Environmental Remediation Deductions: Just Compensation Or Theft?

Deducting the Costs of Environmental Remediation From Compensation Paid In Eminent Domain: Just Compensation Or Theft?

What happens in eminent domain if a property is contaminated by hazardous waste or there is a possibility it is contaminated? This is an area of the law that has not yet been fully developed and addressed by the courts, and that can lead to abuse by the government if the court’s fail to intervene. The Government will use this issue to reduce the just compensation due to the property owner.

For example:

(i) The property taken by Caltrans was an acre of commercial land in Norwalk. Caltrans deposited $1,000, based on a “review,” not an appraisal, and that review was conducted by a person who was not licensed as an appraiser in California (he was licensed in Nevada). The $1,000 valuation given was based on deduction of estimated remediation costs for cleaning jet fuel that had leaked from a subsurface pipeline located across the street from but not on the property being taken. There was no evidence showing that this leakage affected the market value of the property, or that any governmental agency had ordered or would order clean up. In fact, Caltrans’ actual appraiser valued the property at $570,000 and did not deduct anything for the purported contamination. The deduction was apparently an internal decision of Caltrans’ staff, for tactical reasons, not an appraisal decision by a licensed and qualified appraiser. The $1,000 deposited was less than the monthly rent and less than the annual property taxes that the owner had to pay. The pipeline had leaked beneath other large areas of Norwalk as well. Accordingly, if Caltrans’ argument was correct, much of Norwalk was worthless!

(ii) The week before the settlement conference (to be followed shortly thereafter by trial), the MTA amended its appraisal to deduct the costs (exceeding $700,000) of remediating the earth under property MTA sought to acquire using eminent domain. MTA intended to dig out that earth itself and replace it with an underground subway station. In short, MTA wanted the property owner to pay for what MTA was going to do anyway as part of its public project!

Contesting Deduction of Remediation Costs

As set forth in California Code of Civil Procedure section 1255.410, in order to obtain early possession a condemning governmental agency must deposit what it thinks the fair market value of the property is based on an appraisal complying with Code of Civil Procedure section 1255.010. Therefore, the first step is to challenge the valuation if there, in effect, was no appraisal because the appraiser was not licensed or only “reviewed” the work of another appraiser.

Furthermore, even IF the deduction of remediation costs was based on an appraisal, the next step is to determine if the purported contamination actually affected the value of the land being acquired. While one California case has indicated in dicta that it is proper to consider remediation costs as a “factor” in determining value, in that case the appraisers were in agreement that the contamination emanated from the property being valued, that the property decreased in value as a result (though the appraisers disagreed about how much), that the remediation costs were an indicator of the decrease in value and that, from an appraisal standpoint, they should be deducted in determining fair market value. (Redevelopment Agency v. Thrifty Oil Co. (1992) 4 Cal.App.4th 469, 473-74.) However, those factors were not present in either of the above examples, where there was no evidence AT ALL that contamination impacted value and the government’s claims were purely abusive negotiating tactics designed to coerce the owner into accepting less than Just Compensation.  Such abusive and coercive tactics will, undoubtedly, continue to be used by the government until the law is developed and clarified in this area.

Finally, under general eminent domain principles, any increase or decrease in value due to a project itself, or any project related activity, must be factored out in determining fair market value and compensation.  Arguably, if the only reason a property needs to be cleaned up is because of a project, that should be factored out. If a property did sit for years and could have sat for many more years, even being bought and sold, without any cleanup but for the government’s project, that should be factored out.  Deducting the remediation costs would be theft, not Just Compensation.

Therefore, property owners impacted by eminent domain should prepare themselves to fight (as was successfully done by the property owners in the above examples with the assistance of Callanan, Rogers & Dzida, LLP) such tactics and should prepare themselves with a knowledgeable attorney to challenge any claim by the government that contamination costs should automatically decrease the compensation to be paid in eminent domain. (Strangely, California has an automatic deduction statute at Code of Civil Procedure 1263.710 et seq. that applies only to land acquired by school districts. This statute has not yet been challenged or examined in court.) Where the remediation costs are not an indicator of decreased value, because there is no decreased value, remediation costs should NOT be deducted because it would not be “just” to deduct them. They should not be deducted because that would unjustly and unfairly skew value.

If your property is subject to a deduction of costs for environmental remediation during eminent domain acquisition, contact the Law Offices of Callanan, Rogers & Dzida, LLP today.

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