Experience

Property and Construction Law Update
Summer 2006

State Legislature Overhauls Eminent Domain Laws

By Ginny Bell

During this past session, the Minnesota State Legislature made sweeping changes to Minnesota’s eminent domain law. These changes may be the most significant alterations to the law of eminent domain in the past 40 years.  

The recent legal and political climate in Minnesota created the perfect storm for an overhaul of Minnesota’s eminent domain laws. The 2005 U.S. Supreme Court, in Kelo v. City of New London, approved New London’s taking of non-blighted private property for transfer to other private parties. That decision set off a firestorm of protest throughout the country.  The storm raged with particular ferocity here in Minnesota where the Minnesota Supreme Court’s split decision in Walser v. City of Richfield HRA let stand the approval of a taking of private property (a car dealership located along Interstate Highway 494) for redevelopment by other private parties. Fueled by this backlash, national property rights advocates joined forces with Minnesota business groups, farmers, and others to lobby for restrictions on the government’s ability to take private property.  

The result of that effort is a new law that limits the ability of local governments to take private property for economic development or redevelopment purposes. The new law also creates significant new rights for property owners and business owners in eminent domain cases. 

Public Use and Public Purpose Redefined  

The new law begins by redefining public use and public purpose to include only: a) public ownership of property, b) public utilities, and c) the elimination of blighted areas, remediation of environmental contamination, reduction of abandoned property, or removal of public nuisances. These last four areas noted in item (c) above are tightly defined. 

For instance, a “blighted area” is defined under the new law as an area where more than 50 percent of the buildings are “structurally substandard.” “Structurally substandard” is, in turn, defined under the new law to mean that the buildings have been inspected and cited for housing, maintenance or building code violations, the violations have not been remedied after two notices to cure, and the cost to cure the violations is more than 50 percent of the taxable market value for the building. 

The new law also dramatically reduces the ability of condemning authorities to assemble property within a blighted area. Specifically, buildings that are not structurally substandard within a blighted area cannot be taken by eminent domain unless there is no feasible alternative to the taking of those buildings and all steps have been taken to avoid acquisition by condemnation. 

The new law also requires that condemning authorities first conduct public hearings and engage in a cost/benefit analysis before taking blighted or contaminated property. If the taking is later challenged in court, the condemning authority must show that the taking is in fact for a public purpose. The net result of all of these changes is that local governments may find it much harder to use eminent domain as a tool in redeveloping their communities. 

Compensation Expanded for Property Owners and Business Owners  

For property owners and business owners, the most significant changes under the new law are the new compensation provisions. Specifically, the new law adds an explicit provision which compensates for loss of going concern (including good will and other benefits that accrue to a business or trade above the value of the real estate). Previously, it had been very difficult for owners and tenants to obtain compensation for losses above the lost market value of the real estate. Under the new law, owners and tenants are entitled to compensation for loss of going concern if their business or trade is “destroyed” by a taking and they could not have reasonably prevented the loss. Another important provision provides that property owners who are forced to relocate because of a government taking must be paid, at a minimum, an amount sufficient to acquire a comparable property in the community. 

Government Required to Reimburse Property Owners for Attorneys’ Fees in Certain Cases  

The new law also permits, and in certain cases mandates, the recovery of attorneys’ fees and litigation expenses by owners. The new law provides that reasonable attorneys’ fees and expenses must be awarded by the court if the final judgment or condemnation award is more than 40 percent greater than the condemning authority’s last written offer. If the final judgment or award is at least 20 but not more than 40 percent greater than the last offer, the court may still award the fees and expenses. In addition, the owners are entitled to be reimbursed for the reasonable costs of an appraisal, up to $5,000 for most takings, regardless of the amount of the judgment or award. 

The cap on re-establishment expenses also has been raised from $10,000 to $50,000. These expenses are part of the package of relocation benefits paid to businesses that are forced to relocate because of condemnation. In addition, under the new law appeals of relocation decisions must be heard by an administrative law judge (as opposed to an entity chosen by the condemning authority) to ensure fairness. 

The New Law Takes Effect Immediately but Certain Takings are Exempt  

Effective on May 20, 2006, the new law applies to eminent domain actions commenced after that date. There are certain exceptions, however; utilities and certain other “public service corporations” are exempt from many of the provisions of the law. The new law does not apply to takings for drainage purposes or for town roads. It also includes a complicated set of phasein provisions for property included within Tax Increment Financing (TIF) Districts. 

Is the New Law a Good Thing?  

Those connected with municipal government believe that the new law will probably result in fewer takings by local governments for redevelopment purposes. Whether this is a good or a bad thing depends on your perspective. If you believe that government-sponsored redevelopment has helped to breathe new life into inner-ring suburbs and cities, then you probably view the new law as a step backward. If you view such government-sponsored redevelopment as state overreaching and a violation of individual property rights, then you will likely see the new law as a welcome change. 

The new law is also expected to make it easier for property owners and business owners to obtain just compensation. For instance, a case can be made that, by tying the availability of attorneys’ fees to the amount of the condemning authorities’ last written offer, condemning authorities will be motivated to make reasonable and fair offers that will reduce the need for expensive litigation. 

Will this be the legislature’s final word on eminent domain? Probably not. With so many changes to the law, there is speculation that the legislature will take up the subject again next year in an attempt to clarify any ambiguities or perceived imbalances or inequities. Finally, many of the provisions will no doubt be subject to extensive judicial interpretation over the next several years. 

If you have questions, contact Ginny Bell at 612.672.8332 or ginny.bell@maslon.com .