The U.S. Supreme Court's Nollan/Dolan Jurisprudence Is Catching Up With The California Supreme Court in Ehrlich v. Culver City

By Glen C. Hansen

For nearly twenty years, Fifth Amendment takings challenges to adjudicative land-use exactions and permit conditions have been governed by the dual Supreme Court cases of Nollan v. California Coastal Commission, 483 U.S. 825 (1987),and Dolan v. City of Tigard, 512 U.S. 374 (1994). In Nollan, the Court held that a government could, without paying the compensation, demand the easement as a condition for granting a development permit the government was entitled to deny, provided that the exaction would substantially advance the same government interest that would furnish a valid ground for denial of the permit. The Court further refined that requirement in Dolan, holding that an adjudicative exaction requiring dedication of private property must also be “‘roughly proportional’ . . . both in nature and extent to the impact of the proposed development.” However, Nollan and Dolan involved the dedication of real property interests. In Koontz v. St. Johns River Water Management District, ___ U.S. ___, 2013 U.S. Lexis 4918 (2013), the Court held in a 5-4 decision that “the government’s demand for property from a land-use permit applicant must satisfy the requirements of Nollan and Dolan even when the government denies the permit and even when its demand is for money.” 

In Koontz, petitioner (and his father before him) sought to develop a portion of his 14.9-acre property, the southern portion of which included wetlands. His development plans called for the development of the 3.7-acre northern section of his property. Under Florida state law, a landowner wishing to undertake construction on that particular type of property had to obtain a management and storage of surface water permit (which could impose “such reasonable conditions” on the permit as are “necessary to assure” that construction will “not be harmful to the water resources of the district”) and a wetlands resource management permit. Petitioner sought such a permit from St. Johns River Water Management District (“District”). To mitigate the environmental effects of his proposal, petitioner offered to foreclose any possible future development of the approximately 11-acre southern section of his land by deeding to the District a conservation easement on that portion of his property. The District considered the proposed easement to be inadequate, and informed petitioner that the District would approve construction only if he agreed to one of two concessions: (a) Petitioner reduce the size of his development to 1 acre and deed a conservation easement to the District on the remaining 13.9 acres; or (b) proceed with the development on the terms proposed by petitioner and hire contractors to make improvements to District-owned land several miles away. The District also said that it “would also favorably consider” alternatives to its suggested offsite mitigation projects if petitioner proposed something “equivalent.”

Petitioner filed suit in a Florida state court under a state law that provides money damages for agency action that is an “unreasonable exercise of the state's police power constituting a taking without just compensation.” The Florida trial court found that the District's demands failed to comply with Nollan/Dolan. The Florida District Court of Appeal affirmed. The Florida Supreme Court reversed on two grounds: (1) Unlike in Nollan or Dolan, the District denied Petitioner’s permit application; and (2) a monetary exaction cannot give rise to a takings claim under Nollan/Dolan. The United States Supreme Court reversed and held that the Florida Supreme Court erred on both grounds.

As to the first ground, the U.S. Supreme Court unanimously agreed the Nollan/Dolan may apply to the government’s denial of a permit. As Justice Kagan stated in her dissenting opinion: “The Nollan-Dolan standard applies not only when the government approves a development permit conditioned on the owner's conveyance of a property interest (i.e., imposes a condition subsequent), but also when the government denies a permit until the owner meets the condition (i.e., imposes a condition precedent).”

However, the Court split sharply as to the second ground. By a 5-4 margin, the majority held in a decision by Justice Alito that “so-called ‘monetary exactions’ must satisfy the nexus and rough proportionality requirements of Nollan and Dolan.” The majority reiterated: “[T]he government’s demand for property from a land-use permit applicant must satisfy the requirements of Nollan and Dolan even when the government denies the permit and even when its demand is for money.”   In support of that holding, the majority reasoned that it would be “very easy” for land-use permitting officials to evade the limitations of Nollan/Dolan if monetary exactions were not bought under those limitations. For example, “[b]ecause the government need only provide a permit applicant with one alternative that satisfies the nexus and rough proportionality standards, a permitting agency wishing to exact an easement could simply give the owner a choice of either surrendering an easement or making a payment equal to the easement’s value.” Those “in lieu of” fees are “functionally equivalent to other types of land use exactions,” and therefore “‘monetary exactions’ must satisfy the nexus and rough proportionality requirements of Nollan and Dolan.” While the majority subjects the heightened scrutiny of Nollan/Dolan to monetary exactions in the ad-hoc, individualized context, the majority does not discuss whether that heightened scrutiny governs generally-applied, legislatively-imposed fees or conditions.   

The dissent chides the majority for not providing clarity on the extent of its holding regarding monetary exactions. The dissent acknowledges that “[t]he majority extends Nollan and Dolan to cases in which the government conditions a permit not on the transfer of real property, but instead on the payment or expenditure of money.” However, the dissent complains, “[t]he boundaries of the majority’s new rule are uncertain.” The dissent explains the suggested lack of clarity in the majority opinion as follows:

Perhaps the Court means in the future to curb the intrusion into local affairs that its holding will accomplish; the Court claims, after all, that its opinion is intended to have only limited impact on localities’ land-use authority. [Citation.] The majority might, for example, approve the rule, adopted in several States, that Nollan and Dolan apply only to permitting fees that are imposed ad hoc, and not to fees that are generally applicable. See, e.g., Ehrlich v. Culver City, 12 Cal. 4th 854, 50 Cal. Rptr. 2d 242, 911 P. 2d 429 (1996). Dolan itself suggested that limitation by underscoring that there “the city made an adjudicative decision to condition petitioner’s application for a building permit on an individual parcel,” instead of imposing an “essentially legislative determination[ ] classifying entire areas of the city.” 512 U. S., at 385, 114 S. Ct. 2309, 129 L. Ed. 2d 304. Maybe today’s majority accepts that distinction; or then again, maybe not. At the least, the majority’s refusal “to say more” about the scope of its new rule now casts a cloud on every decision by every local government to require a person seeking a permit to pay or spend money.

The dissent is correct in pointing out the lack of clarity in the majority opinion regarding the extent of the Court’s application of Nollan/Dolan. Indeed, lower courts have taken four different approaches in determining the applicability of the heightened scrutiny of Nollan/Dolan. One approach (such as that taken by the underlying Florida Supreme Court decision in Koontz) was that Nollan/Dolan does not apply to monetary exactions that are imposed by the government in an ad-hoc, individualized, adjudicative manner. The decision by the U.S. Supreme Court in Koontz explicitly rejects that approach.

A second approach taken by lower courts is that monetary exactions are not governed by Nollan/Dolan when such exactions are part of a generalized, legislative requirement. See e.g., McClung v. City of Sumner, 548 F.3d 1219, 1227-1228 (9th Cir. 2008) [“across-the-board” storm pipe requirement for all new developments is not an “individual, adjudicative decision” governed by Nollan/Dolan, but “[e]ven if the upgrade could be viewed as a monetary exaction for the cost of upgrading the storm pipe, however, Nollan/Dolan still would not apply.”]   The majority opinion in Koontz does not directly address whether this approach is still valid. 

A third approach taken by lower courts is that Nollan/Dolan may apply not only in the ad-hoc, adjudicative context, but also to certain non-real property conditions that are imposed by generally applicable, quasi-legislative, regulations. For example, in Town Of Flower Mound v. Stafford Estates Ltd Partnership, 135 S.W.3d 620, 640-641 (Tex.2004), the Texas Supreme Court applied Nollan/Dolan to a town’s conditioning the approval of a development on the general requirement that all builders/developers construct concrete streets. The Texas court did not decide “in the abstract whether the Dolan standard should apply to all ‘legislative’ exactions-whatever that really means-imposed as a condition of development.” But the court did apply Nollan/Dolan in that particular case because the governmental authority took into account “individualized circumstances” of the applicants when it granted “exceptions to the general requirement that roads abutting subdivisions be improved to specified standards.” The Texas court explained its rationale as follows: “While we recognize that an ad hoc decision is more likely to constitute a taking than general legislation, we think it entirely possible that the government could ‘gang up’ on particular groups to force extractions that a majority of constituents would not only tolerate but applaud, so long as burdens they would otherwise bear were shifted to others.” The majority opinion in Koontz did not answer whether this approach taken by the Texas Supreme Court is still valid.    

A fourth approach is that the heightened scrutiny in Nollan/Dolan applies to monetary or other exactions imposed in an ad-hoc, adjudicative context, but not to exactions or other conditions imposed in a generalized, legislative context. That was the rule established by the California Supreme Court in Ehrlich v. Culver City, 12 Cal. 4th 854 (1996) (“Ehrlich”). See Ocean Harbor House Homeowners Assn. v. California Coastal Commission, 163 Cal.App.4th 215, 230 (Cal.App.2008). The California court’s rationale to applying Nollan/Dolan to ad-hoc, adjudicative exactions mirrors the language used by the majority in Koontz: “In a context in which the constraints imposed by legislative and political processes are absent or substantially reduced, the risk of too elastic or diluted a takings standard--the vice of distributive injustice in the allocation of civic costs--is heightened in either case.” 12 Cal.4th at 876. The Ehrlich court added: “But when a local government imposes special, discretionary permit conditions on development by individual property owners --as in the case of the recreational fee at issue in this case--Nollan and Dolan require that such conditions, whether they consist of possessory dedications or monetary exactions, be scrutinized under the heightened standard.” 12 Cal.4th at 881. However, unlike the majority in Koontz, the Ehrlich court went further and explained that “it is not at all clear that the rationale (and the heightened standard of scrutiny) of Nollan and Dolan applies to cases in which the exaction takes the form of a generally applicable development fee or assessment--cases in which the courts have deferred to legislative and political processes to formulate ‘public program[s] adjusting the benefits and burdens of economic life to promote the common good.’ 12 Cal.4th at 881 (quotingPenn Central Transp. Co. v. New York City (1978) 438 U.S. 104, 124).

Based on that different rationale, the Ehrlich court interpreted the existing Mitigation Fee Act (Govt. Code §§66000 et seq.) (“MFA”) in a manner that applied the heightened scrutiny in Nollan/Dolan to monetary exactions imposed by local governments in the individualized, ad-hoc, context, but not to monetary exactions imposed in the quasi-legislative or general context. Section 66001 of the MFA sets forth a two-part standard for assessing the reasonableness of a monetary exaction in both of those contexts. Subdivision (a) of section 66001 “applies to an initial, quasi-legislative adoption of development fees.” Garrick Development Co. v. Hawyard Unified School Dist., 3 Cal.App.4th 320, 336 (Cal.App.1992).) Subdivision (b) of section 66001 “applies to adjudicatory, case-by-case actions” involving application of a fee ordinance to a particular development project.   Garrick, supra, 3 Cal.App.4th at 336. Subdivision (b) states: “In any action imposing a fee as a condition of approval of a development project by a local agency, the local agency shall determine how there is a reasonable relationship between the amount of the fee and the cost of the public facility or portion of the public facility attributable to the development on which the fee is imposed.” (Emphasis added.) The Ehrlich court held that the “reasonable relationship” language in subdivision (b) should be construed in light of Dolan's "rough proportionality" test. Thus, as the California Supreme Court later explained in San Remo Hotel v. City & County of San Francisco, 27 Cal.4th 643, 666-667 (Cal.2002), the Ehrlich decision distinguished “generally applicable development fee[s] or assessment[s],” as to which “the courts have deferred to legislative and political processes,” from “special, discretionary permit conditions.” Justice Mosk, concurring in Ehrlich, similarly explained that although “general governmental fees” are “judged under a standard of scrutiny closer to the rational basis review of the equal protection clause than the heightened scrutiny of Nollan and Dolan,” “when a municipality singles out a property developer for a development fee not imposed on others, a somewhat heightened scrutiny of that fee is required to ensure that the developer is not being subject to arbitrary treatment for extortionate motives.”

This article’s author believes that the majority opinion in Koontz will not be read as applying the heightened scrutiny of Nollan/Dolan to monetary exactions or other permit conditions that are legislatively imposed, or generally applied. In other words, following Koontz, the U.S. Supreme Court will likely apply Nollan/Dolan in the same manner that the California Supreme Court interpreted the MFA in Ehrlich. That is apparent not only from the reference to Ehrlich in the dissenting opinion in Koontz (quoted above), but also from the following points discussed in the majority opinion:

  • Nollan/Dolan are a special application of the “unconstitutional conditions doctrine,” which “vindicates the constitution’s enumerated rights by preventing the government from coercing people into giving them up.” 
  • Nollan/Dolan reflect the reality of the permitting process that “land-use permit applicants are especially vulnerable to the type of coercion that the unconstitutional conditions doctrine prohibits because the government often has broad discretion to deny a permit that is worth far more than property it would like to take. By conditioning a building permit on the owner’s deeding over a public right-of-way, for example, the government can pressure an owner into voluntarily giving up property for which the Fifth Amendment would otherwise require just compensation. [Citations.] So long as the building permit is more valuable than any just compensation the owner could hope to receive for the right-of-way, the owner is likely to accede to the government’s demand, no matter how unreasonable. Extortionate demands of this sort frustrate the Fifth Amendment right to just compensation, and the unconstitutional conditions doctrine prohibits them.”
  • “Our precedents thus enable permitting authorities to insist that applicants bear the full costs of their proposals while still forbidding the government from engaging in ‘out-and-out . . . extortion’ that would thwart the Fifth Amendment right to just compensation. [Citation.] Under Nollan and Dolan the government may choose whether and how a permit applicant is required to mitigate the impacts of a proposed development, but it may not leverage its legitimate interest in mitigation to pursue governmental ends that lack an essential nexus and rough proportionality to those impacts.”
  • “A predicate for any unconstitutional conditions claim is that the government could not have constitutionally ordered the person asserting the claim to do what it attempted to pressure that person into doing.”
  • The fulcrum [that the Eastern Enterprises v. Apfel, 524 U.S. 498 (1998), case] turns on is the direct link between the government’s demand and a specific parcel of real property. Because of that direct link, [Apfel] implicates the central concern of Nollan and Dolan: the risk that the government may use its substantial power and discretion in land-use permitting to pursue governmental ends that lack an essential nexus and rough proportionality to the effects of the proposed new use of the specific property at issue, thereby diminishing without justification the value of the property.”
  • “[P]etitioner’s claim rests on the more limited proposition that when the government commands the relinquishment of funds linked to a specific, identifiable property interest such as a bank account or parcel of real property, a ‘per se [takings] approach’ is the proper mode of analysis under the Court’s precedent.”
  • “We have repeatedly rejected the dissent’s contention that other constitutional doctrines leave no room for the nexus and rough proportionality requirements of Nollan and Dolan. Mindful of the special vulnerability of land use permit applicants to extortionate demands for money, we do so again today.”

Furthermore, individualized and case-specific language in the Dolan decision will likely lead the U.S. Supreme Court to limit the Koontz holding to ad-hoc, adjudicatory monetary exactions and permit conditions. The Ehrlich court examined such language in Dolan as follows:

The condition imposed by the challenged regulation must not only be roughly proportional, the Dolan court held, both in “nature and extent to the impact of the proposed development” (512 U.S. at [391]), but the required proportionality must be demonstrated by “some sort of individualized determination.” (Id. at [391].) The court framed the first leg of its rough proportionality test as an inquiry into “whether the degree of the exactions demanded by the city’s permit conditions bear the required relationship to the projected impact of petitioner's proposed development.” (Id. at [388].) The antecedent question underlying that inquiry is, of course, the exact nature of the “required relationship” imposed by the takings clause. [Ibid.] … [¶] … We need not repeat here the extended account of the Dolan court's reasoning set out above [citation], except to note that, as we read the high court's opinion, the chief analytical advance of Dolan over the formulation by the court in Nollan appears to lie in the requirement that the local permit authority “make some sort of individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development.”

Those references to an applicant’s particular circumstances in the Dolan analysis (as described by the Ehrlich court) indicates that generalized, legislatively-applied conditions and exactions will not be subject to the heightened scrutiny of Nollan/Dolan

Also, it is unlikely that the Supreme Court will go as far as the Texas court in Town Of Flower Mound. The Texas approach (described in the “third” approach, above), goes too far because it would essentially include every monetary exaction or fee under Nollan/Dolan. That is because every administratively-applied condition could conceivably have an “exception” component where a variance provision exists under local ordinances. The majority opinion in Koontz does not lend itself to a wholesale revision of constitutional jurisprudence that applies a rational basis standard to generally applicable zoning restrictions and conditions.

In short, the U.S. Supreme Court in Koontz not only applied to the entire nation what had already been the law in California for the last 17 years under the Ehrlich decision, but in the future the high court will likely apply the heightened scrutiny in Nollan/Dolan in the same manner as the California Supreme Court in Ehrlich.

Commentary by William W. Abbott: There is talk of revolution in the air.[1]

I admit it is a challenge to forecast with any degree of assured accuracy as to the impact of Koontz on local government. I will not be surprised if other pundits forecast a revolution in land use practice (consider the NY Times: [http://www.nytimes.com/2013/06/27/opinion/a-legal-blow-to-sustainable-development.html?smid=li-share&goback=%2Egde_1013587_member_253643531&_r=0], or the Sacramento Bee [http://www.sacbee.com/2013/06/28/5530304/court-ruling-a-blow-to-land-use.html].)  Following Nollan and Dolan, despite predictions to the contrary, the legal terrain in California shifted only slightly. Why? For many California public entities, their practices were already compliant with the principles of Nollan and Dolan. Has the legal terrain shifted following Koontz? Yes. Will some public entities have to curb their historic regulatory enthusiasm following Koontz? Again yes. For the reasons outlined below, I think that for the majority of California cities and counties continued good planning practices will see them through post Koontz without the doom and gloom forewarned by some.

For perhaps the only time in my career, one of my predictions held true. I have stated on more than one occasion that the next entity to cross the exactions constitutional line would be a special district. The scenario of a special district engineer telling an applicant that its “my way or the highway” is not unheard of by many applicants or their representatives. The single purpose district, St. Johns River Water Management District, fulfilled my prophecy.

There are factors which mitigate the impact of Koontz on California local planning practice. First, concepts of the reasonable relationship of exactions to the project are embedded in the planning and zoning law (Government Code section 65909), CEQA Guidelines section 15041 and the Mitigation Fee Act (Government Code sections 66000-66022). As a whole, local planners are well versed in the concept of nexus as a cornerstone of land use practice. As a case in point, many cities and counties were concerned following the enactment of the Mitigation Fee Act (“MFA”) as to its potential burden. In fact, the MFA had the effect of giving local governments the technical tools necessary and steps to enact fees. Chronologically over time, there has been a significant expansion in fee practices. Second, it is a near universal truth for cities and counties that disagreements with staff are appealable to the planning commission and then the legislative body. In circumstances in which staff has arguably crossed the constitutional line, there are institutional procedures in place which allow for prompt rectification. No such protections are evident in the Koontz fact pattern.

What then are the ramifications of Koontz?

“Call me maybe.”[2] The facts from Koontz derive from the actions of agency staff addressing a regulatory objective. Viewed in one light, Koontz may operate to discourage agency staff from collaborating with applicants in crafting regulatory options to a project denial.[3] At a minimum, agencies will clearly label those discussions as “preliminary”. Perhaps in some cities and counties the message will be: don’t talk to me, go fix it yourself. 

“Signed, sealed delivered.”[4] I think that one practical consequence of Koontz is to further interest cities and counties in development agreements. As a consensual exercise, a development agreement (Government Code section 65864-65869.5) provides a tool to address exaction objectives which may not meet the Koontz-Nollan-Dolan standards.

“This Time You’ve Gone Too Far.”[5] The Supreme Court recognized the potential for abuse in the conditioning process, wherein as long as the cost of the exaction was less than the value of the approval, the potential existed for the agency to extract property from the applicant that it would not be otherwise entitled to obtain. I welcome a change in heart and practice by regulators who previously recognized and took full advantage of those opportunities.

I’ve got “Work to do.”[6] The Mitigation Fee Act spawned an entire industry of consultants. When push comes to shove over an exaction, the consultants and attorneys will get the call.

“Somebody loan me a dime?”[7] Reimbursement agreements are long time, well established tools designed to avoid takings claims by providing for the agency to collect funds (typically from later developers and builders) and reimbursing a developer who installs a facility with oversized capacity benefiting others. Expect their use to increase to avoid disproportionate burdens falling on individual applicants.

“Money, Money, Money.”[8] Koontz does not prohibit the imposition of in lieu, mitigation or impact fees, whether imposed on an individual basis or as a result of legislative enactment. Koontz changes the standard of review applied by a court when examining fees. The extent of the shift in California remains to be determined. As discussed in Glen’s analysis, we believe that the shift is likely to be small. To avoid creating disproportionate burdens, local governments will need to spread the pain of land use requirements on a broader basis. In many circumstances, this should translate into increasing number and type of facilities funded through fees (spreading the pain) thereby reducing the risk of unfair individualized impositions.

Many years ago, a good friend of mine, a county planning director, announced at a gathering of planners that good planning had nothing to fear from the Nollan and Dolan decisions and the Mitigation Fee Act. Time has proven him right. I think that the same statement holds true for the holding in Koontz.

Glen C. Hansen is senior counsel at Abbott & Kindermann, LLP and William W. Abbott is a partner at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.



[1]A nod to Bob Dylan and his “Tangled up in Blue”.   

[2] Carly Rae Jepsen.

[3] To quote Amy Winehouse in Rehab, “I say No, No, No.”

[4] The late, great soul man, James Brown.

[5] Peter Gabriel

[6] Check out versions by either the Isley Brothers or the Average White Band.

[7] “Somebody Loan Me a Dime” by Boz Scaggs.

[8] From “For the Love of Money” by the O’Jays.

 

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