asserted as soon as the claim arises. This is because de facto takings can be time barred. Carr v Fleming, 122 AD2d 540 (4D Dept 1986).

We previously explained that most property owners will be reluctant to invest in property that is likely to be condemned. But there are some situations where the opposite is true. A property owner might insist on going forward with planned improvements despite the possibility of condemnation when property is vacant or partially improved. There is no great mystery behind the owners’ motivation. An improved property might fetch a greater condemnation award as compared to vacant property. At least one court referred to the practice of rushing to complete construction as “house planting.” Vitale v State of New York, 33 AD2d 977 (4d Dept 1970). And, in the absence of bad faith, it does not appear to be specifically prohibited. Id.

In Matter of Town of East Hampton [Windmill II Affordable Housing Project (9 Parcels)] (Three P. Corp.), 44 AD3d 963 (2d Dept 2007), for example, a condemnation claimant sought compensation for an incomplete improvement even though the condemnor took the position that the improvement should be disregarded because it was made in bad faith. Our firm represented the condemnor, the Town of East Hampton. The condemnor’s allegation of bad faith rested on the sole fact that the owner made improvements even though it knew that the property was going to be condemned. The trial court’s (Hon. John C. Bivona) award of just compensation included payment for the partially-built improvement. On appeal, the Appellate Division, Second Department affirmed and explained that:

Although the claimant knew, before making improvements upon the property, that the Town of East Hampton had plans to condemn the property, such knowledge, without more, was insufficient to establish that the improvements were constructed in bad faith.

Id. (citations omitted).

It appears that courts will be reluctant to place restrictions on an owner’s use of property prior to a title vesting date. This is not unreasonable, especially when one considers that certain restrictions could give rise to de facto takings.

Reprinted with permission from the June 25, 2008 edition of the New York Law Journal © 2008 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.