Supreme Court Gives Michigan Developers new Basis for Challenging Land-use Permit Requirements

“Our precedents ... enable permitting authorities to insist that applicants bear the full costs of their proposals while still forbidding the government from engaging in ‘out-and-out ... extortion’ that would thwart the Fifth Amendment right to just compensation.”

Koontz v. St. Johns River Water Management District, J. Alito.

The 2012-13 term of the Supreme Court recently concluded with many viewing it as “historic.” Much of the press coverage toward the end of the term focused on landmark cases involving affirmative action, the 1964 Civil Rights Act, the Defense of Marriage Act and California’s same sex marriage prohibitions. I earlier reported on a decision that had important ramifications for the Great Lakes Basin. In the bustle of the Supreme Court’s flurry of decisions was Koontz v. St. Johns River Water Management District, which makes it easier for developers to sue regulators for land-use decisions, but may also provide a disincentive for regulators to compromise with developers.

Koontz represents a very common set of facts and one with which any land developer in Michigan should be familiar. A landowner sought to develop 3.7 acres of his 14.9-acre parcel upon which sat wetlands that were regulated by Florida law. As he could not develop his property without impacting wetlands, he offered as mitigation for the impacts to the wetlands to deed a conservation easement for 11 acres of his property to the St. Johns River Water Management District (District).

The District countered by offering two options to the landowner. The first was to reduce the size of the development to one acre and deeding over to the District the remaining 13.9 acres. The second alternative was to allow the 3.7-acre development, deeding over the remaining property to the District and to hire contractors to make certain improvements to a District-owned wetlands located several miles away. The developer chafed at the counteroffer, choosing instead to sue the District, alleging that the District's counteroffer to require work in an area unrelated to the property to be a “taking” that required just compensation.

What the District offered is a very common tactic when agencies consider mitigation of development in wetland areas. Michigan regulates wetlands in the state and has in place a policy of “no net loss of wetlands.” It requires that wetlands lost as a result of development must be replaced by wetlands of a similar type and at times requires increasing ratios of wetland mitigation depending on the “value” of the wetland. The Michigan Department of Environmental Quality (MDEQ) also uses conservation easements to ensure that future development activities do not impact mitigation wetlands.

The question presented to the Supreme Court related to whether, under takings law established by previous Supreme Court precedents, permit seekers have a takings claims when the government entity demanded a payment of money (in this case, work to be done at a District-owned wetlands) in return for a permit. Two Supreme Court decisions, Nollan v California Coastal Commission and Dolan v City of Tigard, held that a regulator cannot require a developer to relinquish its property in order to obtain a land-use permit unless there was a “nexus” and “rough proportionality” between the effect of the development and the regulator’s requirements. In this case, the question was whether the District could require the developer to incur costs for work done in an unrelated wetland.

The Supreme Court recognizes that private development could impose a public cost that would need to be offset by the developer. However, given that the regulator has the ability to leverage its approval of a development in order to obtain a public benefit, it is quite possible that the public benefit obtained has no relationship to the actual development. In such a circumstance, the law recognizes an impermissible “taking.”

The Florida Supreme Court ruled against the developer, finding that “no property of any kind was ever taken.” But the Supreme Court ruled that any land-use regulation that results in a permit denial or a demand for payment as a condition of obtaining a permit requires the “nexus” and “rough proportionality” of Nollan and Dolan to be met. Because the demand for payment did not have a connection to the development or public impact of the development, the District’s actions amounted to an attempt to “leverage its legitimate interest in mitigation to pursue government ends that lack an essential nexus and rough proportionality to those impacts.”

One especially interesting aspect of this decision is that the Supreme Court did not necessarily find that an actual taking occurred, as no permit was ever issued. Koontz sued before ever having obtaining a permit and paying any costs related to the mitigation wetlands. Whether there was an actual taking was left to the Florida courts to decide on remand.

Developers in Michigan have a new basis upon which to challenge wetland permit and other land-use permit requirements. If a wetland permit requires it to do work that is not somehow connected to the property or activity being regulated, they may have a taking claim. The Michigan wetland rules, however, may have a built-in protection in that mitigation that occurs away from the development (because it is impractical to do it onsite or in the immediate vicinity of the development) must be done in the same watershed. A different result may occur given that the mitigation of affected wetlands are rarely one-to-one, as a developer could potentially argue that the costs related to the added acreage requirements are not sufficiently connected to the specific activity being regulated.

One unintended consequence of this ruling is that some regulators may decide to become more inflexible in granting permits. In this case, the regulators offered two alternatives to the developer, presumably to be more flexible to the developer’s plans. In a case of “no good deed goes unpunished,” it was this flexibility that gave rise to the potential for a taking.

Often regulators want to work with developers to get a project completed and can be creative toward reaching a solution. But, given the Supreme Court’s holding, regulators may see fewer advantages to working with developers and may just deny permits, rather than work with developers to see projects completed. An inflexible approach may provide more cover for the regulating agency than attempts at reaching a compromise under this decision.

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