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Governmental Taking?

The spread of the coronavirus has prompted most states to issue orders mandating non-essential businesses to close and non-essential workers to stay home. These regulations, whether or not justified, have decimated small and large businesses alike.  Loans are being made available to businesses, some containing a forgiveness option provided that the business spends the money in a specified way.

But when the dust settles after all of this, will there be a flood of lawsuits from business owners, destitute after the government’s loan money has run out and their firms are dried up. And these suits will likely be on the grounds of the Fifth Amendment.  Is it true that statewide regulations mandating business closure is actually a regulatory taking.

A regulatory taking is when a regulation put forth by a governmental authority diminishes the value of one’s property, such that that property owner becomes entitled to compensation for it. But as to whether these aforementioned regulations constitute a regulatory taking?

There has been significant disagreement within the Supreme Court over the years, leaving a lot to be clarified. One of the key cases governing regulatory takings is Penn Central Transportation Co. v. City of New York (1978). This case, which dealt with an ordinance precluding Penn Central leasing airspace above Grand Central Terminal, lays out a three-pronged balancing test to guide the court. The three factors are: (1) the economic impact on the owner of the property; (2) the regulation’s interference with the owner’s reasonable investment-backed expectations; and (3) the character of the government action.

In the regulations related to the coronavirus, the economic impact on the business owners is, of course, devastating. The second prong, investment-backed expectations, describes whether the government regulation at hand was foreseeable and thus reflected in the price of the property. There is little doubt the business owners, when purchasing the property, intended to do business without disruption from state governments. Shutdowns like we’re seeing now would have been inconceivable to property owners just a few months ago, let alone at the time of purchase. The third prong, which measures the character—that being the purpose and circumstances—of the government action, too, is unquestionably strong.

The next salient case when approaching the takings question is Lucas v. South Carolina Coastal Council (1992)Lucas holds that a regulation that deprives property of all economic value constitutes a regulatory taking. At first blush, this suggests that a shutdown of non-essential business would, in fact, constitute a regulatory taking. The case becomes even stronger when businesses are in areas with tight zoning restrictions, such as New York City, where property must be used for commercial purposes. In other words, if commercial activity shuts down, there can be no economic value to the land. An example that we could see is that if a restaurant is unable to keep the business afloat amid this shutdown, and they lack the capital to reinvigorate the restaurant when the ban is lifted, that would be considered a total deprivation of economic value.

The final case, Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency (2002), however, casts doubt over the regulatory takings argument. Tahoe dealt with a temporary prohibition of development in certain sensitive areas of the basin for 32 months on the California side, and eight months on the Nevada side. The court ruled that because such restrictions were temporary, the case was better suited to be decided under the Penn Central framework over the Lucas framework. And under the Penn Central framework, the regulation did not require a payment of just compensation. It is uncertain how long these statewide regulations will last, but it’s extraordinarily unlikely that they will permanent.

It could be argued, however, that in Tahoe, property owners factored in the chance of environmental regulation and instability when purchasing the property. By contrast, there is little reason for a business owner in metropolitan New York to suspect a wholesale shutdown when looking to buy property. And more crucially, the Lucas analysis would look a lot more relevant than the other two cases if the imposition of these regulations results in the permanent shutting down of certain businesses.

It remains to be seen how long the coronavirus pandemic will loom over our heads, but one thing is sure: the longer it persists, the longer these regulations will last. And, by extension, the stronger the regulatory takings case becomes. As a timeline becomes more clear, the more we will understand about the permanency of the economic impact.  If your business has faced a situation that you would like to discuss please let us know how we can serve you.

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