No legal issue captures the public-private conflict quite like the doctrine of eminent domain, arguably one of the most litigated questions in US constitutional history. Recent legislative and judicial developments in the law on eminent domain in California are testament to the keenness of legislators and judges to clarify and refine the scope and nuances of the doctrine, which has its roots in the Takings Clause of the Fifth Amendment. In this two-part series, we discuss some of these developments, and the impact that they have on the application of the doctrine in California, particularly with respect to the valuation of loss and compensation.

The Fifth Amendment qualifies the Takings Clause – the constitutional basis for the state’s power to seize private property – with (1) public use and (2) just compensation, both of which are crucial to the valid exercise of the state’s eminent domain, and hence inevitably, points of substantial disagreement between private property owners and governmental agencies. With the expansive interpretation accorded to the term “public use” – i.e. the inclusion of “public welfare,” and even the “furtherance of economic development” (Kelo v. City of New London, 545 U.S. 469 (2005)) within its ambit – it is not difficult to foresee the potential for abuse by the government as well as by larger private entities acting in cohort with the government.

It is in this light that the discourse surrounding the issue of “just compensation,” particularly with respect to the valuation of the property sought to be acquired, further highlights the inherent asymmetry in bargaining power between the state and the private individual.

For instance, November 2013 saw a spate of premature suits filed before the California courts, by large banks seeking redressal against an anticipated exercise of eminent domain in respect of mortgages. In both Wells Fargo Bank v. City of Richmond (N.D. Cal., Sept. 16, 2013), and Bank of New York Mellon v. City of Richmond et al. (N.D. Cal., Nov. 6, 2013), the court was presented with two nearly identical cases that sought injunctions restraining the state from exercising its eminent domain in order to refinancing loans which had accumulated balances far in excess of the value of the properties themselves.

Observing that allowing such claims were (a) based on a factual scenario that may or may not eventually take place, i.e. before a dispute had even materialized, and hence (b) absent any imminent, irreparable harm, the court, in both cases, held that judicial intervention in such a case would result in overreach beyond what was necessary to maintain judicial efficiency. Thus, the courts have been unequivocal in mandating that the loss for which just compensation is claimed be “real.” In the aforementioned cases, the judicial determination of real loss hinged on when the loss was incurred; in the following post, we will examine another instance of judicial analysis that leads us to a similar result, albeit in respect of what constitutes “loss” for the purpose of valuation.

The Non-Residential Building Energy Use Disclosure Program (AB 1103 and AB 531) mandates the disclosure of energy use data (for the prior 12 months), operating characteristics, and ENERGY STAR Energy Performance Score of commercial buildings of over 5,000 square feet, to be made to a prospective buyer or tenant no later than 24 hours prior to the execution of the purchase/lease agreement, and no later than the submission of the loan application in the case of a prospective lender. Since July 1, 2013, the program has been in force with respect to buildings of over 50,000 square feet, however the same is slated to come into effect on a staggered basis and will cover buildings over 10,000 square feet by January 1, 2014, and those over 5,000 square feet by July 1, 2014.

Indeed, this mechanism is not unknown to realtors and the administration – since January 1, 2009, gas and electric utilities have maintained energy consumption data for all commercial (non-residential) buildings, which have been uploaded to the United States Environmental Protection Agency’s ENERGY STAR Portfolio Manager portal on a consent basis. However, the program now mandates the usage of the free online portal, which requires utility account-holders to furnish data within 30 days of each request. Additionally, the user is also required to fill out a compliance report and download and make available certain “Energy Use Materials” (Disclosure Summary Sheet, Statement of Energy Performance, Data Checklist, Facility Summary) to prospective tenants and buyers.

The software tool compares buildings located in regions experiencing similar climate and operational conditions, and scores them relatively on a 1-100 scale – a rating of 75 qualifies for ENERGY STAR certification – allowing prospective tenants and buyers to estimate future operating costs, rather than mere utility bills, when comparing buildings. At the same time, maintenance of the ENERGY STAR profile and rating is an additional burden on the real estate developer, given the degree of influence it can have over potential customers.

This system is an improvement on the benchmarking system to aid tenants, buyers, and lenders to compare energy consumption data of similar commercial buildings that was created in 2007 pursuant to Section 25402.10 of the California Public Resources Code. Moreover, it must be borne in mind that these disclosure obligations apply specifically to sales, purchases, or financing agreements in respect of an entire building, and not portions of buildings, or to multi-family buildings.

Though no sanctions have been specified for the failure to comply with the above mandated disclosures, it is certainly in the interest of real estate developers to take these regulations seriously, when dealing with clients, who will almost certainly require evidence of compliance as a prerequisite to the closing of a real estate transaction, thus creating a self-regulating market, that significantly reduces the burden of enforcement on the state.