January 2, 2013

When Government Takes You Hostage

Do property rights count for nothing when you refuse the state's unlawful demands?

On January 15, 2013, the United States Supreme Court will hear Koontz v. St. Johns River Water Management District, a case that comes out of Florida. At issue in the case is the longstanding conflict between the constitutional protection of property rights and the state’s desire to protect its pristine wetlands, always in short supply, from destruction by real estate development.

The current law on this thorny topic, in Florida as elsewhere, gives the state the advantage in this struggle: The state has the final authority to decide whether these wetlands should be developed. Pursuant to its statutory powers, the state can let the development proceed as planned when its effects on the wetlands are minimal. But whenever those effects are more substantial, as they always are, the state can refuse to permit the development of the land unless the landowner agrees to “mitigate” any resultant harm to the environment.

Epstein
Illustration by Barbara Kelley

The scheme seems simple, but it is not. The facts of Koontz are typical of the herculean struggles over permits more generally. This saga began in 1994 when Koontz applied for a permit to dredge and fill with sand about 3.7 acres of a 14.2 acre parcel. Of the disputed land, 3.4 acres were undeveloped wetlands, 0.3 acres of which were adjacent uplands also protected under Florida law. For nineteen years, the two sides have struggled to determine the terms of Koontz’s mitigation obligation.

The issue is clouded because the Water Management District does not have a free hand in dealing with the problem. Rather, it has to make sure that its conditions do not amount to what the Supreme Court has termed an “out-and-out extortion,” which it treats as an uncompensated takings under the U.S. Constitution’s Takings Clause, which states: “nor shall private property be taken for public use without just compensation.”

The Elusive Constitution

The Supreme Court case law has tied itself into a knot over this issue. In land use cases, the extortion doctrine got its start in Nollan v. California Coastal Commission (1987), which held by a 5-to-4 majority that the Commission could not prevent the Nollans from building a new beachfront house by insisting that they dedicate a lateral easement across the front of their property that would allow the public to walk back and forth between two public beaches.

In a formulation that solved nothing, Justice Scalia opined that there was “no essential nexus” between the easement desired and the government’s legitimate interest in preserving public viewing rights over the Nollans’ land from the Pacific Coast Highway that ran behind the house. In the subsequent 1994 decision of Dolan v. City of Tigard, the late Chief Justice Rehnquist sought to clarify that elusive nexus by insisting that the only constitutional conditions under which the state can restrict the owner’s use of private property fell into two classes. The first were those conditions intended to offset a benefit that the government improvement of public lands and waters provided to the landowner. The second covered those conditions that prevented the landowner from causing harm to others.

It is this element of environmental harm that takes center stage in Koontz: just what is the harm for which the government seeks the mitigation of losses? It is with this question that the current law goes wrong. In dealing with ordinary private disputes, the question of an actionable harm is always tied to the harm that one person inflicts on another, typically by a physical invasion.

In the land use context, an elaborate body of the law of nuisance starts with the strong notion that these harms cover any discharge or release of filth, odors, stenches, or other pollutants on to the property of another party. Those same discharges and releases also count as public nuisances when they enter public lands and waters. These environmental protections are of course essential to any coherent system of land use, and have been firmly in place for hundreds of years. It is worth noting that nothing in Koontz’s proposed development plans threatened the release of any hazardous substance.

Nor, it should be added, did Koontz’s application involve the limited class of noninvasive nuisances, which deal with such matters as providing lateral support for a neighbor’s land, or, in limited circumstances, not erecting fences that block out light, air, or view from one parcel over another. These negative easements arise only in cases of potential reciprocal harm, where each party is left better off by limiting his own development rights in order to receive the benefits of parallel restrictions on his or her neighbors’ lands. Koontz’s proposed development lay far outside the scope of any such easement.

Grand Theft Real Estate?

In order, therefore, to maintain the case for mitigation, environmentalists point to the alleged harm that the landowner does to his own property. But that harm is offset by the gain that the owner receives from the project that he erects in its place, which he presumably undertakes only because that project will generate net benefits in excess of costs.

The only way that a neighboring private party could block that development is to purchase, as is often done, a covenant from the property owner that restricts the scope of his proposed project, usually by setback, height, or size. If the private developer does not wish to cooperate, the deal then does not go forward. Again, that is probably the right result, if stopping development creates larger losses for the owner than it supplies benefits to neighbors.

That conclusion will not hold in all cases, because the savvy developer could hold out for large gains from desperate neighbors. Environmentalists are right to insist that this private remedy may prove inadequate because it ignores the diffuse negative effects that the development has on an entire region. But the proper corrective for this gap is for the government to collect taxes from its citizens to condemn that restrictive covenant over the undeveloped land. With the holdout power gone, the compensation award should leave the original owner no worse off financially than if the project had gone to completion.

Using condemnation for this admitted public purpose places a price limitation on the government appetite for environmental gains. That is a hidden strength of the system, because it guards against the state making exaggerated claims for supposed environmental harms that it would never be prepared to rectify if it had to foot the bill from public funds.

The situation that is now before the Supreme Court in Koontz shows the folly of the current law, which rejects the long-established common law baselines between neighbors. No longer does the state have to take (and pay just compensation) to satisfy its environmental goals. Rather, the entire mitigation doctrine amounts to nothing more than a form of grand theft larceny by which the state first claims for nothing a state-wide environmental easement, which it will then sell back to the landowner for the (mitigation) price that it regards as acceptable by its own standards. It is, quite literally, no better than allowing the state to confiscate land for nothing, which it then duly sells back to its original owner for a price. Ransom money involves the same dubious strategy.

The Koontz Negotiation Saga

The nineteen-year-old legal conflict in Koontz is about the second-order dispute over the level of compensation owed, assuming the state owns this floating environmental easement. Koontz took the position that the Water District could only insist on conditions that were attached to his 14-acre plot. Accordingly, he offered to mitigate his losses by dedicating his remaining 11 acres as protected wetlands. But the Water District summarily rejected his offer to dedicate three acres as wetlands for each acre developed because this fell far below its minimally accepted “mitigation ratio.” Florida deemed that the loss of 25 percent of its wetlands was unacceptable. It never once considered condemning additional lands with tax dollars to increase its stock of pristine wetlands.

Instead the Water District wanted mitigation to extend to off-site lands. More specifically, the Water District identified some 50 off-site acres of wetlands that were located between 4.5 and 7 miles from the Koontz property, and demanded that Koontz pay for replacing worn out culverts and repairing porous ditches. From the state’s point of view, this offer made good sense. Unless the District expands mitigation opportunities beyond the same parcel of land, the landowner will be left high and dry because he could do nothing to coax the District to grant its permit. After all, the current law gives the Water District the unquestioned option of just saying no to Koontz’s application. Far from being an act of high-handed thievery, therefore, these extra mitigation opportunities increased Koontz’s odds of developing his property.

But the problems run deeper, for no one knows how to price these mitigation opportunities. The Water District offered a low-ball estimate that priced these repairs at around $10,000. Koontz’s estimate ran from $90,000 to $150,000. Negotiations collapsed over this valuation dispute, as they frequently do. The Water District denied the permits, and Koontz brought an action for “inverse” condemnation, which would brand the government’s refusal to grant the building permit as a confiscatory act.

The Court’s Opportunity

The narrow issue before the U.S. Supreme Court is whether this condemnation claim is valid when the District’s aborted land use exactions are off-site. Unfortunately, the Water District offers no explanation as to why its price schedule (over three acres put aside for each acre developed) for mitigation is correct. More critically, it never explains why there should be any environmental mitigation doctrine at all. When the case came before the Florida Supreme Court, the state began its discussion by insisting that the “purpose behind the takings doctrine is to prevent government from forcing an individual to carry burdens that should be carried by the public as a whole.” Yet that is precisely what the government does by asking Koontz to underwrite the repair of its culverts and ditches for the benefit of the public at large.

The significance of this issue, moreover, not only concerns fairness to individuals in deciding who pays for any repairs. Also relevant is whether the repairs should be made at all. Looming behind these distributional questions lies key issues about economic waste from the misallocation of social resources. By linking the permit to the proposed repairs, the District frames the issue by making the wrong comparison.

Any landowner is likely to yield to exactions when the building permit it receives is worth far more than the conditions imposed upon it. But the right social comparison is whether the social cost of repairs exceeds their social benefits. If the state bears zero cost, it will eagerly order repairs that cost $1,000 but are worth only $100. All too often the landowner will buckle because the permit is worth $5,000 to him. By allowing the state to bundle the repairs with the permit, the law obscures the correct comparison, which is between the cost and value of repair; this obfuscation leads to excessive repairs. That mismatch of costs and benefits is not the only source of loss. The expensive bargaining process is pure social waste.

Both of these problems are obviated if the traditional rules are followed: the state should have to buy out the restrictive covenant if it wants to stop the development. It now has the incentive to make the right calls, and the private owner can no longer hold out for excessive amounts of cash because the “just compensation” language limits the amount owed to the market value of the property taken. The creation of the environmental easement is conducive to social loss and factional struggle. The Supreme Court in Koontz should take off its blinders by rejecting the environmental mitigation doctrine once and for all.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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