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July 16, 2013

Property owners who are facing onerous conditions, including demands for payment of fees, in exchange for government permit approvals may be able to obtain recourse by claiming their property has been “taken” without receiving fair compensation.

On June 25, 2013 the Supreme Court of the United States issued a 5-4 opinion in Koontz v. St. Johns Water Management District, significantly expanding a property owner’s right to challenge onerous conditions attached to permit approvals. Although Illinois courts have generally held a similar stance to the Koontz majority with regard to government demands for impact fees, the Koontz decision is likely to bolster Illinois’ disfavor of not only excessive impact fees but other forms of “extortionate” conditions as well.

Background

Generally, the Fifth Amendment to the U.S. Constitution provides that governments may “take” private property only in exchange for fair compensation and only if there is a public purpose justifying the taking. However, the ability of local governments to issue permits for developments has created an opportunity for a governmental unit to avoid paying fair compensation, by requiring developers to dedicate a piece of their property as a condition of permit approval. Many cases over the years have addressed whether a particular government action, such as imposing conditions in a permit, are so onerous as to constitute a “taking” of property requiring compensation to be paid to the owner. The Koontz case, once again, contemplated that exact concern. As a result, the Supreme Court established a formula, applicable only in the land-use permitting context, which allows courts to determine whether a governmental body’s demands have gone too far or become “extortionate.”

Outcome of the Koontz Decision

In Koontz the Court determined that developers may seek compensation for coercive demands, including exorbitant fees, imposed by governmental units as conditions of land-use permit approval or as conditions that must be satisfied in order to avoid denial. If the government does impose conditions, as a prerequisite or proviso to permit approval, then it must prove that each condition is: 1) sufficiently related to the proposed use of the property; and 2) reasonably related to the impact of the development. If the government cannot prove either of the two factors, then a condition may be labeled as “extortionate” and could entitle the developer to compensation.

What Types of Conditions Constitute "Extortion"?

In Koontz, the property developer offered to deed 11 acres of his 14.9 acre parcel to the government as a conservation easement. This was not enough to assuage the local authorities who demanded that the property developer choose between: 1) dedicating 13.9 acres; or 2) hiring contractors to enhance 50 acres of District-owned wetlands (at a cost of up to $150,000) several miles away. These options were considered too extreme by the Court. Developers will have to pursue a case-by-case approach, but the test to determine whether an attached condition is considered “extortionate” is: 1) if the government conditions its permit approval or denial on an owner giving up his/her right to fair compensation; and 2) if the government cannot show any reasonable connection between its demand and the impact of the owner’s use.

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