Owning adjacent parcels of land, especially if located on the waterfront, is generally considered a wise investment. In most cases, an owner of adjacent parcels has increased flexibility in how the lots can be used. For example, the owner may decide to combine the adjacent lots into one larger lot, build on one of the lots and sell the others, or develop each lot separately. Owning adjacent lots didn’t have a downside … until now.

If you own adjacent parcels of property, your property rights and the value of your property may soon be changed by the outcome of a case from Wisconsin that will be decided by the United States Supreme Court during next term. The case, Murr v. Wisconsin, will decide the following question: whether adjacent lots in common ownership must be combined when determining whether government regulation has “gone too far,” requiring payment of just compensation under the “takings” clause of the 5th Amendment.

Background

In 1960, the Murr family purchased a parcel of land, known as Lot E, next to the St. Croix River and built a cabin on the land for recreational use. In 1963, they purchased an adjacent lot, Lot F, for investment purposes. 

In 1973, the state of Wisconsin passed a law requiring all municipalities and counties along the lower St. Croix River to adopt local riverway ordinances that complied with the Department of Natural Resources (DNR) shoreland development standards. In 1975, St. Croix County adopted an ordinance that was consistent with the DNR regulations and increased the minimum lot size requirements for new residential lots. 

Under the ordinance, any existing lot that doesn’t meet the new minimum lot size requirements is considered “substandard,” but is buildable under a grandfathering clause unless the substandard lot is adjacent to another lot owned by the same person. The ordinance prohibits the development or sale of individual, substandard lots adjacent to another lot under common ownership. Such lots must be merged into a single, buildable lot that meets the minimum lot size requirements. 

The Murrs applied for several variances from St. Croix County in an attempt to develop and/or sell the undeveloped substandard lot, Lot F, but the variance requests were denied. The Murrs filed a lawsuit alleging the county’s ordinance denied them all economically beneficial use of

Lot F and thus constituted a regulatory taking. The circuit court rejected the Murrs’ takings claim and upheld the county’s ordinance. 

On appeal, the Wisconsin Court of Appeals affirmed the circuit court’s ruling, finding that no taking had occurred because the two parcels, Lot E and Lot F, together continued to have an economically beneficial use — for example, one house could be built upon the two lots combined. In doing so, the appeals court established the following bright-line rule: a parcel of property must be combined with any adjacent parcels owned by the same person when evaluating the impact of the regulation on the parcel for regulatory takings purposes. 

The Wisconsin Supreme Court rejected the appeal and elected to not hear the case. However, the United States Supreme Court granted certification and will be hearing the case next term. 

What is “property”? 

While the facts of this case are compelling, the Supreme Court will not be deciding whether the St. Croix ordinance violated the constitutional rights of the Murrs by prohibiting the development or sale of Lot F. Rather, the court will decide on a much bigger issue that could have more far-reaching implications: whether adjacent lots in common ownership must be combined in all cases for determining whether a regulation has denied all economically beneficial use of the property. In other words, the court will determine the definition and scope of “property” for purposes of the 5th Amendment. A broader definition of property that includes more parcels of land will make it more difficult for a property owner to demonstrate that a regulation constitutes a taking by denying all economically beneficial use of the property.

Arbitrary and unreasonable results

The definition of property and the takings standard created by the Wisconsin Court of Appeals considers only two factors: contiguity and common ownership. By ignoring all other facts and circumstances, this rule will result in arbitrary and unreasonable regulatory decisions as well as confusion for and unfair treatment of property owners, as demonstrated by the following examples: 

Timing of acquisition: Two contiguous lots owned by the same person and purchased at the same time must be treated the same as two contiguous lots owned by the same person and purchased 20 years apart. 

Owner’s investment-backed expectations: Four contiguous lots owned by the same person — purchased for the purpose of building one residence with large, open-space buffers between neighboring properties — must be treated the same as four contiguous, downtown lots owned by the same person purchased for the purpose of building separate commercial buildings on each lot. 

Existing development on lots: Two contiguous lots owned by the same person must be combined for regulatory takings purposes even if one of the lots is fully developed with a single-family home.
Treatment by state and local ordinances: Two legal, substandard lots must be combined for regulatory takings purposes despite being “grandfathered” and declared buildable for purposes of residential construction. 

Number of lots: Two contiguous lots owned by the same person must be treated the same as 100 contiguous lots owned by the same person. 

Zoning on parcels: Three contiguous lots, each with a different zoning classification — such as residential, commercial and agricultural — must be combined for regulatory takings purposes. 

Treatment by government: Four contiguous lots treated as individual tax parcels for property tax purposes must be combined for regulatory takings purposes. 

By consolidating adjacent lots in common ownership for regulatory takings purposes, the rule established by the appeals court will likely increase the financial risk of owning adjacent lots. Greater exposure to unreasonable regulations increases the financial risk associated with the common ownership of adjacent lots. A financial disincentive to common ownership of adjacent lots could adversely affect economic development and the real estate market, which often relies on assembling numerous parcels for purposes of large-scale developments.

WRA legal action program

Because of the potential impacts on property rights and the ownership and development of adjacent parcels of land, the WRA, through its Legal Action Program, filed an amicus (“friend of the court”) brief with the United States Supreme Court. The WRA’s brief asked the court to invalidate the court of appeals’ rule, highlighting, among other things, the rule’s inconsistency with Supreme Court precedent and numerous Wisconsin laws that protect the rights of property owners and treat each individual lot as property. 

The WRA’s Legal Action Program is actively involved in cases before federal, state and local courts on a wide range of issues to promote the interests of the real estate industry and property owners throughout Wisconsin, including questions pertaining to the authority of governmental entities to regulate the use, development and transfer of real property.

Tom Larson is Senior Vice President of Legal and Public Affairs for the WRA.