Property

NINE

Government Forbearance

THE GOVERNMENT HAS MADE an appearance at various points in this book, as an enforcer of property rights, a creator of different property forms, a recorder of property rights, and an arbiter of disputes between neighbors, among other functions. But the government can also pose a threat to property rights, either by seizing property or by changing the rules of the game in ways that are destabilizing to owners. The most general question here is how far the government should forbear from undermining the expectations of owners about what they can and cannot do with their property. Complete vindication of expectations is impossible. Change is inevitable, and as new problems emerge, adjustments in property rights are often the response. Consider, for example, how changing attitudes about racial discrimination resulted in laws that limit the right of owners to refuse to rent or sell their property to persons based on their race (see Chapter 4). But too much change in government policy toward property, including in the extreme case outright expropriation, can undermine the ability of owners to plan for the future and may discourage them from undertaking needed investments. Striking the right balance between accommodating change and forbearing from frustrating expectations has always been, and will continue to be, difficult.

In this chapter, we consider some of the important ways in which governments are constrained to forbear from upsetting the expectations of property owners, thereby enhancing the security of ownership and the value of the institution of property. ¹

The General Form of the Problem

The difficulty in striking a balance between demands for change and protecting reliance interests is nicely illustrated by a famous Supreme Court case, Charles River Bridge v. Warren Bridge. ² In 1785, Massachusetts granted a charter to the Proprietors of the Charles River Bridge to build a private toll bridge across the Charles River between Boston and Charlestown. The charter, after one extension, was to last 70 years, or until 1855. As population and economic activity in the Boston area grew, the bridge became highly profitable. In 1828, the legislature was persuaded to charter a second bridge, the Warren Bridge, which would roughly parallel the Charles River Bridge. The new bridge was to collect tolls for a short time and then become a free bridge. Not surprisingly, once the Warren Bridge stopped collecting tolls, the value of the Charles River Bridge franchise was destroyed. The proprietors of the Charles River Bridge sued, claiming that their charter was impliedly exclusive, and that by chartering the second bridge to compete against the first, the legislature had impaired the obligation of contract, in violation of Article I, section 10 of the Constitution. ³

In the Supreme Court, all the justices agreed that the original charter was a contract between the Commonwealth of Massachusetts and the proprietors of the Charles River Bridge, and hence was protected by the Constitution. But they disagreed sharply about whether the original charter should be interpreted as including an implied promise of exclusivity.

Chief Justice Taney, writing for the majority, adopted the rule that corporate charters should be strictly construed in favor of the government. Because the charter was silent on whether it precluded a competing bridge, the proprietors’ claim failed. Taney noted the great difficulty that courts would have in determining the scope of exclusive rights if such a provision were implied. How far up and down the river would the original bridge have the right to operate as a monopoly? He also stressed how an implied term of exclusivity could interfere with economic growth and technological change. Many ferry charters had been replaced by bridge charters, and many charters for turnpike roads had been superseded by charters for railroads. If charters for bridges and roads always include an implied term of exclusivity, then innumerable old charters would awake “from their sleep,” and their promoters could call upon the courts “to put down the improvements which have taken their place.” ⁴ In other words, affording too much protection for the reliance interests of the original charter holders would stifle progress.

Justice Story wrote a long and impassioned dissent. He said the rule of strict construction applied only to government charters given by donation, not to charters supported by consideration. Charters given for a promise of some return benefit, such as the one for the Charles River Bridge, should be liberally construed in favor of the grant recipients to ensure that the charters achieve their intended purpose. He rhetorically asked whether the original proprietors would have built the bridge, at considerable expense and risk, if they had been told that the state reserved the right to build a free bridge immediately next door. The rule adopted by the majority would discourage investment in enterprises designed to promote the public interest. Such a rule, he said, did not preclude modification of charters if technological or social change rendered the original promise obsolete. But the proper way to repeal or modify a charter was by using the power of eminent domain and paying just compensation for the value of the rights taken.

Charles River Bridge raises enduring questions about how far the government should forbear from interfering with expectations of property owners. The general question here is how much risk property owners should be expected to assume based on changes in government policy. Chief Justice Taney did not believe that property owners assume all risks of change in public policy. He acknowledged that explicit takings are prohibited without compensation, and that government must keep its express promises. But all other risks from government action he would treat as no different from the risks associated with natural disasters or changes in consumer preferences. Implicit in this view is the assumption that the government can generally be trusted to do the right thing.⁵

Justice Story believed that the government should provide a more robust form of insurance against risks associated with the government’s own actions. At the very least, when the government has taken action specifically designed to induce parties to invest in some enterprise, the government has an obligation to forbear from undermining reasonable expectations associated with that investment. In effect, Justice Story would impose a duty of good faith on the government in dealing with persons who have acted in reliance on its promises. His view implied a more skeptical attitude about whether government can be trusted without court supervision.

What is at stake here? Justice Story is probably correct that requiring the government to forbear from frustrating reasonable expectations would induce higher levels of investment in new enterprises. The risk of making such investments would be reduced, and hence the expected return would be higher. Justice Taney may be correct that a general policy of forbearing from interfering with reasonable expectations would significantly tie the hands of the government. If the government always had to pay just compensation to those whose reasonable expectations were frustrated, politicians might hesitate before adopting otherwise desirable changes in policy, because of the additional cost of compensation.

The matter is complex, however, because it is not clear how government actors respond to forbearance requirements.⁶ With private actors, the requirement to forbear or pay internalizes the cost of interfering with others’ rights to the private actor, who can then weigh it against the benefit from the action in question. With governments, things are less clear. If governments must forbear or pay, the cost of compensation ultimately comes out of taxpayers’ pockets. Politicians seek to maximize their political support and, in particular, their chance of reelection, which may or may not correlate closely with taxpayer welfare. The incentives of government officials are especially likely to be skewed if the linkage between government action and the need for higher taxes is not very transparent.

Another way to view the problem is to ask whether or how far one generation should be allowed to tie the hands of the next. Government forbearance presents a more specific application of the problem of “dead hand control” that raises its head in many areas of the law of property. Just as we ask whether an owner should be allowed to dictate who should get the owner’s property after the owner’s death, or whether an owner should be allowed to enter into a servitude that limits the use of the property after it has been sold to someone else, we also must ask whether one generation of lawmakers should be allowed to make promises to forbear from interfering with property that are binding on succeeding generations of lawmakers. One perspective is that it is inherent in the concept of democratic government that each generation should be able to decide what laws it will be governed by.⁷ Values and social problems change, and it makes no sense that people living today should remain slaves to the vision of those long dead. A rival perspective is that the ability to entrench certain expectations is vital to achieving the goals of democratic government; to deny this tool to lawmakers would impair their ability to govern.⁸ Certainly, we hold governments to their contracts, and one way of viewing the problem of government forbearance is to ask whether an additional precommitment device analogous to a government contract is useful or possible.⁹

In practice, neither of the extreme positions—never permit entrenchment or always permit entrenchment—prevails. Our legal system has gradually become more committed to the principle of majority rule, for example, by expanding the franchise to include previously excluded groups such as racial minorities and women, providing for direct election of the Senate, and choosing Presidential electors by statewide elections. Yet many features of entrenchment remain, such as requiring the approval of both houses and the President before a law is passed—which is in practical effect a supermajority requirement—and subjecting legislation to review by life-tenured judges to assure compliance with the Constitution. As is reflected in the competing positions of Justices Taney and Story in Charles River Bridge, our legal system seeks to strike a balance between majoritarianism and entrenchment, as well as between change and stability.

Sources of Forbearance

From the perspective of a property owner, the problem of government forbearance is largely one of minimizing the risks associated with changes in government policy that impair the value of property. Property owners do not want to abolish government. After all, this would leave property at the mercy of trespasses, nuisances, and conversions committed by others, and would almost certainly result in a severe undersupply of public works such as roads and sewers that greatly enhance the value of property. Nor do property owners necessarily even favor minimal government. Zoning appears to be highly popular with owners of single-family residences, perhaps because zoning has been designed to protect single-family homes against potential adverse effects from commercial or multifamily development (see Chapter 8). What most owners want is to be able to predict with some confidence what the government is likely to do in the future that could have an impact on the use and enjoyment of their property. Will the government prohibit certain uses previously permitted, or dramatically change tax rates, or embark on a takeover of property by public authorities? Forbearance means, above all, predictability about future government policy.

There are multiple sources of government forbearance, in the sense of predictability about government policy toward property. Lawyers are most interested in constitutional constraints on government, such as the protection against uncompensated takings of property. But these are not the only sources of forbearance, or even the most important ones. Among the other sources of constraint are democratic politics, social norms that encourage respect for property, and rule of law values. We will return to the rule of law momentarily. But first, a few words about democratic politics and social norms.

As should be obvious, one very important source of government forbearance is ordinary politics. In a democracy, government is unlikely to take action that would affect large numbers of property owners in an adverse way. Consider, for example, the tax deduction for home mortgage interest. There is no constitutional or other legal impediment to abolishing this deduction, and it has been widely criticized as an unwarranted subsidy for homeownership. But the home mortgage interest deduction enhances the value of millions of homes throughout the country (and its supporters cite the greater involvement of homeowners in their communities). Notwithstanding repeated calls to eliminate the deduction, or phase it out for higher-income taxpayers, the political outcry that would greet any attempt at repeal probably insures against any such adverse action taking place in the foreseeable future.

The political support that property enjoys depends not only on how widespread the form of ownership is, but also on whether owners have a credible threat to exit from the jurisdiction. Property that is immovable, such as land and fixed-plant investment, is generally more vulnerable to changes in government policy. Many railroads learned this lesson the hard way in the nineteenth century. State and local governments made lavish promises to induce the construction of new rail lines. But after they were built, many governments reneged on their promises, or attempted to impose new taxes and regulations that restricted the profitability of the investments that had been made. This kind of “bait and switch” behavior is one interpretation of what happened in Charles River Bridge.

The importance of political constraints is reflected in the fact that property is generally much less secure in authoritarian regimes than in democratic ones. Outright expropriation is rare in democracies. It is much more common in authoritarian and one-party regimes. In the extreme cases of Soviet Russia and Maoist China, expropriation became celebrated as official policy. There seems to be a loose associational relationship between widespread property ownership and political democracy, in that widespread property ownership supports democracy, and democracy helps support widespread ownership of property. One reason for this is that democracies tend to promote government forbearance from interfering with property.¹⁰

Social norms provide another important source of government forbearance. The relevant norms range from general customs of society to internal bureaucratic habits. In countries with strong traditions of respect for property rights, government officials—whether elected or not—are likely to act with restraint in taking action that affects owners. This will be true whether or not constitutional or other formal laws require this, and whether or not owners have access to courts to call officials to account—although formal legal constraints and judicial enforcement will no doubt reinforce social norms of respect. In effect, in a society with strong norms supporting ownership, elected politicians and bureaucrats will internalize these norms, so it is unlikely they will take action that deeply upsets owner expectations, even if such opportunism might be in their short-term interests.

The history of post-Maoist China provides a possible illustration of the importance of social norms in fostering forbearance.¹¹ Reflecting its communist heritage, all land in China is owned by the state or by rural collectives. Buildings and other improvements can be held privately, in the form of time-limited ownership rights, and the Chinese constitution has been amended to stipulate that these rights cannot be taken by the government except in the public interest and for compensation. Nevertheless, there is little tradition of judicial enforcement of these rights. Moreover, China engages in frequent takings of rural land and of urban land that was developed before China opened itself up to foreign investment.¹² There are many complaints about the lack of procedures and the adequacy of compensation for these takings. Yet notwithstanding the weak legal and political checks on government interference with property rights, China has had little difficulty in recent years attracting large amounts of capital from foreign investors. This investment has fueled an enormous construction boom, especially in major cities along the coasts.

The intriguing question presented by China is: What is the basis for the apparent confidence on the part of foreign investors that they will get their money back from the fixed-plant investment projects they have funded? How do they know the Chinese government will forbear from directly or indirectly expropriating these investments? Formal legal guarantees cannot be the answer, because judicial enforcement is too weak. Legislative checks on administrative opportunism cannot be the answer, as China is a one-party state. The best answer would seem to be that Chinese administrators in the post-Mao era have developed a strong norm against interfering with the expectations of foreign investors. Chinese officials have “compartmentalized” their behavior toward property, with one set of attitudes about old property—rural land and older Mao-era urban buildings—and a different set of attitudes about new property developed in the post-Mao era. Foreign investors have been able to observe the consistent behavior generated by these compartmentalized norms, and have become confident that Chinese officials will forbear from interfering with foreign investment. The conditions of repeat play with current and future foreign investors and the practice of partnering with local government entities may also serve as a constraint on government behavior. Whatever the explanation, the recent history of China suggests that caution is in order before concluding that strong legal rights enforced by courts are a necessary precondition for creating the degree of government forbearance needed for investment in property to flourish.

The Rule of Law

The most general legal strategy for achieving a significant degree of government forbearance is a commitment to the rule of law. Like other concepts in political theory, there is considerable dispute about what “rule of law” means. For present purposes, we can define the rule of law as a strategy for promoting forbearance by requiring that the government act in accordance with rules that are generally applicable, knowable in advance, and enforced by an impartial judiciary. The objective, again, is to enhance the predictability of the government’s behavior, so that owners have greater confidence about what the government is likely to do in the future that could affect their property. The predictability here is supplied by the expectation that courts will require the government to obey existing laws that protect property, and that the government will obey the courts.

There is no freestanding rule of law norm in American law. Instead, the rule of law is supported by a variety of doctrines and understandings. We will briefly consider four: procedural due process, the doctrine of vested rights, stare decisis, and waivers of sovereign immunity to permit suits against the government.

Procedural Due Process

One very important doctrine reinforcing the rule of law is procedural due process. The Due Process Clauses of the Fifth and Fourteenth Amendments to the U.S. Constitution provide that the government may not deprive individuals of “life, liberty, or property, without due process of law.” These words have been interpreted to mean many things. The most important from the present perspective is a commitment to the principle of legality. Individuals who have entitlements to “life,” “liberty,” or “property” may not have these things taken away by the government unless the government demonstrates it has complied with all requirements of existing law that protect these interests. For example, assume the law provides that the government may not seize an individual’s real property for nonpayment of taxes unless the government proves that the taxes are owed and have not been paid. Under the Due Process Clauses, the individual is entitled to demand a hearing before any seizure takes place, to challenge the legal proposition that the taxes are owed and/or the factual claim that the taxes have not been paid. In effect, due process guarantees that the individual be given an opportunity to challenge the legality of the seizure before it occurs, both as to its legal and its factual basis.

This is a powerful reinforcement of government forbearance. Procedural due process provides a weapon for the property owner to assure that the government does not ignore the rules on the books, either because of hostility to the owner, a mistake about the relevant law or facts, or just plain sloppiness. To be sure, procedural due process does not protect property owners against prospective changes in the rules that have an effect on property. The government can change the rules, and in any future dispute the new rules will be applied, not the rules that were in effect at some time in the past such as when the property was acquired. Still, the due process guarantee makes the government’s behavior more predictable, and thus enhances the security and value of property rights.

One important question that arises in the due process context is how we define the “property” that is subject to this guarantee. (Similar questions are presented about the meaning of “life” and “liberty,” but this would take us too far afield.) The basic answer is that just about everything we have covered in this book qualifies as property for procedural due process purposes—and more besides. In a series of controversial decisions in the early 1970s, the Supreme Court held that property includes all entitlements grounded in law upon which people rely in their daily lives.¹³ Under this “new property” definition, not just conventional property—such as houses, cars, and securities—is included in the category of due process property, but also welfare benefits, disability benefits, government employment protected by civil service laws, publicly supplied utility services, professional licenses, and even public schooling. ¹⁴ This goes well beyond the common-law idea of property as based in large part on a right to exclude others from specific resources. If a central reason for wanting to secure government forbearance is to enhance incentives to develop and invest in property, it is not clear that welfare benefits, utility services, or the right to attend public school should be regarded as property, as these benefits are not things in which individuals invest. They may use the stream of benefits to invest in something else, for example, in developing their own human capital. But the benefits themselves are not subject to individual control and direction. Arguably, therefore, the Court’s “new property” definition is overbroad.

The overbreadth of the definition of property would not matter, and might even be considered a good thing in terms of expanding the scope of the rule of law, except for one concern: the broader the definition of property, the greater the pressure on the courts to dilute the procedural protections afforded for the protection of property. There is some evidence that this has occurred. Before the Court embraced the “new property” conception, it was understood that the government must generally afford a person a hearing on the legality of a taking of property before the deprivation takes place, subject to some narrow exceptions for public emergencies and the like.¹⁵ After the expansion of coverage reflected in the new definition, the Court announced that the procedures appropriate in any given context should be determined by a balancing test, in which courts weigh the significance of the private interest, the marginal value of additional procedures in protecting that interest, and the cost to the government of providing the additional procedure.¹⁶ This balancing test has allowed the Court to declare that many interests are adequately protected by hearings held after, rather than before, the deprivation occurs,¹⁷ as well as to scale down the required procedures to include in some cases mere notice and an opportunity to voice objections before a nonjudicial officer.¹⁸ If these dilutions spill over to traditional property rights, this would represent a serious erosion of protection against unlawful government interference with property.

Vested Rights

A second and much less well-defined rule of law constraint is the doctrine of vested rights. Roughly speaking, rights are vested when there are no contingencies of law or fact that might stand in the way of their enjoyment. Thus, a future interest is considered vested either when it becomes possessory (“vested in possession”) or when any conditions precedent that must be resolved before it can take effect have been satisfied (“vested in interest”). (See Chapter 5.) The core example of a vested right is full ownership of tangible property, for example, a fee simple in land. But the concept has a broader signification as well. In the famous case of Marbury v. Madison, ¹⁹ William Marbury’s commission to serve as a justice of the peace was described as a vested right, because his appointment papers had been signed by the President and sealed by the Secretary of State and all that remained was for the commission to be delivered, which the Court concluded was a purely ministerial act that entailed no discretion. So the concept of vested rights can include things such as public offices as well as more conventional property rights.

Protecting vested rights was once described as the central concern of American constitutional law.²⁰ In its strongest form, the doctrine of vested rights provided that neither courts nor legislatures could interfere with rights once they were vested. In a weaker form, the doctrine proclaimed that all retroactive interferences with vested rights were prohibited. Both forms of the doctrine have faded considerably over time. One reason is the lack of any express textual basis for the doctrine of vested rights in either the federal or most state constitutions. A second problem is the difficulty of defining the key concepts of “vesting” and “retroactive.” A third problem is the accumulation of counterexamples, whereby demands for social change have led to the overturning of vested rights. The freeing of slaves, who were regarded as property under earlier law, and the prohibition movement, which rendered distilleries and liquor stocks worthless, are examples. In both cases the “de-vesting” of rights was authorized by a constitutional amendment, but these and other upheavals nevertheless produced major cracks in the edifice of vested rights.

Notwithstanding its weakened status, the concept of vested rights continues to play a role in promoting government forbearance. A particularly striking example is the protection of nonconforming uses under zoning laws. Uses established before the imposition of zoning have generally been allowed to continue, with some state courts requiring compensation for their abolition. Since 1950, many zoning ordinances have attempted a gradual phase out (“amortization”) of such nonconforming uses.²¹ In addition, retroactive legislation continues to be disfavored. The Supreme Court has held that retroactive laws that interfere with property rights require a double justification under the Due Process Clause—one justification for the interference, and a separate justification for making the law retroactive.²² And the Court has held that ambiguities about whether a statute applies retroactively are generally to be resolved in favor of the statute applying only prospectively.²³ These understandings, cumulatively, provide additional security for property rights.

Stare Decisis

The understanding that courts should follow previous decisions unless they have a strong justification for overruling—known generally as stare decisis—serves also to protect expectations about property rights. It has long been held that “[c]onsiderations in favor of stare decisis are at their acme in cases involving property and contract rights, where reliance interests are involved.”²⁴ Whether courts in fact are more faithful to precedent in matters implicating property rights is difficult to say. Certainly during the “rights revolution” of the 1970s, courts overturned a number of older property doctrines as “vestiges of feudalism.” Landlord-tenant reforms, such as the adoption of the implied warranty of habitability, the duty to mitigate damages, and increased freedom for tenants to sublet or assign are examples of judicial reforms of this era. Still, the perpetuation of old forms of ownership, like the defeasible fees, as well as the resistance to Restatement-inspired reforms in the law of servitudes, suggest an enduring judicial caution about upending property law too much.

Note that the doctrine of stare decisis applies only to the courts, not other branches of the government. The functional significance of strong adherence to precedent in matters of property (assuming it exists) is that this channels law reform toward the legislature, where change can be made prospective. Such a channeling, of course, furthers general rule of law values of predictability and notice.

Waivers of Sovereign Immunity

Common law courts were originally royal courts, answerable to the King. Perhaps out of prudence, the courts decided the “King could do no wrong,” and hence could not be sued without his consent. Modern courts have perpetuated this understanding in the form of the doctrine of sovereign immunity: The government cannot be sued without its consent, which must be clearly given. If we are interested in promoting government forbearance through a rule-oflaw strategy, sovereign immunity is potentially a serious barrier. The government cannot be held to account for the legality of its behavior unless it can be haled into a court of law, where a judgment directing the government to comply with the law can be rendered.

Fortunately, enough inroads have been made into sovereign immunity to allow the rule-of-law strategy to take hold. Under the Administrative Procedure Act, the federal government has broadly waived sovereign immunity for claims against government agencies for other than money damages.²⁵ This allows courts to review and potentially set aside a broad array of government actions alleged to be contrary to law. Claims for money damages can be brought against the federal government under the Tucker Act either for breach of contract or a taking of property without just compensation.²⁶ The waiver for contract claims has been held to include claims for reliance damages based on the government’s breach of a promise to forbear from certain kinds of regulations.²⁷ The recognition of this cause of action could evolve into an important check on government policy reversals that undermine property rights. The waiver for takings claims has allowed the Takings Clause (considered below) to be given teeth insofar as it applies to the federal government.

State governments also enjoy sovereign immunity; indeed, the Supreme Court has held that the states enjoy a particularly powerful form of sovereign immunity that cannot be abrogated by Congress under its general Article I powers such as the Commerce Clause.²⁸ Nevertheless, express constitutional limits on state power, such as the Contract Clause and the Takings Clause (which applies to the states through the Fourteenth Amendment) are recognized as overriding any sovereign immunity that subordinate state units, such as municipalities, might claim,²⁹ and possibly even the immunity of states themselves. The Court has diluted the accountability of states under the Takings Clause by imposing an elaborate set of requirements of exhaustion of state remedies before plaintiffs can turn to federal courts for relief.³⁰ Still, these exhaustion requirements shield the states only to the extent that they have subjected themselves to a legal regime that provides protection for property, so even here we see that the rule of law strategy has room to work.

Explicit Takings

The government, or entities exercising power delegated by the government, often engages in compulsory acquisitions of property, generally known in the United States as the power of condemnation or eminent domain. The most common uses of the power are for public infrastructure projects such as roads, sewers, power lines, and airport expansions. The power can also be used to acquire sites for government facilities such as courthouses, schools, or prisons. More controversially, the power has been used to reconfigure aging urban centers. Starting in the 1950s, eminent domain was used for massive urban renewal projects that bulldozed entire neighborhoods for redevelopment projects, a policy now widely discredited as destroying community ties and targeting minority groups. Most controversially, the power has sometimes been used to acquire sites for private business firms, as in the Poletown case,³¹ which approved condemnation of a tract of land in Detroit for a General Motors assembly plant.

The U.S. Constitution and parallel provisions of state constitutions directly address explicit takings of property by the government. The Fifth Amendment provides: “nor shall private property be taken for public use without just compensation.” This has been construed as imposing two limits on explicit takings. First, any such taking must be for a “public use.” Second, such a taking requires the payment of “just compensation.” Both of these requirements limit government interference with property rights, and hence promote forbearance.

Public Use

The public use limitation promotes the security of property rights by limiting the use of compulsory acquisitions to circumstances of public need. The government cannot force an exchange of property from A to B merely because B has more friends in the government, or because government officials harbor a dislike for A. The public use requirement also presumably means the government cannot set itself up as an all-purpose property acquisition service, forcing the transfer of property to any person willing to put up the money for the taking. By limiting the scope of compulsory acquisitions, the public use requirement promotes the stability of ownership, and allows people to make long-range plans for the development and use of their property.

Notwithstanding this important function, the U.S. Supreme Court has always given the public use requirement a weak interpretation. Although some state courts have flirted with the idea that public use means public ownership or a public right of access, the Supreme Court never explicitly adopted such a narrow definition, and beginning in the twentieth century, it has been increasingly explicit in its view that “public use” means public interest. Thus, government can take property as long as it can cite some publicregarding rationale for the taking, whether or not the property ends up in the hands of the government and whether or not the public can actually use it. Moreover, the Court has given great deference to legislative and administrative determinations of when property should be taken, suggesting that these decisions should be subject to only the requirement of minimum rationality as to the ends of the taking and whether the taking is an appropriate means to those ends.³²

The Court’s highly deferential approach to public use was tested by Kelo v. New London, ³³ a decision that sparked intense controversy about the use of eminent domain. At issue in Kelo was a project designed to revitalize the economy of New London, Connecticut, an economically depressed port city. Pfizer, the drug company, had purchased an abandoned factory on the waterfront, and was using the site to build a new research facility. The New London authorities decided to acquire a large tract of land next to the Pfizer facility. The plan was to level virtually all the buildings in the area, and retransfer the land to a private developer for a mixeduse project. The project would include some traditional public uses, such as a marina, a walkway, and a Coast Guard Museum. But most of it would be used for a hotel, commercial office buildings, and 80 new residences, which would be built and marketed by the developer.

Most property owners in the redevelopment area reached negotiated agreements to sell to the New London authorities. But ten owners of fifteen properties, many of which were owner-occupied residences, refused to sell, and the city instituted eminent domain proceedings against these owners. The dissident property owners argued in the state courts that the taking was not for a public use as required by the United States and Connecticut Constitutions, because the primary beneficiary would be an as-yet-to-be determined real estate developer, and because there was uncertainty about whether the project would ever achieve its stated goal of revitalizing the New London economy. The city prevailed in the state supreme court, over a dissent.

The U.S. Supreme Court also held that the project was for a public use, although by a surprisingly close vote of five to four. Justice Stevens’s opinion for the majority reaffirmed that the Takings Clause prohibits takings for a purely private purpose. The majority held there is no categorical constitutional rule against using eminent domain to promote economic development, even if the properties taken have not been found to be blighted.³⁴ Following prior decisions, the Court said that economic development is a legitimate government purpose, and that the decision whether to use eminent domain to achieve any legitimate government objective is largely left to the people’s elected representatives. Justice Stevens concluded that the record showed the project was a bona fide effort to promote local economic development, and was not merely a pretext for private gain.³⁵

The notion of pretext figured centrally in Justice Kennedy’s concurrence.³⁶ According to Justice Kennedy, courts should strike down takings that are primarily meant to benefit a private party and have only incidental public benefits. He did not favor a remand, because he read the record in Kelo to include sufficient evidence for the conclusion that the exercise of eminent domain in New London was not pretextual. What exactly this potentially more robust standard of review would mean in practice is unclear, but courts may need to figure it out, because not unusually, Justice Kennedy supplied the crucial fifth vote for the result in Kelo.

Justice O’Connor, writing for four dissenting justices, viewed the decision with alarm. If economic development, without more, is a sufficient rationale for eminent domain takings, she wrote, then all properties are at risk of condemnation. All that is needed is a plausible argument that someone other than the current owner will put the property to a more valuable use.³⁷ She suggested limiting the use of eminent domain for economic development to circumstances where the precondemnation use of the property is imposing affirmative harm on society, as where the property has been found to be blighted.³⁸

In a separate dissent, Justice Thomas objected to the decision on two grounds.³⁹ He argued that a natural reading of the Takings Clause at the time it was adopted (1791) would have required that the property either be retained in government ownership or used by the public. Adverting to more recent history, Justice Thomas also pointed out that eminent domain has often been used against vulnerable groups such as African Americans, the poor, and the elderly, especially in the urban renewal era of the 1950s.

The lessons of early history alluded to by Justice Thomas are potentially instructive but in the final analysis ambiguous. The records of the Constitutional Convention and the ratification debates in the states provide very little guidance. The prohibitory word “without” appears before “just compensation,” not before “public use.” The words “public use” themselves may have been a paraphrase for “eminent domain,” as if the Clause read, “nor shall private property be taken by eminent domain without just compensation.” Would that mean that a government-sponsored private seizure (a taking from A to give to B) would not even require compensation? It has been almost universally assumed that taking from A merely to give to B is not permitted. Or would uncompensated A -to- B takings be prohibited by some other clause, such as the Due Process Clause? Even if the public use language meant only that takings by eminent domain require compensation, this still requires that we identify what it means to take by eminent domain (as opposed to take for some other purpose, such as to satisfy a tax liability). And eminent domain has always included some notion of publicness, so perhaps we circle back to the need to identify some public purpose, even if the Takings Clause is not read as directly prohibiting takings for private use.

Early eminent domain practice is likewise ambiguous. Compensation was often not given for land taken for roads, but in early American history being close to a road was considered a benefit and undoubtedly increased the value of the land retained. Mill acts were also enacted that allowed private owners to build dams that flooded upstream lands, upon paying just compensation to the upstream owner. Grist mills were open to the public, and therefore satisfied the public access test. But other mills were private factories, and state laws granting them what amounted to a private right of eminent domain were also sustained, at least sometimes.⁴⁰ Some mill acts required the prospective mill builder to apply to an official and justify the taking, but others did not. Much of the litigation over mills also occurred in the nineteenth century and therefore sheds only indirect light on original understandings of the Takings Clause.

The analytical problem in determining the limits of eminent domain has always been that there are innumerable situations in which a forced exchange of rights can be useful in overcoming transaction-cost problems. Any project that requires the assembly of multiple contiguous parcels of land (think of a highway or an urban renewal project) will run into problems with holdouts, where some owners either behave strategically to exact a high price, or have an intense subjective attachment to their land, or just resent being forced to move. Even if only two parties are involved, as in the landlocked parcel problem mentioned in Chapter 8, this will be a bilateral monopoly and bargaining may break down. Moreover, any use of eminent domain to overcome transaction-cost problems has at least some public-interest justification—the assembly of land or the new access to land obtained through forced exchange presumably makes the community at least a little bit better off, and the additional wealth can be seen as a public good that redounds in some small degree to the benefit of everyone in the community, if only in the form of more jobs and more tax revenues. So, practically any exercise in eminent domain can be described as satisfying a public-interest standard.

Yet few would advocate a universal right of eminent domain. This would undermine incentives to invest and would interfere with the market’s ability to establish prices. The courts, however, have been singularly unsuccessful in drawing a line in the sand between permissible and impermissible uses of eminent domain. The U.S. Supreme Court, by holding public use to mean public interest, has effectively left the matter to the state courts and local political processes.

Given the Supreme Court’s interpretation of public use as public interest and the reaffirmation of that interpretation in Kelo, one might think that the public use requirement would do little to promote forbearance. But this would be misleading, for two reasons.

First, although the Supreme Court has been very deferential about enforcing the public use requirement in the federal Constitution, state courts, where most condemnation cases are tried, have been more willing to hold that exercises of eminent domain do not satisfy the public use requirement in state constitutions. If we look only at reported appellate decisions, about one in six state appeals court decisions addressing a contested public use holds that the taking is not permitted.⁴¹ These decisions suggest that state courts are not just rubber stamps approving any and all exercises in eminent domain. Cases in which property owners attach a high subjective value to property, or where eminent domain is being used to capture an assembly value for a private developer, appear to be particularly vulnerable to invalidation.

Second, the Kelo decision provoked a large backlash about the misuse of eminent domain. The result is that many states have amended their constitutions or statutes to tighten limits on the use of eminent domain. One common reform is to limit takings of property for economic development to circumstances where the property being taken is blighted. Whether this makes sense from an urban planning perspective is debatable. But from the vantage of property owners, a blight limitation, at least in theory, enhances protection against government takings, as the property owner has it within his or her power to prevent an economic development taking simply by keeping the property sufficiently well maintained to avoid a finding of blight. To be sure, some definitions of blight are so capacious that it is doubtful that they provide much protection, and blight findings have historically been manipulated to the disadvantage of minority groups, as highlighted in Justice Thomas’s dissent. In addition, there is some indication that state courts, chastened by the backlash against Kelo, will become more vigilant in policing proposed takings to make sure that there is a genuine public need and that all applicable legal requirements have been satisfied.⁴² In short, compulsory acquisitions are likely to be more tightly rationed after Kelo than they were before.

Just Compensation

Federal and state constitutions also require that the owner be given “just compensation” for any compulsory acquisitions that take place. If just compensation meant complete indemnification—compensation so complete that the owner is indifferent between keeping the property and getting the compensation—then all concerns about explicit takings would presumably go away. Property owners would be just as happy with the compensation as with the property and would have no objection. But the law has never required complete indemnification for takings. Instead, the general rule is that the owner receives the “fair market value” of the property taken—what the property would trade for in an arm’s length transaction between a willing buyer and seller just before the taking by the government. The fair-market-value standard systematically undercompensates the owner, in two respects.

First, the market-value formula deprives the owner of the subjective premium the owner attaches to the property. There are many reasons why owners of discrete assets value them more highly than does the market. Psychological attachment is one. Owners of homes, in particular, often come to regard them as an extension of their selves. Personalized or idiosyncratic modifications are another. A home owner may have installed access ramps for a disabled child, or a factory owner may have configured the interior space to accommodate a unique production process, and the market will not value these modifications at cost. Loss of community ties or business good will is yet another reason. A restaurant or dry-cleaning shop may be uniquely dependent on its location for its customer base, such that being forced to move even a few blocks would put it out of business. Moving and relocation costs (including legal fees) are potentially a final reason. Eminent domain effectively expropriates the owner’s subjective premium, whatever its source. This is a potent source of opposition to compulsory acquisitions.

Second, the market-value formula means that the condemning authority captures what may be called the assembly gain from the taking, and shares none of this with the owner. Eminent domain typically entails the assembly of many contiguous parcels of land, or the acquisition of a parcel that has some unique value to the condemning authority. Thus, the value of the assembled tract after the taking is greater than the sum of the parts before the taking, putting aside the value of any improvements. The assembled tract has scarcity value—it cannot be readily found in the market—for otherwise it would not be necessary to use eminent domain to put it together. Under the market-value formula, whereby the condemning authority pays the market value of what it takes, not what it gets, all of the assembly value is captured by the condemnor. This strikes many landowners as unfair, particularly in economic development takings, where the ultimate beneficiary of the assembly gain is often a private developer.

Why does condemnation law insist on undercompensating owners in these ways? The primary answer given by the Supreme Court is administrative costs.⁴³ Measuring the owner’s subjective premium would be very difficult, might degenerate into a swearing contest, and would be prone to abuse. Measuring assembly gain would also be difficult, given the lack of a market for many assembled tracts (consider highway rights of way for example). And there is no obvious principle for how the gain should be divided between the condemnor and the condemnees.

Undercompensation may also be appropriate to discourage overreliance by owners. For example, we do not want to encourage owners to make elaborate improvements to their property when there is a high probability that it will soon be taken for some public project. Incomplete compensation for takings can be seen as a kind of co-payment requirement that creates an incentive for owners, as well as the government, to minimize the losses associated with takings. Too much government forbearance, as Chief Justice Taney recognized, can be a bad thing, not just too little forbearance.

Nevertheless, it is quite plausible that some reform of the fairmarket-value formula in the direction of more complete compensation is warranted. The model here would be the federal Uniform Relocation Act, which mandates the payment of certain costs of takings that the fair-market-value formula ignores. The federal act, for example, pays moving costs, costs of temporary housing, and damage to personal property caused by a taking, subject to limits. Further modifications along these lines aimed at providing more complete compensation would enhance the security of property rights, and would be consistent with a general objective of promoting government forbearance.⁴⁴

Regulatory Takings

The Court has not limited the Takings Clause to explicit takings, but has held that it also applies to certain regulations of the use of property that have a particularly disruptive effect on owners. This has come to be known as the regulatory takings doctrine. The doctrine comes in two versions, weak and strong, with different implications for how much they promote government forbearance.

The weak version of the regulatory takings doctrine understands it as an antievasion rule. The Constitution requires that the government pay just compensation when it “takes” property. Consequently, the government should not be allowed to enact a regulation that achieves the same end as an explicit taking, and thereby evades the requirements of the Constitution. Under this weak version, the task of the courts is to ask whether the challenged regulation is “functionally comparable to government appropriation or invasion” and to force the government to pay compensation if the answer is yes.⁴⁵ The weak version provides modest support for forbearance, basically by preserving the integrity of the requirement that the government may engage in explicit takings only for public uses and only if it pays just compensation. The writings of Joseph Sax, who has argued that the regulatory takings doctrine should be limited to cases in which the government is acting as an enterprise, as opposed to a regulator, are consistent with the narrow view.⁴⁶

The strong version is considerably more ambitious. Under this version, the regulatory takings doctrine is designed to protect owners from any type of disproportionate loss in the value of their property caused by government regulation. As stated in one often-quoted case, the idea is to prevent “Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”⁴⁷ The strong version has drawn intellectual sustenance from the pioneering work of Frank Michelman, who coined the term “demoralization costs” to refer to the disutility of an owner and the owner’s sympathizers from an uncompensated taking as well as the loss of production stemming from the greater insecurity of property rights.⁴⁸ Michelman suggested that the government should always compensate if demoralization costs exceed settlement costs (which include compensation and administrative costs). He argued this was required on general utilitarian principles, and was also consistent with Rawlsian justice, insofar as the worst off in society would see this practice as part of an overall pattern that they would choose behind a veil of ignorance.

The contest between the Sax and Michelman perspectives, and more broadly between the narrow and broad visions of the regulatory takings doctrine, raises yet again far-reaching questions about the need for government forbearance. The broad version seems to suggest that the Takings Clause can be viewed as a form of mandatory insurance against losses in property values as a result of changes in government policy. The narrow version, in contrast, assumes that actors can anticipate that there will be change, and therefore mandatory government insurance is not called for; either self-insurance or private insurance would be better. Under the broad view, the government is both the insurer and the source of the risk—unlike private insurance companies that insure against earthquakes or lightning. The demand that the government insure against risks of its own creation brings us back to the question whether the main objective should be to require the government to internalize the costs of policy changes.⁴⁹

Some find instructive evidence about the need for greater cost internalization in Oregon’s recent experience with Measure 37, which very broadly requires local governments either to compensate landowners for decreases in land values caused by regulations, or to drop the regulation.⁵⁰ So far in every case, the government has chosen to drop the regulation rather than pay. This could be because the costs of the regulations were internalized by the governments and were found not to be worthwhile. Or it could be because the government has to pay for the costs imposed by its regulations but is not able to charge for the benefits those regulations provide. Or it could be because the legislature has refused to appropriate funds for compensation, leaving only the option of dropping the regulation. The explanation is unclear, and thus the competing intuitions underlying the narrow and broad versions of the regulatory takings doctrine still await a definitive empirical test.

Support for both the weak and strong versions can be found in the Supreme Court’s decisions. The Court’s first important regulatory takings case, Pennsylvania Coal Co. v. Mahon,⁵¹ involved a Pennsylvania statute protecting surface owners of land from subsidence caused by the mining of coal beneath their property. The Pennsylvania Coal Company, which owned the rights to mine the coal, challenged the statute as an uncompensated taking of the pillars of coal that would have to remain in place in order to prevent damage to the surface.

Elements of Justice Holmes’s opinion for the Court read as if he was simply preventing the state from evading the requirement of paying compensation for an explicit taking. He stressed that the right of support is considered a separate “estate” under Pennsylvania law, and that the company had expressly reserved this right in the deed under which the Mahons claimed. The Pennsylvania statute, from this perspective, looked like an attempt to transfer a discrete property right from the coal company to the Mahons—something that ordinarily would require either a purchase of rights or an exercise of eminent domain.

Other elements in the Holmes opinion point toward a broader doctrine. He said that among the factors to be considered were the extent of diminution in value caused by the regulation, whether the statute seeks to regulate what would be regarded as a public nuisance, and whether the statute affords a rough reciprocity of advantage by restraining all property owners in a way that benefits each. The general rule, he concluded, is that “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.”⁵² These elements of the opinion point toward an ad hoc balancing test in which courts decide whether particular regulations “go too far” and must result in a payment of compensation.

The ambiguity has persisted. In 1978, the Supreme Court restated the ad hoc regulatory takings doctrine in Penn Central Transportation Co. v. New York.⁵³ The case involved a takings challenge to a New York City landmark designation that prevented the owners of Grand Central Station from constructing a new office building in the air space above the station. The Court rejected the challenge, but in so doing offered up a different set of factors than the ones considered in Pennsylvania Coal v. Mahon. Writing for the majority, Justice Brennan agreed that the degree of diminution in value is relevant, but he identified the relevant “property” to be examined for these purposes as the “whole parcel” owned by the railroad, not just the air rights that were barred from development. Justice Brennan also said that courts should ask whether the regulation interfered with “distinct investment-backed expectations,” thereby expressly linking the regulatory takings inquiry with forbearance values. Finally, he said courts should consider the nature of the government action, and in particular whether it has intruded directly onto the property or merely engaged in a regulation of its use.

The rhetoric of Penn Central points away from a minimalist concern with evasion toward a broader degree of protection of reasonable owner expectations. But the outcome of the case seemed to suggest that even highly intrusive regulations that disproportionately affect a small number of owners will not qualify as a regulatory taking. Over time, the latter signal appears to have dominated the former. After Penn Central, application of the ad hoc test has generally been fatal to regulatory takings claims.

Perhaps because of the uncertainty of the ad hoc approach of Penn Central, perhaps in response to the weak protection that case appears to afford to property owners, the Court in subsequent cases has developed exceptions to the Penn Central test in the form of certain “categorical” regulatory takings rules. In Loretto v. Teleprompter Manhattan CATV Corp.,⁵⁴ the Court held that any permanent physical occupation of property by the government or a stranger acting with permission of the government is a taking, without regard to how the ad hoc Penn Central analysis would come out. Specifically, the Court held that a New York statute that allowed cable television companies to string cable transmission wires on rental buildings without the owner’s consent was a taking, even though the addition of cable service was likely a net benefit to both the landlord and her tenants. And in Lucas v. South Carolina Coastal Council,⁵⁵ the Court ruled that unless it prohibits what would have been a nuisance at common law, a regulation that deprives an owner of all economically beneficial use of the property is a taking, again without regard to how the Penn Central balancing test would come out. The regulation at issue in Lucas prohibited construction of homes on two beachfront lots on a barrier island subject to periodic erosion, which the South Carolina courts had found rendered the lots “valueless.”

Loretto and Lucas were greeted by property rights advocates as redressing an imbalance in favor of government regulation introduced by Penn Central. Paradoxically, however, their long-range effect may have been to push the Court back in the direction of the narrow, anti-evasion conception of the regulatory takings doctrine. The regulation in Loretto was “functionally comparable” to the condemnation of a utility easement. Ordinarily, if an electric or telephone company wants to string wires on someone’s property, it must acquire an easement to do so, either by purchase or condemnation. The New York statute allowing cable companies to string wires on rental property without the owner’s consent looks like a straightforward evasion of this settled understanding. Similarly, the regulation in Lucas was “functionally comparable” to the condemnation of a conservation easement. Again, conservation easements are ordinarily donated or purchased. The South Carolina statute looked like an attempt to acquire by regulation something that ordinarily would be purchased or condemned by eminent domain.

In any event, the history of the regulatory takings doctrine after Lucas has largely been one in which the Court has narrowly defined these categorical rules. For example, the Court declined to characterize a rent control statute that prohibited eviction of the tenant as a “physical occupation” under Loretto,⁵⁶ and it declined to characterize a temporary moratorium on development as a deprivation of all economically beneficial use under Lucas.⁵⁷ By confining the categorical rules to circumstances in which the government uses its regulatory power to acquire something that ordinarily would be purchased, the Court has effectively recast the regulatory takings doctrine as a narrow, antievasion principle.

Of course, the narrow version advances important forbearance values. It prevents the government from circumventing the protections the Takings Clause provides in cases of explicit takings. But, for the moment at least, the Court seems disinclined to expand the regulatory takings doctrine into a general source of insurance against government frustration of reasonable owner expectations. The regulatory takings doctrine is taking the shape that Chief Justice Taney would have given it, not the one advocated by Justice Story.

The problem of flexibility versus stability is characteristic of property in another sense. As we have seen in this book, some areas and elements of property law are fairly standardized and formalistic and achieve their goals indirectly. The basic exclusion strategy itself serves people’s interests in use only indirectly. This simple basic structure is easy to use and manages a lot of complexity, and so stability is an emergent property of the system. It is when problems become great and urgent enough that more direct methods, from new governance rules on a micro scale to larger macro reforms, come onto the agenda. Debate over when and how to make this shift will continue, but property’s basic architecture has proven quite resilient.