What Happens At Trial?

A condemnation trial is essentially a trial involving different opinions of expert witnesses. An appraisal must be filed and will be exchanged with the condemning authority which will have its own appraiser and appraisal report. Cases involving partial takings require expert engineering testimony and reports to identify the severance or consequential damages. Where the valuation question of “highest and best use” is dependent on the likelihood of a zoning change, an expert land planner and report will also be required.

All of these reports must strictly conform to specific rules and requirements and filed and exchanged within a specified time in advance of trial. See EDPL §508.

The trial of a claim involving the State is held in the Court of Claims and a trial of a taking by a local government is held in the Supreme Court in the County in which the property is located.

A condemnation is a taxable event at the time of vesting. Section 1033 of the Internal Revenue Code of 1954, as amended, deals with “involuntary conversions” and affects reinvesting of proceeds of the condemnation proceeding so as to accomplish a deferral of any capital gains.

THERE ARE STRICT TIME LIMITATIONS UNDER THESE SECTIONS! IMMEDIATE TAX ADVICE SHOULD BE SOUGHT WITH RESPECT TO THESE MATTERS AND AS TO ANY OTHER PROBLEMS WHICH MAY AFFECT AN OWNER AS A RESULT OF THE CONDEMNATION — WE EMPHASIZE — AT THE TIME OF TAKING. DO NOT WAIT UNTIL THE AWARD IS ACTUALLY RECEIVED, WHICH MAY BE YEARS THEREAFTER.

The answer to this question is a qualified “yes,” but it is extremely difficult to prove.

In recent years, much attention has been focused on these so-called regulatory or “de facto” takings. These are situations where the regulatory authorities place such onerous restrictions on the use of the property that the property owner claims that the government has “de facto” (as opposed to formal or “de jure”) taken the property, entitling the property owner to just compensation. Traditionally, the remedy for a de facto taking was known as an “inverse condemnation.”

A recent spate of cases from the Supreme Court of the United States, in conjunction with a number of lower state and federal court cases, gave rise to the sense that a major change in the standards of de facto condemnation was being implemented by the courts. See, e.g., First English Evangelical Lutheran Church of Glendale v. Los Angeles County, 482 U.S. 304 (1987); Nollan v. California Coastal Commission, 483 U.S. 825 (1987); Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992); and Dolan v. City of Tigard, 512 U.S. 374 (1994).

The Supreme Court of the United States seemed to be moving toward a concept of requiring compensation (or at least recognizing a de facto condemnation requiring payment of compensation) whenever local regulations resulted in substantial market depreciation in the value of the property.

The New York courts are generally not receptive to de facto condemnation claims requiring a very powerful showing that the property has been destroyed by government action. Gazza v. New York State Dept. of Envtl. Cons., 89 N.Y.2d 603, 657 N.Y.S.2d 555 (1997).

However, in certain circumstances, New York’s statutory scheme does provide some relief to recover for a “de facto” condemnation where the government’s application of the environmental rules and regulations deprive a property owner of substantial value. See, ECL 24-0705(7) which provides:

“In the event that the court finds the action reviewed constitutes a taking without just compensation, and the land so regulated merits protection under this article, the court may, at the election of the commissioner, either (i) set aside the order or (ii) require the commissioner to proceed under the condemnation law to acquire the wetlands or such less than fee rights therein as have been taken.”

The statute requires a two-step analysis. It must first be determined whether the administrative denial of the permit is rational and supported by substantial evidence. Once this is established, it must be determined whether the denial of the permit constitutes an unconstitutional taking of petitioner’s property. See, Spears v. Berle, 48 N.Y.2d 254, 422 N.Y.S.2d 636 (1979).

A precautionary note. The law on the question of “de facto takings” is changing very rapidly. Decisions have come down even as this brochure was being prepared refining and redefining the legal standards. The above review should therefore be viewed as only the broadest outline of this area and any property owner who believes that they are the victim of a de facto condemnation must consult with their counsel to be assured that they are evaluating their situation under the most recent standards.

If there are building department or health department violations which have been placed on the property and not officially removed, the cost of clearing up such violations could become a deduction from the market value as of taking date. The property owner, so as to effectively deal with any attempt by the condemning authority to take such a deduction, should:

(i) Maintain a copy of the notice of violation(s).

(ii) Detail what work was done (if any) to remove the violations or any part of them, even though not officially removed.

(iii) Preserve all documents showing that the work was done to remove any violations, including contracts and cancelled checks.

If violations have not been removed, an estimate should be obtained from a contractor or an engineer on the cost of the removal of these violations. This could become an important issue in the valuation trial or settlement.

The question of the effect of an environmental condition on the valuation of the property for condemnation or just compensation purposes is still an open issue. As of the date of this brochure, no New York appellate court has rendered a definitive determination on how costs of remediation fit into the valuation of property where there is an environmental condition. The position of the government is that these costs must be deducted from the gross market value to determine the net market value of the property and the position of the claimant/property owner is that it would be improper to impose costs of remediation as a deduction, especially where the property taken has been operating without interference with this condition. Trial courts which have addressed the issue have largely found that either the costs of remediation may not properly be deducted from the award, or that the amount of costs of remediation which can be deducted are limited by various circumstances. This is still a developing area of condemnation law and you, as property owner, should feel free to contact us to discuss this problem if the situation applies.

(A) – Rent

(i) Back Rents. The owner of the building should collect all his rents up to but not including the date of title vesting. The condemning authority or its agents will not attempt to collect any of the rents due prior to title vesting date. If the owner does not collect back rent himself, it will not be adjusted or collected by the condemnor.

(ii) Rents after Vesting. If any rent is collected by the owner for a period subsequent to the passing of title, the condemnor will demand a rebate of those rents. If unpaid, such rents will be a lien against the award to be made and will have to be paid or adjusted prior to the payment of the award. The property owner should make rent adjustments to the condemning authority as soon after title vesting as possible. Disputes can better be resolved while tenants are still available.

(iii) Continued Occupancy. The owner or a tenant can often occupy any of the space in the building after vesting, either as a commercial or residential tenant. The condemning authority will demand a rent to be paid for use and occupancy. The amount of this rent may be negotiated, and will not affect the determination of just compensation. If unpaid, such rent will be deducted upon payment of the award. Disagreements on the amount of the appropriate use and occupancy rental, are resolved by a judicial hearing or may be an issue in the trial itself. No written agreement as to rent should be entered until counsel has reviewed it. See EDPL §305.

(iv) Services/Utilities. Tenants should assume that the rental arrangement with the State, unless otherwise agreed, will be on a net basis (i.e., the tenant is responsible for insurance, maintenance, etc.). It is highly unlikely that the condemning authority will provide services or repairs to the premises or make arrangements for same after the taking. If the owner chooses to remain in occupancy, it is his or her responsibility.

(B) – Insurance

Even where the taking is total, liability insurance should be continued for a reasonable period after the title vesting date as protection against pre-existing physical defects or claims. If the owner of the property continues to occupy all or any portion of the premises, insurance should be continued on personal property. The owner should consult its insurance broker as to continuing protection for itself as a tenant with respect to fire and liability insurance.

(C) – Taxes

(i) Payment to Vesting. As a general rule, the owner is required to pay only the apportioned amount of the real estate taxes for that part of the tax year prior to vesting of title. However, if the owner is in title as of the tax status date, it is, as far as the assessor is concerned, still the owner and will be liable for the tax for the entire year although the condemning authority may vest title at some point in that tax year. Note, however, that this excess payment can be adjusted later see (iii) below.

(ii) Apportionment. Prior to the next tax status date, application should be made to the assessor for an apportioned bill to remove the property taken by the condemnor and adjust the tax bill accordingly. All real estate taxes should be paid promptly to avoid any interest and penalties.

(iii) Condemnor/State Refund of Apportioned Taxes. If the tax has already been paid for a period beyond title vesting, the condemnor, upon proper application, will pay an apportioned amount of the taxes.

(iv) Where the taking is partial, the above explanation applies, but there will be a further apportionment.

(D) – Water

If water taxes are paid by a frontage charge, the owner is liable for an apportioned water tax for the year in which title vested. If there is a water meter, a reading should be requested as soon after the date of title vesting as is possible to include up to the date of title vesting. If water frontage charges have already been paid, application should be made by the owner himself to the local tax collector for a refund.