By Travis Brooks

In one of the first federal “takings” cases after last year’s U.S. Supreme Court decision in Knick v. Township of Scott, Case No. 17-647, 588 U.S. ___ (2019), the U.S. Court of Appeals for the Ninth District, in a March 18, 2020 decision, made clear that the administrative “finality requirement” elaborated in the 1985 decision Williamson County Regional Planning Commission v. Hamilton Back, 473 U.S. 172 (1985), still remains in place. As part of this finality requirement, a prospective federal takings plaintiff must pursue the procedurally available avenues, within the timelines prescribed by local agencies, to seek relief from a challenged land use decision before bringing a federal action. [Pakdel v City and County of San Francisco, 952 F.3d 1157 (9th Cir. 2020).]

Factual and Procedural Background

Plaintiffs owned a tenancy-in-common interest in a multi-unit building in the City of San Francisco (City). Under a fairly common ownership arrangement in the city, several tenants-in-common share ownership over an entire building and then enter into agreements among themselves to give each owner an exclusive right to occupy a particular unit. Plaintiffs leased their tenant-in-common unit to a tenant but planned on occupying the unit upon their retirement.

Until recently, the City conducted a lottery to determine which tenant-in-common buildings could be converted into condominium units and the lottery faced a severe backlog. In 2013, to clear the backlog, the city temporarily suspended the lottery and replaced it with the Expedited Conversion Program (ECP) which allowed tenancy-in-common property to be converted into condominium property on the condition that its owner agreed to offer any existing tenants in affected units with lifetime leases within the converted property. The city also had procedures to request exemptions to the lifetime lease offer requirement.

Plaintiffs purchased their property in 2009. In 2015, plaintiffs, along with their co-owners, applied to convert the building into a condominium building under the ECP. While advancing through the application process, plaintiffs had several opportunities to seek a waiver from the lifetime lease requirement. They never did so and in January 2016, the San Francisco department of public works approved plaintiffs’ “tentative conversion map.” In November of 2016, plaintiffs signed an agreement with the city to offer a lifetime lease to their tenants and even offered their tenants such a lease. At the last minute, before signing executing the lifetime lease they offered to their tenant, tenants refused to sign the lease and instead sued the City in the U.S. District Court in the Northern District of California. Plaintiffs contend under various theories that the city’s lifetime lease requirement violated the Takings Clause of the Fifth Amendment of the U.S. Constitution.

The Knick v. Township of Scott Decision

Plaintiffs case reached the U.S. District Court before the U.S. Supreme Court’s decision in Knick v. Township of Scott. Before Knick, regulatory takings plaintiffs had to clear two hurdles in local and state venues before seeking relief in federal court. Such plaintiffs needed to: 1) obtain a final decision through whatever administrative procedures were available to challenge the alleged taking in the local jurisdiction (Finality Requirement), and 2) exhaust all state court remedies available to obtain compensation for regulatory takings (Exhaustion Requirement). The U.S. Supreme Court’s decision in Knick eliminated the exhaustion requirement.

Because Plaintiffs filed their lawsuit before the Knick decision, the U.S. District Court dismissed plaintiffs’ suit for failure to exhaust all available state remedies to obtain compensation. Plaintiffs appealed to the Ninth Circuit.

The Ninth Circuit’s Decision

The Ninth Circuit began by noting that constitutional challenges to local land use decisions are not considered by federal courts until the posture of such challenges are considered “ripe.” Before Knick case needed to meet the two requirements above before it was “ripe” for federal review:

“First, under the finality requirement, a takings claim challenging the application of land-use regulations was not ripe until the government entity charged with implementing the regulations ha[d] reached a final decision regarding the application of the regulations to the property at issue… Second, under the state-litigation requirement, a claim was not ripe if the plaintiff did not seek compensation [for the alleged taking] through the procedures the State ha[d] provided for doing so.”

The Ninth Circuit acknowledged that the U.S. Supreme Court’s Knick decision removed the second requirement above, and as a result, plaintiffs’ failure to seek just compensation in state court no longer barred them from brining their takings claim in federal court. The Court of Appeals then analyzed whether plaintiffs takings claims were ripe under the first pre-Knick, “finality” requirement.

Ripeness and the ‘Finality’ Requirement

First the court recognized that the Knick decision left the first or “finality” pre-Knick requirement intact. Plaintiffs did not argue this, but instead argued that they satisfied the “finality” requirement by refusing to sign the lifetime lease that it agreed with the City of San Francisco to sign, after failing to attempt to seek a waiver of the lifetime lease requirement through the procedures made available by the City. The court disagreed.

In doing so, the court analyzed the rationale behind the “finality” requirement that was articulated by the Supreme Court in the 1985 case Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City. As the court in Williamson County noted, the finality requirement exists in constitutional land use challenges because many of the factors essential to determining whether a taking has occurred (economic impact of the action, and extent to which it interferes with investment backed expectations):

“. . .simply cannot be evaluated until the administrative agency has arrived at a final, definitive position regarding how it will apply the regulations at issue to the particular land use question.”

The finality requirement addresses the high degree of discretion that local land use boards have in granting variances from their general regulations with respect to individual properties. In light of this discretion, federal courts simply cannot “make a sound judgment about what use will be allowed by a local land use authority merely by asking whether a development proposal” facially conforms to the land use regulations at issue. As the court noted, a federal court cannot decide whether a regulation:

“. . .has gone too far until it knows how far the regulation goes which requires a final and authoritative determination of how the regulation will be applied to the property in question.”

Applying ‘Finality’ under Williamson County

The court went on to articulate that the Williamson County “finality” rule requires a plaintiff:

“. . .to meaningfully request and be denied a variance form the challenged regulation before bringing a regulatory takings claim…but the term variance is not definitive of talismatic; if other types or permits are available and could provide similar relief, they must be sought.”

The court then analyzed the various avenues that the San Francisco department of public works made available to plaintiffs during the ECP application. Public works staff had discretion to authorize exceptions to the lifetime lease requirements. Plaintiffs could have sought an exception at the January 7, 2016 hearing on the ECP application’s tentative map. The City also notified plaintiffs that before the City approved a final conversion map, plaintiffs could raise any objections to the conditions of the tentative conversion map approval, including the lifetime lease requirements. Plaintiffs also could have raised an objection to the lifetime lease requirement to the City board of supervisors and were notified of this in a letter that followed initial approval of the conversion map. At each of these opportunities, plaintiffs failed to seek an exception to the lifetime lease requirement, until all available procedural methods had expired.

Plaintiffs nonetheless alleged that they met the finality requirement by refusing to execute the finality lease. The court disagreed. The “finality” requirement requires plaintiffs to timely avail themselves of the administrative avenues available to seek a variance or exception from a challenged land use regulation:

“Plaintiffs cannot make an end run around the finality requirement by sitting on their hands until every applicable deadline has expired before lodging a token exemption request that they know the relevant agency can no longer grant. . . .”

The court also recognized that although there is no exhaustion requirement for actions brought under § 1983, in the land use takings context, a property owner’s failure to seek a variance (or similar exception) through procedures made available by the local-land use authority, means that the authority had not reached a final decision.

Conclusion and Implications

The U.S. Supreme Court’s recent decision in Knick was a boon for federal regulatory takings plaintiffs who want to avoid the need to pursue state court actions. However, the Ninth Circuit’s decision in Pakdel makes clear that such plaintiffs still need to pursue the procedurally available avenues, within the timelines prescribed by local agencies,  to seek relief from a challenged land use decision. Williamson County’s finality requirement remains firmly intact, for now, within the Ninth Circuit. The court’s decision is available online at: https://cdn.ca9.uscourts.gov/datastore/opinions/2020/03/17/17-17504.pdf