In Koontz v. St. Johns River Water Management District, No. 11-1447 (U.S. June 25, 2013) a sharply divided United States Supreme Court expanded the landowner’s Fifth Amendment protections against takings to certain monetary exactions imposed by a government agency as part of its land use permitting process.

Following Koontz, when a government agency requires, as a condition of approving a development permit, that the developer perform services or make a monetary payment in lieu of performing the services, the government must establish a "nexus" between the exaction and the impact of the development and the exaction must be "roughly proportional" to the impact being addressed by the government.

Background

The "nexus" and "rough proportionality" tests were established by two Supreme Court decisions, Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994). These cases allow the government agency to require that the property owner grant a public easement only if it can establish a "nexus" and "rough proportionality" between the easement that the government demands and the impact of the proposed development.

In the Nollan case, the Nollans proposed to build a large house on their beachfront lot. The California Coastal Commission approved the development permit on the condition that the Nollans dedicate for public use an easement to pass across their beach. The Coastal Commission maintained that the easement was appropriate because the proposed house blocked the view of the beach from the road and would prevent the public from realizing that public access to the beach was nearby. The Supreme Court rejected this justification because there was no "essential nexus" between the house’s impact on public views and the public easement across the Nollans’ property. Because the proposed house would have no impact on existing public access, the easement requirement would violate the Fifth Amendment’s protection against a taking without just compensation.

In Dolan, the owner of a hardware supply store sought a permit to expand her store and pave its parking lot. The City of Tigard granted approval conditioned on Dolan dedicating a portion of her land for a public greenway for flood control and as a pedestrian and bike path. The Supreme Court found that the required easements were not "roughly proportional" because there was no "individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development."

Because the Nollan and Dolan cases were based on required dedications of an easement and were decided under the Fifth Amendment protection against takings, the cases were widely understood to be limited to the situation where the government agency conditioned a development permit on the developer granting an easement or other real property right to his or her property.

Koontz raised the question whether the Nollan/Dolan protections apply in two different situations: first, where the government agency denies a land use permit unless the developer agrees to its conditions, as opposed to approving a permit subject to certain conditions, and second, where the government agency requires the payment of money, as opposed to demanding an easement. By a five to four margin, the Supreme Court sided with Koontz, applying the Nollan and Dolan restrictions in both instances.

Facts of the Koontz Case

In 1972, Coy Koontz purchased 14.9 acres of undeveloped property located in central Florida. The property was located less than 1,000 feet from the intersection of one of Orlando’s major expressways and a four-lane highway. The northern section of Koontz’s property drained well, despite being classified as wetlands, and Koontz hoped to develop that land. In 1994, Koontz applied to the St. Johns River Water Management District for development permits to develop the 3.7 acre northern portion of his land. Koontz offered to raise the level of the development parcel and install some storm water improvements. To mitigate the impact of his development on the loss of wetlands, he offered to prevent any further development on the remaining 11.2 acres by granting the District a conservation easement over that area.

The District rejected Koontz’s 11.2 acre conservation easement as inadequate and informed Koontz that it would approve the permits if Koontz agreed to one of two arrangements: First, Koontz could limit his development to one acre, install more costly storm water improvements and grant a 13.9 acre conservation easement. Alternatively, Koontz could proceed with his proposed 3.7 acre development only if he paid for improvements to 50 acres of District-owned wetlands. When Koontz refused to accept either alternative, the District denied his application.

Koontz brought suit under a Florida law permitting him to seek damages for government actions that amounted to a "taking" without just compensation. The Florida Supreme Court rejected these claims, concluding (1) that Nollan and Dolan do not apply when the government agency simply denies a permit because the landowner would not agree to its demands, and (2) that Nollan and Dolan apply only when a government agency conditions its approval on the dedication of an easement, not when the agency demands payment of money. In a five to four decision, the Supreme Court reversed on both grounds.

The Government Agency Must Satisfy Nollan and Dolan Even If It Denies a Permit.

The Supreme Court addressed the first issue by holding that a government agency cannot avoid the constitutional requirements of Nollan and Dolan simply by denying the permit unless the developer agrees to proposed conditions. The Supreme Court reasoned, "[a] contrary rule would be especially untenable in this case because it would enable the government to evade the limitations of Nollan and Dolan simply by phrasing its demands for property as conditions precedent to permit approval."

The Government Agency Must Satisfy the Nollan and Dolan Standards When It Demands Payment of Money In Lieu of Dedications.

On the central issue of the case, the five Justice majority opinion, written by Justice Alito, held that so-called "monetary exactions" must satisfy the nexus and rough proportionality requirements of Nollan and Dolan. At the heart of the opinion is what the majority called the "two realities of the permitting process." The first reality is that the government agency can coerce the developer into agreeing to exactions as long as the development rights are more valuable than the cost of the exactions. The second reality is that the government may properly seek to require a developer to mitigate the negative impacts of the development. In the Court’s view, the Nollan and Dolan decisions create a balance between the government’s interest in offsetting the public costs of development and the danger that the government would coerce a landowner through "extortionate demands" into giving up property rights.

The majority argued that a government agency could evade the Nollan and Dolan limitations by simply giving the developer the "choice between surrendering an easement or making a payment equal to the easement’s value." By equating the practical effect of a "monetary exaction" with the type of easement demanded in Nollan and Dolan, the majority found that the protections afforded by those cases should also apply to a requirement to pay for offsite mitigation. To the majority, all that was required for the Nollan and Dolan limitations to apply was a "direct link between the government’s demand and a specific parcel of real property."

Although the holding in Koontz is limited to "monetary exactions," there can be little doubt that the majority decision would apply to other forms of exactions. As Justice Alito noted, "so-called ‘in lieu of’ fees are utterly commonplace . . . and they are functionally equivalent to other types of land use exactions."

Justice Kagan, joined by Justices Ginsburg, Breyer and Sotomayor, wrote a vigorous dissent, arguing that the Fifth Amendment protections should not apply to monetary payments because no property was taken by the government. Justice Kagan would not have extended Nollan and Dolan to monetary exactions but would have relied instead on the standard established by the case of Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), under which courts review governmental land use actions as to whether the action goes beyond "adjusting the benefits and burdens of economic life to promote the common good" and whether it "interfere[s] with distinct investment-backed expectations." Justice Kagan maintained that the boundaries of the Koontz ruling were unclear and threatened "to subject a vast array of land-use regulations . . . to heightened constitutional scrutiny." She characterized the Court’s decision as extending "the Takings Clause . . . into the very heart of local land-use regulation and service delivery" and expressed her concern that the Court’s holding "threatens significant practical harm" by diminishing "the flexibility of state and local governments to take the most routine actions to enhance their communities."

Implications of the Koontz Decision

The Koontz ruling has far-reaching implications for developers and government agencies.

Developers

By applying the Nollan/Dolan standards to monetary exactions, the Supreme Court has substantially expanded the rights of developers seeking development approvals. Developers can now subject monetary exactions to greater scrutiny and, and if necessary, challenge in federal court any exactions that exceed the Nollan/Dolan limitations. We can expect to see an increase in litigation over these issues, particularly whether the exaction is "roughly proportional" to the impact of the development.

The effect of the Koontz ruling may be less pronounced in California, where the Mitigation Fee Act (Gov’t Code §§ 66000-66025) already requires government agencies to comply with Nollan and Dolan when imposing fees against individual projects. The Mitigation Fee Act governs both ad hoc monetary fees imposed in individual cases and those of general applicability, and requires that for each fee, the government must demonstrate a "reasonable relationship" between the amount of the fee and the public facility attributable to the development.

Similarly, Section 15126.4(a)(4)(B) of the California Environmental Quality Act guidelines provides that mitigation measures imposed to reduce significant environmental effects of development projects must be consistent with Nollan and Dolan.

In practice, many developers readily agree to and creatively structure exactions that exceed the Nollan and Dolan standards in order to enhance their chance of obtaining project approvals. Following Koontz, government agencies may be unable or unwilling to agree to such arrangements in their efforts to comply with the constitutional requirements of the Takings Clause as now interpreted under Koontz. Developers in California that wish to provide benefits to the government agency that are beyond what is permitted under Nollan and Dolan will need to use a development agreement as the tool to agree to such benefits.

Government Agencies

Government agencies will now need to exercise renewed care in fashioning exactions to comply with Koontz. The Koontz case raises the specter, as expressed by the dissent, that merely negotiating for excessive exactions could expose the government agency to monetary damages for a taking. Government agencies will need to carefully consider how they justify monetary exactions (in particular, that the amount is roughly proportional to the impact), and this may inhibit agencies and developers from negotiating freely.

Additional Questions

The Koontz case will likely be read to apply to all "exactions" that a government may impose in individual permitting cases, thereby covering a wide range of requirements, including infrastructure improvements, mitigation measures, dedication of habitat or open space, school fees, park fees and other impact fees, public art and affordable housing. However, as with most Supreme Court decisions, new questions are raised and uncertainties remain.

  • Koontz was decided in the context of an ad hoc negotiation of offsite mitigations of a specific project. The major question left unanswered by Koontz is whether Nollan/Dolan apply to fees and exactions imposed through legislation of general application. Several cases have held that fees imposed through legislation of general applicability are scrutinized under the more deferential Penn Central standard and the Nollan and Dolan restrictions do not apply. For example, in Ehrlich v. City of Culver City, 12 Cal. 4th 1737 (1993), the California Supreme Court differentiated between legislative fees, which are generally applied, and ad hoc fees, that are individually assessed against a particular permit application. The Ehrlich Court reasoned that the heightened scrutiny under Nollan and Dolan should apply to ad hoc fees, but not to legislative fees where "the heightened risk of ‘extortionate’ use of the police power to exact unconstitutional conditions is not present." See also San Remo Hotel v. City & County of San Francisco, 27 Cal. 4th 643, 671 (2002). Accordingly, many jurisdictions may favor imposing exactions through legislation of general application, such as a city-wide impact fee. It remains to be seen whether the Nollan and Dolan restrictions are eventually extended to legislatively adopted, generally applicable exactions.
  • It is unclear how developers will enforce their remedies for exactions that violate the Takings clause. Koontz holds that a developer whose permit is denied because he or she would not agree to an impermissible exaction has a cause of action, but the developer’s remedies under Koontz are not clear. The developer may wish to challenge the exaction under Nollan or Dolan and seek a judicial ruling in federal court to invalidate an exaction that is unconstitutional. The developer will also need to decide whether it seeks to recover damages for an unconstitutional exaction and, if so, whether the developer must first satisfy the unconstitutional exaction. Alternatively, there may be state court causes of actions or state law remedies, such as California’s Mitigation Fee Act, that are available.
  • The Koontz decision did not decide whether the District’s exactions exceeded the "roughly proportional" standard. We can expect greater focus on whether exactions meet the "roughly proportionality" standard and future case law defining the limits of that standard and the method for calculating damages.
  • It remains to be seen whether the dissent’s concerns are borne out. Will government agencies deny permits outright rather than negotiate exactions with developers at the risk of facing litigation under Koontz? Will Koontz otherwise impede "the flexibility of state and local governments to take the most routine actions to enhance their communities"?

Courts, developers and government agencies alike will grapple with these issues, and likely many others, in the coming years.