Property owners in Missouri need not wait until their property is condemned to seek precondemnation damages, at least according to the Missouri Supreme Court. In its recent decision, Clay County Realty Company v. City of Gladstone, Case No. SC88924 (June 10, 2008), the Missouri Supreme Court appears to have opened the door for property owners to make a claim for damages where the threat of eminent domain alone has resulted in lost income, diminished property values and other costs. However, upon closer analysis, it appears that its decision did little more than clarify existing case law on inverse condemnation and created a heavy burden for property owners seeking damages for condemnation blight.

In Clay County Realty Company, Clay County Realty Company and Edith Investment Company ("Property Owners") owned a retail building commonly known as the Gladstone Plaza Shopping Center (the "Shopping Center"). The City of Gladstone declared the Shopping Center blighted in 2003, pursuant to the provisions of chapter 353, RSMo 2000 ("The Urban Redevelopment Corporations Law") and, where amended, RSMo Supp. 2007. Thereafter, the City entered into a redevelopment agreement with a developer in May 2004. Nonetheless, by August 2005, the City withdrew its designation of the developer and cancelled the agreement.

In August 2005, however, the City began to solicit tax increment financing ("TIF") proposals for the Shopping Center pursuant to the provisions of Missouri's Real Property Tax Increment Allocation Redevelopment Act ("TIF Act"), sections 99.800 to 99.865, RSMo 2000, and where amended, RSMo Supp. 2007. The City, in October 2007, adopted another ordinance designating the Shopping Center as blighted under the TIF Act and approved a TIF plan for the property. The approved TIF plan provided for the use of eminent domain for economic development. See section 99.805 (13), RSMo Supp. 2007 (definition of TIF "redevelopment plan").

The City never approved a TIF project specifying the redevelopment to occur at the property and never completed a formal condemnation proceeding against the Shopping Center. See section 99.805(14), RSMo Supp. 2007 (defining TIF "redevelopment project"). In this regard, however, section 99.810.1(3) provides in relevant part:

[N]o ordinance approving a redevelopment project shall be adopted later than ten years from the adoption of the ordinance approving the redevelopment plan under which such project is authorized and provided that no property for a redevelopment project shall be acquired by eminent domain later than five years from the adoption of an ordinance approving such redevelopment project.

Thus, as the Property Owners acknowledged, because the City had not approved a TIF project ordinance for the Shopping Center, the City was not yet under the five-year time limitation for acquiring the Shopping Center as set forth under section 99.810.1(3). Though no allegations were made that the City violated any of the applicable time provisions, the Property Owners nevertheless filed a complaint against the City several years after the initial blight designation, alleging a violation of Missouri Constitution article I, section 26, because the City's actions caused "significant diminution in value of the [Shopping Center]" thereby resulting in a de facto taking of the Shopping Center.

More specifically, the suit claimed that the City had engaged in "undue delay" and "untoward activity" in implementing condemnation proceedings against the Shopping Center. The Property Owners alleged that the City failed to timely proceed with redevelopment, failed to find an adequately capitalized developer, and that the City harassed them with inspections and code violations. As a consequence of the City's actions, the Property Owners claimed that numerous retail tenants did not renew leases at the Shopping Center and the Property Owners could not attract new tenants. They therefore sought compensation for their ongoing consequential damages, including increased operating costs and lost rental and lease income.

The Missouri Supreme Court, reviewing the trial court's grant of summary judgment de novo, found that Missouri courts had long recognized that "the common, long delays associated with blight designations and condemnation proceedings can damage a property owner's interests." Clay County Realty Company (citing to State ex rel. Washington University Medical Center Redevelopment Corp. v. Gaertner, 626 S.W.2d 373, 375-376 (Mo. banc 1982) (holding that claim for precondemnation damages must be brought as tort claim)). It noted that such damages, which are suffered when a "cloud of condemnation" hangs over a property and an actual taking is never effectuated or is long-delayed, are commonly labeled as "condemnation blight." The Court further acknowledged that condemnation blight damages are recognized in several jurisdictions under the theory of inverse condemnation.

Upon reviewing such out-of-state cases permitting damages for condemnation blight along with the constitutional protections against the taking of private property afforded under both the Missouri Constitution and U.S. Constitution, the Missouri Supreme Court was able to distinguish prior Missouri cases that denied property owners' claims for condemnation blight or similar damages. In doing so, the Court held that "actions for condemnation blight are inverse condemnation claims that owners may advance in order to recover consequential precondemnation damages," such as those raised by the Property Owners in Clay County Realty Company.

Nonetheless, the Supreme Court was quick to limit the application of its ruling, noting that some delays relating to condemnation proceedings are "natural" and "unavoidable." Thus, the Court provided that "before property owners have a viable cause for action for precondemnation damages, they must establish that there has been aggravated delay or untoward activity in instituting or continuing the condemnation proceedings at issue."¹

Furthermore, the Missouri Supreme Court found that, in determining whether the condemnor has acted with undue delay, consideration should be given to the time limitations established by the Missouri Legislature, citing to section 99.810.1(3) and 523.274.2, RSMo Supp. 2007. Accordingly, where the condemnor has not exceeded the statutory limitations, the Court found that the delays should not be considered "aggravated" without additional evidence of related "untoward activity." In turn, the existence or nonexistence of "untoward activity" should be determined by reviewing the facts and circumstances of each case (noting that such "untoward activity" might be shown where a condemning authority renewed its blight designation without just cause).

What's more, the Supreme Court held that in such cases the property owners must prove their damages were caused by the condemning authority's actions or inactions. And, it was quick to state that proving causation in condemnation blight cases is "inherently challenging," noting that cities usually do not attach blight designations to properties that are not already in decline.

Based on the above analysis, the Supreme Court found that the Property Owners' alleged genuine issues of disputed material facts relating to whether the City's actions constituted "aggravated delay" or "untoward activity" that could merit recovery of precondemnation damages. Consequently, the Supreme Court reversed the trial court's decision granting summary judgment in favor of the City of Gladstone, which had found that the property owners failed to make a claim of an unconstitutional taking and could not sue before their property was condemned, and remanded for further proceedings.

The importance of the Missouri Supreme Court's decision in Clay County Realty Company is as follows: (1) it clarifies that property owners need not wait until a condemnation action is filed to seek precondemnation damages, even where such damages are continuing in nature, and that such actions should be brought as inverse condemnation claims as opposed to a tort action; and (2) it serves as a reminder that the use of eminent domain for economic development will be reviewed with heightened scrutiny in the post-Kelo world.²

For Further Information

If you have any questions about this Alert or would like to learn more about eminent domain and redevelopment laws, please contact George J. Kroculick or any of the other attorneys in our Eminent Domain and Land Valuation Practice Group.

Footnotes

^1. The terms "aggravated delay" and "untoward activity" were taken by the Missouri Supreme Court from other state court cases concerning the issue of precondemnation damages. See Land Clearance for Redevelopment Auth. of the City of St. Louis v. Morrison, 457 S.W.2d 185, 199 (Mo. banc 1970) (denying property owner relief for claims alleging damages from loss of rental tenants where condemnation did not involve a "situation of aggravated delay or untoward activity. . ."); State ex rel. Mo. Highway & Transp. Comm'n v. Edelen, 872 S.W.2d 551, 558 (Mo. App. 1994) (denying property owner relief where property was under threat of condemnation for 10 years, because property owner did not prove aggravated delay, bad faith, or untoward activity by condemning authority); Roth v. State Highway Comm'n, 688 S.W. 2d 775, 778 (Mo. App. 1984) (finding that plaintiffs had shown substantial evidence of "aggravated delay" in inverse condemnation action where seven years passed after announcement of condemnation plans until condemnation award entered and evidence of "untoward activity" through denial of building permits and threatening statements by condemnor's attorney).

^2. In Kelo v. City of New London, 545 U.S. 469 (2005), the U.S. Supreme Court rendered its controversial opinion, which held that the promotion of economic development served a legitimate "public purpose" and that no finding of blight was required for condemnation, and affirmed that the transfer of property from one private owner to another private owner was sometimes necessary, and permissible, to realize such a public purpose.

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