U.S. Supreme Court Expands Just Compensation Requirement to Permit Denials

Last week, the U.S. Supreme Court issued its 5-4 decision in Koontz v. St. Johns River Water Management District. While the opinion was overshadowed somewhat by a Voting Rights Act opinion issued the same day, the case could affect municipal development regulations in Texas. Essentially, the Court held that the Fifth Amendment can require compensation to a developer if a city denies a permit based on the developer’s refusal to comply with certain conditions.

The case centers around the concept of “development exactions,” which are conditions (e.g., parkland dedication or money in lieu thereof, infrastructure improvements, etc.) that a city places on the approval of a permit to develop property (e.g., the approval of a subdivision plat).

The justification for such a requirement is that a new development will place an increased burden on city facilities. For example, if a street is not currently capable of supporting the increased traffic that results from the new development, it is fair to require the developer to bear the cost of upgrades. Moreover, parkland dedication or fees in lieu of dedication are acceptable because they offset the loss of recreational and natural areas due to development. On the other hand, requiring a landowner to improve unrelated property far away from his proposed development may not be appropriate.

The Dolan test, which was articulated by the U.S. Supreme Court in the previous case of Dolan v. City of Tigard, states that an essential nexus must exist between an exaction and a legitimate state interest and that the exaction must be “roughly proportional” to the public consequences of the requested land use. (In the 2002 Texas case of Town of Flower Mound v. Stafford Estates Limited Partnership, the Texas Supreme Court adopted the standard for Texas. In 2005, the Texas Legislature passed H.B. 1835, which essentially codified the holding.)

In the Koontz case, Koontz sought a permit to develop a portion of his Florida property. The special district to which he applied for a permit refused to approve his project unless he made certain concessions, including spending money to improve public wetlands elsewhere. Koontz refused to pay, and the district denied his permit application. Koontz didn’t agree that he should be required to improve public lands away from his development, and he sued under a state law permitting him to seek damages.

The Florida Supreme Court held that Koontz did not have a claim for two reasons, the most important being that regulatory takings jurisprudence had not been held to apply to a denial of a permit, as opposed to an approval. For example, the Flower Mound case in Texas was based on the approval of a permit (a subdivision plat) that was conditioned on the improvement of an abutting street. The court in that case held that the condition wasn’t proportional to the impact the proposed development and ordered the town to pay the developer back for the money he paid to improve the street.

Under the holding in Koontz, the reverse could also be true: if the Town of Flower Mound had denied the permit for the developer’s refusal to improve the abutting street, he would still have had a viable takings claim. The odd result is that the Court has now held the Fifth Amendment test applies regardless of whether property is actually taken. Thus, if a city requires money for some specific purpose (e.g., impact fees, a fee in lieu of parkland dedication), and denies a permit because a developer refuses to pay, that requirement can be a taking.

City officials should consult with their city attorney to determine how the opinion may impact their procedures. For attorneys or others interested in legal analysis, the American Bar Association’s Section of State and Local Government Law will be presenting a 90-minute webinar on the issue on Friday, July 12, 2013. For registration information, click here


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