In Eminent Domain, is a Restrictive Covenant a Property Interest?

In oral arguments this week, the Colorado Supreme Court will take a look at a 63-year-old case in Colorado’s eminent domain law to figure out how broadly it applies. At issue is a Court of Appeals decision that interpreted the precedent’s peculiar fact pattern as a sweeping application of an exception to the takings clause. The key question: Does a covenant that restricts certain uses of property create a compensable property interest if a government declares eminent domain on it?

In 2018, the Court of Appeals ruled the application of a 1956 Supreme Court decision, Smith v. Clifton Sanitation District, is not limited to its fact pattern. In that case, property owners enacted a restrictive covenant against the use of their land as sanitation disposal after negotiations with a sanitation district to buy property for that purpose fell apart. The property owners’ clear goal was to prevent the sanitation district from declaring eminent domain to getting the land for its intended purpose, and the Supreme Court ultimately said the covenant did not create a property interest for compensation. 

This new case on appeal from the Court of Appeals, formerly known as Town of Monument v. State of Colorado, involves a parcel Monument bought in a residential area to build a municipal water storage tank. A restrictive covenant that applies to all the subdivision’s property lots bars such structures. Monument filed a case to use its eminent domain power, but other property owners said because the covenant benefits all the subdivision’s property, Monument can’t have an exception to the covenant without compensating each property owner.

The Court of Appeals ruled in favor of Monument. The court read the Smith precedent broadly to mean a restrictive covenant does not create a property interest that a government has to compensate. The court acknowledged the fact pattern in Smith is unusual, but said the decision didn’t depend on on the property owners’ intent when they enacted the restrictive covenant.

The Supreme Court “could’ve just said that regardless whether such restrictive covenants are compensable property interests in this context, they aren’t when agreed to as part of a scheme to muck up a condemning authority’s plans to acquire property through eminent domain,” wrote Judge Jerry Jones for the Court of Appeals. “But the court didn’t say anything like that. Instead, it articulated a rule in broad terms, without caveat.” Key to Monument’s argument is that “private entities do not have the power to curtail a government’s proper use of the condemnation power, and that’s what our contention is,” said Joseph Rivera, special counsel with Murray Dahl Beery Renaud who represents Monument. The case is now Raymond Decker and Forest View Company v. Town of Monument. “However, I think why the court is looking at it is because other states have held differently.” 

As one example, the New Mexico Court of Appeals cited the Smith case in Leigh v. Village of Los Lunas. The 2004 decision held construction of a drainage pond violated a restrictive covenant and required compensation to landowners of one nearby parcel. The decision recognized Colorado’s decision in Smith as part of a “minority view” that restrictive covenants aren’t property covered by eminent domain protections.

Jack Sperber, a partner at Faegre Baker Daniels who represents both landowners and condemning entities in eminent domain cases, said it seems well-established that private entities can’t restrict governments’ eminent domain authority. The unusual question, he said, is more about whether a restrictive covenant is actually a property interest if an entity with eminent domain powers violates it for a public use. “I think that is a pretty clear baseline proposition. What’s interesting about these kinds of cases is [whether] a restrictive covenant is some form of property right.”

Rivera said he plans to argue that even though the Smith precedent had a peculiar fact pattern, the court still “took great pains” to make its decision broad. “One of the [policy] bases was that private landowners cannot contract to restrict a government from exercising its power of eminent domain,” he said.

In Smith, the Supreme Court pointed to the difficulty a condemning authority would have if it had to pay damages for each property interest in an area subject to restrictions. Richard Hanes, an attorney at Hanes & Bartels who represents Raymond Decker and Forest View Company, said he disagrees with that reasoning. Compensation would in reality depend on specific damage to each lot, he said, rather than automatically applying to all lots subject to a restrictive

Hanes added it doesn’t make sense to base a ruling on the “worst-case scenario that is probably unlikely.”

Rivera said the fact that Monument didn’t actually take property is a key piece of the municipality’s case, because entitlement to compensation in an eminent domain case requires the use of a landowner’s property.

“What was harmed was not an interest in real property that [residents] own,” he said. “That’s a super important distinction.” 

—Julia Cardi

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