In 2005, in Lingle v. Chevron U.S.A. Inc., the U.S. Supreme Court unanimously overruled the first prong of a regulatory takings test established 25 years earlier, in Agins v. City of Tiburon.  In Agins, the Court held that a regulation effects a taking if it (1) does not “substantially advance legitimate state interests” or (2) “denies an owner economically viable use of his land.” Writing for a unanimous Court in Lingle, then Justice Sandra Day O’Connor recognized that “the language the Court selected [in Agins] was regrettably imprecise” and “reveals nothing about the magnitude or character of the burden a particular regulation imposes upon private property rights.”

The Lingle Court thus held that the “substantially advances” formula is not a valid takings test and that it has no proper place in federal takings jurisprudence.  The Court also reaffirmed that a plaintiff seeking to challenge a federal law as an uncompensated taking of private property may proceed only by alleging a “physical” taking under Loretto, a “total” regulatory taking under Lucas, an “ad hoc” taking under Penn Central’s balancing test, or a land use exaction under Nollan and Dolan.

Although various state and federal courts have recognized that the “substantially advances” formula no longer constitutes a valid test by which to determine whether there has been a regulatory taking under the Fifth Amendment to the U.S. Constitution, no court had determined whether the “substantially advances” formula remains a valid test by which to analyze a regulatory taking under the takings clause of the California Constitution.  On September 18, 2018, however, in Bottini v. City of San Diego, __ Cal.App.5th __ (2018) (Case No. D071670), the Fourth District Court of Appeal held that “the Penn Central test endorsed in Lingle—and not the ‘substantially advances’ formula—applies to ad hoc regulatory takings claims that arise under the California Constitution.”

Bottini arose out of the owners’ efforts to construct a single-family home on a vacant lot in La Jolla that had been the location of a late Victorian-era beach bungalow known as the Windermere Cottage.  The City’s Historic Resources Board determined that the Windermere had undergone too many alterations to warrant a historic designation, but the State Office of Historic Preservation later notified the Board that the home “appeared eligible” for inclusion on the California Register of Historical Resources.

The owners later applied to the City for a determination whether the Windermere constituted a public nuisance based on a structural engineer’s determination the home could collapse even in the event of a minor seismic event and thus was no longer inhabitable.  The City agreed the Windermere was uninhabitable and ordered that it be demolished.  After demolishing the structure, the owners applied to the City for a Coastal Development Permit to build a new residence on their lot.  City staff determined the proposed home was categorically exempt from the California Environmental Quality Act.

The La Jolla Community Planning Association and La Jolla Historical Society challenged the CEQA exemption, arguing that it constituted improper “piecemealing” and that the demolition should have been considered part of the overall “project.”  The City Council ultimately agreed with the administrative appeal, concluded the project was not categorically exempt from CEQA due to exceptions to the exemption, and determined the project should have a CEQA baseline of January 2010.  My partner, Art Coon, will write about the CEQA aspects of the case here.

The owners filed a lawsuit against the City challenging its CEQA determination and asserting causes of action for inverse condemnation, equal protection, and due process violations.   In their inverse condemnation cause of action, the owners alleged that the City’s CEQA determination constituted a regulatory taking of their property because it delayed their plans to construct a home on their property and, as a result, required them to pay a mortgage for both their existing home and an empty lot.

The trial court granted the owners’ petition for a writ of mandamus on the CEQA cause of action, concluding that the project is separate from the demolition of the Windermere and that the baseline should be set at the point at which the property was an empty lot.  The court granted summary judgment for the City on the owners’ constitutional causes of action.  The court determined that the City was entitled to summary judgment on the inverse condemnation cause of action, however, because governmental review of a project “for compliance with CEQA is clearly a legitimate governmental purpose,” on the equal protection cause of action because there was no evidence the City had “intentionally discriminated” against the owners or that the City lacked a rational basis for its decision, and on the due process cause of action because the owners have no protected property interest where the decision maker has discretion to grant or deny the benefit at issue.

The Court of Appeal affirmed the trial court judgment in full.  With respect to the takings cause of action, the Court analyzed the “substantially advances” test created in Agins in 1985 and relied on by the California Supreme Court in 1988 in Landgate, Inc. v. California Coastal Commission, and the Penn Central balancing test, and determined that:

“based on our Supreme Court’s instruction that we are to interpret the California Constitution’s takings clause congruently with the federal takings clause, we make explicit the conclusion that past decisions have impliedly reached and hold that the Penn Central test—not the ‘substantially advances’ formula—applies to regulatory takings causes of action arising under the California Constitution.”

The Court went on to apply the Penn Central factors:

• The economic impact of the regulation on the claimant.

Given that the owners have had to pay a mortgage for both their existing home and an empty lot—at an additional cost of several thousand dollars per month—as a result of the construction delay caused by the City Council’s erroneous CEQA determination, the Court held that the evidence suggests the economic impact factor weighs in favor of the owners.

• The extent to which the regulation has interfered with distinct investment-backed expectations.

The Court held that the owners’ declaration that they had relied on the property listing in deciding to purchase the property does not establish that they had distinct investment expectations.  According to the Court, their “expectations are not distinct and concrete, but are instead vague and abstract.”  A reasonable investment-backed expectation must be more than a unilateral expectation or an abstract need.  Instead, it “must be objectively reasonable.”  The Court reasoned that “there is no basis for us to conclude that the Bottinis had a reasonable expectation that they would be permitted to engage in such conduct without undertaking any form of environmental review.”

• The character of the governmental action.

Because the City did not physically invade or appropriate the owners’ property, the Court held that this factor did not support a taking.

Balancing the Penn Central factors, but placing particular emphasis on the lack of distinct investment-backed expectations, the Court concluded the trial court did not err in granting summary judgment to the City on the owners’ takings claim.

Bottini is California’s first published appellate decision since Lingle to directly confirm that the “substantially advances” test invalidated in Lingle is also not good law under Landgate.  And though the Court agreed the City abused its discretion under CEQA, Bottini is yet another reminder of the extreme difficulty landowners have in obtaining compensation for adverse governmental action resulting in costly financial impacts.