"The Failed Condemnation: May Property Owners Recover Compensation When the Government Changes its Mind?" Maslon Whitepaper, 2004
February 25, 2004
You own commercial property that the City has targeted for condemnation. City officials repeatedly tell you that it will be condemned. Actions they subsequently take back up these statements. Since all signs point to inevitable condemnation, you lose rental income because no business wants to commit as a tenant. In addition, your property's overall market value decreases in light of pending eminent domain. Suddenly, Murphy's law strikes: on the eve of condemnation, the City changes its mind and cancels its plan to condemn your property. Even though the City never formally condemned your property, a question lingers in your mind: am I entitled to compensation for damages caused by the City's conduct? The Minnesota Supreme Court recently addressed this very question in Johnson v. City of Minneapolis. Maslon lawyers, including members of our Real Estate Litigation and Appellate Teams, served as appellate counsel for the property owners, and helped win a major victory for Maslon clients.
Takings Under Minnesota Law
Both the Minnesota and United States Constitutions require the government to pay just compensation when a "taking" of private property occurs. But what exactly is a "taking"? Many might assume that the government must actually physically take a parcel of property. However, the law is not that simple. Under Minnesota law, a taking "includes[s] every interference, under the right of eminent domain, with the possession, enjoyment, or value of private property." Minn. Stat. § 117.025, subd. 2. In Johnson, the Minnesota Supreme Court examined whether property owners were entitled to compensation under Minnesota law for economic losses they sustained after City officials backed out of their plan to condemn multiple commercial and retail properties.
Johnson v. City of Minneapolis
The story behind Johnson began in 1983, when the City of Minneapolis adopted a redevelopment plan for the southern part of Nicollet Mall. Part of this plan involved condemning commercial and retail property from multiple property owners. In 1986, the City entered into a contract with a developer to make the plan a reality. The contract required the developer to secure anchor tenants before the City was obligated to condemn any property.
The developer submitted an initial design, which the City rejected. Frustrated with the project, the City wrote a letter to the anchor tenants suggesting that the developer had not been honest in its dealings, which jeopardized the developer's ability to secure the anchor tenants. Curiously, the City also sent a letter to the property owners informing them that it would be appraising their properties for condemnation. Soon after that, the City terminated its contract with the developer. The developer sued the City in federal court and placed a notice of lis pendens on the properties. It was not until that point that the City finally informed the property owners that the condemnation might not occur.
Ultimately, the City prevailed in the lawsuit and the developer was awarded no damages for its breach of contract claims. However, the property owners, feeling they had been led down the proverbial primrose path, filed an action against the City. At trial, the court found that the City's actions constituted a taking and awarded compensation to the property owners. The Minnesota Court of Appeals reversed the award, concluding that the City's conduct did not amount to a taking.
The property owners then retained the Maslon Firm to help take the case to the Minnesota Supreme Court. The Minnesota Supreme Court found that a taking did occur, and reinstated the damages awarded to the property owners. Importantly, the court held that "while the general rule is that economic loss caused by 'normal activities in connection with an urban renewal project, without more, does not constitute a de facto taking in a constitutional sense,' an abuse of the power of eminent domain may be tantamount to a regulatory control, constituting a de facto taking 'when that abuse is specifically directed against a particular parcel.'" The Court found that the City's actions in Johnson constituted a "de facto taking" based on three important facts. First, the City misled the property owners and failed to inform them when the project was abandoned. Second, the City specifically targeted the properties for acquisition. Last, the Court found that City officials had acted in bad faith towards the property owners by "failing to use their best efforts and by failing to cooperate with [the developer] in meeting required deadlines."
The Ramification of Johnson
So what is the impact of Johnson on condemnation law in Minnesota? First and foremost, the Minnesota Supreme Court's decision in Johnson allowed Maslon clients to recover millions of dollars for loss of economic use and damages to their properties. Second, the Court held that a property owner may recover compensation for economic damages sustained from a government's abuse of eminent domain powers during pre-condemnation activities. However, the breadth of Johnson's impact on other cases may be limited. In order to obtain compensation for pre-condemnation government activity, the Minnesota Supreme Court stated that egregious conduct must exist similar to the facts in Johnson, where the City specifically targeted the properties for acquisition, misled the property owners, and acted in bad faith in its contractual dealings.
If you are a property owner and believe that a city or state's pre-condemnation activity has diminished the value of your property or resulted in the loss of revenue to your business, the key is to seek legal advice. The Maslon Firm's Real Estate Litigation and Appellate Groups are here to answer any questions and assess whether there is a basis for recovery at the trial level, or reversal at the appellate level.