Highlights: In the United States, the power of eminent domain—the government’s right to take private property for public use upon reasonable payment to the property’s owner—has always operated within strict parameters. Then a United States Supreme Court decision in 2005 appeared to signal a sea change that could make such takings much easier to justify, so long as the property would be used for economic development. In response, many states have set their own rules that affect both the process for taking private property and the justification for doing so. This article explains the law recently enacted in Ohio to clarify the boundaries of eminent domain. Even public bodies whose takings have little to do with economic development need to be familiar with this law, as its changes reach far beyond the rationale for the action. Because much public construction depends at least in part on the taking of private property, anyone involved in public construction should understand how the law in this complex area is about to change.
Since the United States Supreme Court’s decision in Kelo v. City of New London (2005), 125 S. Ct. 2655, most states, Ohio included, have been scrambling for a response to quell the public outrage caused by that decision. In Kelo, the Court held that under the United States Constitution economic development is a legitimate public use. Accordingly, the taking of private property in an area that is economically depressed, but not blighted, in order to give it to another private entity for the purpose of economic development is permissible under the Federal Constitution. However, Kelo noted that individual states were free to enact legislation to further restrict the exercise of eminent domain. Ohio has attempted to do exactly that through Senate Bill 7, which Governor Strickland signed on July 10th.
Why the New Law?
As an initial response to Kelo, the General Assembly placed a moratorium through December 31, 2006, entity could use eminent domain to take property that was not in a blighted area when the purpose for the taking was pure economic development. The threatened penalty for violation of the moratorium was loss of state funding for the project.
Along with the moratorium, the General Assembly created the Legislative Task Force To Study Eminent Domain and Its Use and Application in the State. The Task Force had several assignments:
- to study the use of eminent domain and its impact on the state,
- to analyze how the decision in Kelo affects state law governing the use of eminent domain, and
- to review the overall impact of laws governing the use of eminent domain on economic development, residents, and local governments.
Members of the Task Force included General Assembly members, representatives from various executive branch agencies, representatives of local government, and developer and property owner advocates. On August 1, 2006, nearly a year ago, the Task Force issued its final report with recommendations to the General Assembly for changes to Ohio’s eminent domain laws.
In the meantime, the Ohio Supreme Court issued its decision in City of Norwood v. Horney (2006), 110 Ohio St.3d 353 (discussed at length in the lead article for our July 2006 issue, “Ohio Supreme Court Reverses Norwood, Says Government Can’t Take Private Property for Purely Economic Benefits”). In that decision, the court held that economic development, in and of itself, does not satisfy the public use requirement in the Ohio Constitution. So, while the Federal Constitution permits takings for the sole purpose of economic development, the Ohio Constitution does not. The court also struck down the City of Norwood’s definition of “blight” as unconstitutionally vague, as it included as blighted areas that were merely “deteriorating.” The court found that such a determination required speculation as to the property’s future condition. Further, the court deemed unconstitutional the prohibition against stays pending appeal in eminent domain cases.
In the wake of the Horney decision and the Task Force’s issuance of its final report, two efforts surfaced in the General Assembly:
- SB 7, an enactment seeking to amend various portions of Ohio eminent domain law, and
- SJR 1, a proposed constitutional amendment that would have prohibited eminent domain for purely economic development and required municipalities to follow state law procedures in using eminent domain instead of exercising their home rule powers to take property.
After negotiations between the House and Senate, the General Assembly passed SB 7 on June 27th of this year. However, the General Assembly failed to pass SJR 1.
SB 7 makes significant changes to eminent domain law in Ohio. These changes not only modify the eminent domain process, but expand the compensation potentially available to property owners in these cases. Accordingly, any municipality, school district, or other public entity considering the use of eminent domain needs to know and understand these changes.
New Definition of “Blight”
One of the most hotly contested issues in Ohio following Kelo was the process used by local governments for determining property to be blighted. Current Ohio law contains multiple definitions of blighted areas and slums. SB 7 attempts to create a comprehensive definition of a “blighted area” or “slum,” so that no area could be so defined unless at least 70% of the parcels within it were blighted parcels that impacted the area negatively in at least one of these ways:
- They substantially impair or arrest the sound growth of the state or a political subdivision,
- They retard the provision of housing accommodations,
- They constitute an economic or social liability, or
- They are a menace to the public health, safety, morals or welfare.
A “blighted parcel” can fall under either of two categories. First, a parcel is considered a “blighted parcel” if it has a structure that is dilapidated, unsanitary, unsafe, or vermin infested and has been designated as unfit for human habitation or use by a housing, building or fire code enforcement agency; if it poses a direct threat to public health or safety by reason of environmentally hazardous conditions, solid waste pollution, or contamination; or if tax or special assessment delinquencies exceeding the fair market value of the land remain unpaid 35 days after notice. Second, a parcel is considered a “blighted parcel” if it has two or more of several listed conditions that adversely affect surrounding community values, or it entails uncorrectable land use relationships.
Importantly, agricultural land is generally excluded from the definition of a “blighted parcel.”
Notably, in making a determination of blight, the public entity is prohibited from considering whether the property could be put to a different use that could generate more tax revenue. Further, before a public entity appropriates such property, it must pay for and adopt a comprehensive development plan, which must include at least one study documenting the public need for the property. Also, the legislative governing body for the appropriating entity must pass a resolution affirming the public need for the property. Finally, an appropriating entity is prohibited from making a finding that property is in a blighted area or slum by emergency ordinance or resolution.
The new law creates several new pre-appropriation requirements.
Written Notice of Intent To Appropriate. An appropriating entity must provide the property owner with written notice of its intent to appropriate property at least 30 days before filing an appropriation action. The appropriating entity must deliver the written notice personally or by certified mail to the property owner or property owner’s designated representative. The notice must substantially comply with the proposed form of such notice set forth in the statute. The form notice includes a general description of the property interest to be appropriated and a description of the property owner’s legal rights.
Good Faith Offer. Current Ohio law requires that an appropriating entity make a good faith effort to negotiate with the property owner before filing an appropriation action. SB 7 now requires that the appropriating entity make a written good faith offer to the property owner to purchase the property at least 30 days before filing an appropriation action. The appropriating entity is permitted to revise its offer before the appropriation proceeding if it becomes aware of conditions indigenous to the property that reasonably could not have been discovered at the time of the good faith offer or if the appropriating agency and the property owner exchange appraisals before the proceeding. These provisions have particular importance in relation to fees (discussed later).
Exchange of Appraisals. The appropriating entity must provide a copy of the appraisal to the property owner with its good faith offer or before. However, if the value of the property according to the appraisal is less than $10,000, the appropriating entity may provide the property owner with a summary of the appraisal.
Inability To Agree. Under existing law, an agency is not permitted to appropriate property unless there is an inability to agree with the property owner on the acquisition. SB 7 specifies that the failure to agree must be a failure to agree on a conveyance or the terms of a conveyance.
Traffic Flow and Property Access. Prior to appropriating property that will disrupt traffic flow or property access, the appropriating entity must make reasonable efforts to limit those effects. However, this requirement does not apply to appropriations under ORC Title 55, Road, Highways and Bridges.
Approval for Park Authority Takings. Before a park board, park district, conservancy district, incorporated association charged with preserving public parks, or similar park authority appropriates property outside of the county in which it is located, it must obtain written approval of the legislative authority of the county where the property is located.
Veto of Unelected Agency Appropriations. If an appropriation is by an appointed or unelected public agency and the property owner has made written objection to the appropriation, the elected official or officials who appointed the members of the unelected agency have the ability to veto the appropriation. In cases where the unelected public agency was appointed by more than one public agency or elected official, veto of the appropriation requires majority vote of the elected officials or the appointing public agencies or appointing public officials.
New Procedures for Appropriation Proceedings
In addition to the new pre-appropriation requirements, appropriating entities will have to comply with several new changes in appropriation proceedings.
The Appropriation Petition. An appropriating entity must follow all the previous requirements for a petition to appropriate and now must include a statement that the taking is for a public use. Further, if a “blighted parcel” is being appropriated pursuant to a redevelopment plan, a statement showing the basis for the finding of blight and supporting the determination that the parcel is part of a “blighted area” must be included.
Currently, an appropriating entity requiring less than the entire parcel is required to appropriate the entire parcel or structure where the needed portion would require removal of a garage and insufficient land for a replacement garage exists. SB 7 now permits the property owner to waive this requirement. In that case, the appropriating entity would appropriate only the required portion of the property and the entirety of any structure that is in whole or in part in the required portion of the property.
Mediation. Mediation is now a formal part of the appropriation process. Specifically, within 10 business days after the filing of the property owner’s answer, either party to the appropriation action is permitted to request non-binding mediation as to property valuation. The appropriating entity is required to pay the cost of mediation, and the court must appoint the mediator. The mediation must occur within 50 days after the answer is filed, unless the court extends the time due to an inability to obtain an appraisal.
Burden of Proof. Currently, if challenged by the property owner, the judge must determine whether the agency has the right to take the property, whether the parties were unable to agree, and/or whether the appropriation is necessary. The burden of proof has always fallen upon the owner on these issues, and the appropriating entity’s resolution declaring the necessity of the appropriation has constituted prima facie evidence of necessity. In other words, the mere existence of the resolution proved that the taking was necessary, unless the property owner could prove that the appropriating entity had abused its discretion in making its necessity determination. Historically, the presumption that the appropriation was necessary was very difficult for the property owner to overcome.
SB 7 now requires that the appropriating entity prove these preliminary issues by a preponderance of the evidence (the same standard used in most civil cases). However, three presumptions are permitted. First, the appropriating entity’s resolution or ordinance will create a rebuttable presumption of necessity (rather than being prima facie evidence of necessity). Notably, this presumption does not apply if the property is being appropriated because it is a “blighted area” or “slum.” Second, a public utility’s presentation of evidence of necessity also creates a rebuttable presumption of necessity. Third, a state or federal regulatory approval of an appropriation by a public utility creates a rebuttable presumption of necessity.
SB 7 also extends the time the court has for setting the jury valuation trial following the decision on these preliminary issues. Rather than 20 days between the decision on the preliminary issues and the jury valuation trial, SB 7 changes this to not less than 60 days and makes this time subject to the parties’ right to request mediation and to the property owner’s right to an immediate appeal of the judge’s decision on the preliminary issues. This provision, as well as the following appeals provisions, could significantly delay appropriation proceedings.
Appeals. SB 7 provides the property owner with the right to an immediate appeal from an order in favor of the appropriating agency on any one of several issues:
- the agency’s right to make the appropriation,
- the inability of the parties to agree,
- the necessity for the appropriation, or
- the right to a quick-take pursuant to the Ohio Constitution.
However, the right to immediate appeal does not exist if the appropriation is in time of war or other public exigency, for the purpose of making or repairing roads open free of charge to the public, for the purpose of implementing rail service, or by a public utility owned and operated by a municipality as the result of a public exigency.
In Horney, the Ohio Supreme Court took issue with the prohibition against stays pending appeal in eminent domain cases. Before this, the government could proceed with the taking while the property owner appealed. SB 7 eliminates this prohibition. Accordingly, Ohio courts are permitted to stay an appropriating entity’s taking of possession until all appeals are exhausted. Any such stay requires posting of a bond.
Importantly, SB 7 provides no time limitations for these permitted appeals and potential stays pending such appeals. Rather, the General Assembly simply made a finding in SB 7 that in order to adequately protect property rights and ensure that vital public improvements are completed in a timely manner, it is necessary to provide prompt appeals from adverse judgments in appropriation cases. Further, the General Assembly encouraged the Supreme Court to adopt a procedural rule requiring expedited appeals in appropriation cases. However, whether such appeals will actually be given any preference remains to be seen.
Compensation, Costs, Fees and Attorney Fees
SB 7 provides for additional compensation, costs and potential attorney fee awards to property owners. Such provisions will likely make eminent domain more expensive for municipalities, school districts, and other public agencies.
Relocation Assistance. SB 7 expands an appropriating entity’s current obligation to make relocation assistance payments to displaced persons. Now the appropriating entity must pay an owner, a commercial tenant, or a residential tenant who is forced to move or relocate and is identified by the owner in a notice filed with the court. The owner has the burden of proving these expenses.
In addition to relocation expenses, an owner of a business who is required by an appropriation to relocate its business may recover damages for actual economic loss resulting from the appropriation. The property owner must prove such economic loss by a preponderance of the evidence, and such loss may not include attorney fees. Further, such compensation cannot exceed 12 months’ net profit of the business on an annualized basis and is further limited by the same restrictions that apply to immediate appeals. (Such compensation is inapplicable in appropriations in time of war or other public exigency, for the purpose of making or repairing roads open free of charge to the public, for the purpose of implementing rail service, or by a public utility owned and operated by a municipality as the result of a public exigency.)
Goodwill. In certain situations, SB 7 permits property owners to recover compensation in addition to the fair market value of the property appropriated and any damage to the residue. For instance, the property owner may be entitled to recover for loss of goodwill. Specifically, such damages are available when the property appropriated was used for a business, the entire business property is appropriated, and the owner proves that a loss of goodwill caused by the appropriation cannot be reasonably prevented by relocating the business or by other reasonable steps to preserve such goodwill. In such situations, the jury is charged to assess compensation for loss of goodwill up to $10,000.
Costs To Vacate a Structure. What happens if a structure straddles the dividing line between unappropriated property and property being appropriated for road construction or repair? Now the appropriating agency may be liable for the owner or occupant’s costs to vacate the structure. The same is true if the appropriation is for rail service by an agency using a quicktake procedure and if the structure cannot be divided without manifest injury.
Other Costs and Fees. Currently, if the court finds in favor of the property owner on the appropriating entity’s entitlement to appropriate the property, the court is required to award the property owner costs. SB 7 expressly requires that such costs include the owner’s reasonable disbursements and expenses, including appraisal and engineering fees.
Further, upon a final unappealable order in favor of the property owner on necessity or public use, the court must award the property owner reasonable attorney fees, expenses and costs.
SB 7 makes additional provision for award of attorney fees in favor of the property owner. To be eligible for an award of attorney fees, at least 50 days before the initially set trial date, the property owner must provide the appropriating entity with an appraisal or summary appraisal or with the owner’s sworn statement setting forth the value of the property and the basis for that value. A property owner who timely provides this information may be entitled to its attorney fees based on the amounts of the appropriating entity’s offer and the final jury compensation award. Specifically, if the jury award exceeds 125% of the initial or revised good faith offer, the court must award the property owner just amounts for all costs and expenses incurred by the property owner, including attorney and appraisal fees.
However, such provision for attorney fees does not apply if the appropriation is in time of war or other public exigency, for the purpose of making or repairing roads open free of charge to the public, for the purpose of implementing rail service, or by a municipality as a result of a public exigency. An exception, however, exists even in these situations if the property being appropriated is agricultural property that is not blighted and the final award of compensation exceeds 150% of the good faith offer or revised offer. The attorney fees provisions further do not apply if the parties exchanged appraisals before the filing of the appropriation action and the final award of compensation was not more than 125% of the agency’s first offer made after such exchange and at least 30 days before the filing of the petition.
How much can the award of attorney fees be? There is a cap, which can be figured by calculating the lesser of 25% of the amount by which the jury award exceeds either the initial or revised good faith offer or the agency’s last written offer made not less than 45 days from the initially set trial date.
Right To Repurchase
Sometimes an agency changes its mind. If an agency decides not to use the appropriated property for the purpose stated in the appropriation action, the former owner may repurchase the property for its fair market value, as determined by an independent appraisal. Several actions can mean the owner loses the right to repurchase the property:
The owner declines to repurchase the property;
- The owner fails to repurchase within 60 days after the agency’s offer to let it do so;
- An urban renewal project commences that includes the property;
- The appropriating entity grants or transfers the property;
- Five years have passed since the appropriation; or
- The property was blighted before the appropriation and the former owner contributed to the blight.
Impact of SB 7 on Public Entities
The revisions to eminent domain law will have an impact on how and when municipalities and other public bodies will use eminent domain. New requirements will affect the determination of whether property is sufficiently blighted to permit eminent domain for purposes of urban renewal. Further, government entities will no longer receive the strong presumptions in favor of their determinations on necessity and other preliminary issues. Rather, they will have to stand ready to prove such issues by a preponderance of the evidence. Also, additional appeal, compensation, and attorney fee provisions will lengthen and increase expenses in what can already be a lengthy and costly process. While property owner advocates may disagree, SB 7 will have a dramatic impact on how and when the government uses eminent domain.
Status of SJR 1
SJR 1, viewed as a companion to SB 7, failed by four votes to pass in the Ohio House. It proposed a constitutional amendment that would have limited municipal home rule powers by requiring municipalities to follow state law in using eminent domain, rather than following local ordinances. Does this failure mean that municipal home rule powers are safe from attack?
No, such powers may not be out of the woods just yet. In fact, Senator Kevin Coughlin (a Republican from Cuyahoga Falls) has already reportedly stated that he intends to re-introduce the proposed constitutional amendment in hopes of making the November 2008 ballot. Accordingly, public entities will want to stay tuned to see what happens with this issue when the General Assembly reconvenes.