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July / August 2010
Volume 22, Number 4

Legislature may revisit eminent domain issues in next regular session
By Andrei Lubomudrov

THE TEXAS LEGISLATURE MAY REVISIT ISSUES involving eminent domain law during its 2011 regular session. Eminent domain is the authority of a government or private entity to take private property for a public use upon providing adequate compensation to the property owner. This authority is regulated by the Texas Constitution and state statutes. Previous discussions of eminent domain in Texas centered on whether current law adequately protects property owners from unfair and unnecessary takings.

Property Code, ch. 21 governs eminent domain (condemnation) proceedings and provides a three-step process for contesting the taking of property under eminent domain authority. First, an entity with condemnation authority that is unable to agree with a property owner on the amount of damages that should be awarded for a property may file suit in district court or county court-at-law in the county where the property is located. A presiding judge then appoints three special commissioners who reside in the county to award damages based on evidence submitted at a hearing. Finally, if either party appeals the award suggested by the commissioners, the case is submitted to the court with jurisdiction over the case.

Some issues that continue to generate debate include the factors that may be considered in awarding compensation for taken land, how to ensure condemning authorities negotiate in good faith, relocation assistance for property owners, and the extent to which eminent domain authority should be used for slum and blight clearance.

Those who oppose further revisions say recent changes in the law have effectively curbed eminent domain abuse in the state and that continuing to restrict the exercise of this authority hampers its legitimate and necessary use.

Since enacting a law restricting the taking of private property for economic development purposes in 2005, lawmakers have considered a range of proposed revisions to the exercise of eminent domain in Texas. In 2007, the governor vetoed one bill, HB 2006 by Woolley, that would have made a number of changes to the use of eminent domain, including narrowing the uses for which land may be taken and revising the processes that govern the taking of private property. Another bill, SB 18 by Estes, which included similar provisions, was approved by the Senate but died in the House during the regular session in 2009. Voters approved a constitutional amendment in 2009 that narrowed the purposes for which property may be taken.

Restricting uses of eminent domain
Two laws enacted recently have sought to restrict the permissible uses of eminent domain authority. A law enacted in 2005, SB 7 by Janek, limits the circumstances under which a condemning authority may take land for economic development. SB 7 prohibits a taking that:

• Confers a benefit on a particular private party through the use of the property;
  
  
• Is for a public use that is a pretext to confer a private benefit on a particular private party; or
  
  
• Is for economic development purposes, unless the development is a secondary purpose resulting from urban renewal activities to eliminate affirmative harms from slums or blighted areas.

The Legislature enacted SB 7 in response to the U.S. Supreme Court’s decision in Kelo v. City of New London, 545 U.S. 469 (2005), which held that use of eminent domain for economic development purposes was permissible but that states could restrict such authority.

Public use
Advocates of reigning in eminent domain power said SB 7, while a marked improvement, did not adequately define “public use” or sufficiently limit the use of eminent domain in slum and blighted areas. Under the Texas Constitution, eminent domain authority may be exercised only when land is being taken for a public use, but the definition of “public use” has been defined largely by the courts.

In November 2009, voters approved Proposition 11 (HJR 14 by Corte), amending the Texas Constitution to restrict the use of eminent domain authority to a taking or other damage to a property primarily for the ownership, use and enjoyment by certain entities.

Those entities include the state, a local government, an entity with condemnation authority under state law and the public at large. The amendment disallowed the taking of property for transfer to a private entity primarily for economic development or to enhance tax revenue. It also required a two-thirds vote of all the members elected to each house for the Legislature to enact a law granting the power of eminent domain to an entity, effective January 1, 2010.

No formal legal challenges to an eminent domain proceeding based on the recently amended public use clause are currently pending. Some say that further limiting permissible public uses of eminent domain in statute may be necessary to define key terms and respond to potential court interpretations of language in the Constitution.

Slum and blight
The authority to acquire property for economic development, including the removal of slum and blight, remains a subject of controversy. The Legislature has recently debated whether to restrict the use of eminent domain authority to acquire property identified as “slums” or “blighted areas.” Proposition 11, the constitutional amendment adopted in 2009, allows a taking of property to eliminate blight on a particular parcel only, rather than a larger area designated as “slum” or “blighted.”

The Texas Urban Renewal Law, enacted in 1987, allows local authorities to exercise eminent domain to acquire property within an urban renewal plan area that a municipality designates as a slum or blighted. Property may be condemned in a section of a designated urban renewal area where the municipality has determined that at least 50 percent of structures are dilapidated and show other characteristics of blight.

In 2007 and 2009, the Legislature considered revising the authority to condemn property in so-called blighted or slum areas, but none of the proposed statutory revisions became law. HB 3057 by Callegari in 2007 and SB 18 by Estes in 2009 would have prohibited a municipality from exercising powers under the Urban Renewal Law unless its governing body determined that each unit of property in an area met the definition of “blight.” Both bills would have required written notice to property owners before a blighted area was designated and would have allowed a property to be designated as blighted only if the owner took no reasonable measures to remedy hazardous conditions. A municipality wishing to exercise eminent domain authority in an urban renewal area not only would have had to determine that each property in the area met the definition of blighted — also a provision of Proposition 11, the constitutional amendment approved by voters in 2009 — but also would have had to reaffirm the designation on an ongoing basis.

Under Proposition 11, condemnation for a public use includes a taking intended to eliminate blight on a particular parcel only. It makes no allowances for taking property due to the conditions of surrounding properties, calling into question the constitutionality of provisions of the Urban Renewal Law that authorize this practice.

Supporters of restricting the use of eminent domain for slum and blight say current law allows municipalities to seize the properties of established residents and businesspeople based on a questionable designation of their property as “blighted.” This often arbitrary designation, they say, undermines individual property rights through an overly broad definition of acceptable property maintenance and appearance. This can be a means of displacing working class and middle class residents and businesses for enterprises that generate more tax revenue.

Opponents of restricting the use of eminent domain for slum and blight say proposed limits would create obstacles that effectively eliminate a municipality’s authority to designate a blighted area and promote urban renewal through eminent domain. They say this would diminish their ability to improve the quality of life of residents who need the most assistance.

Rights of property owners

Another issue centers on the rights of property owners whose land is taken under eminent domain authority.

HB 2006, which Gov. Perry vetoed in 2007, and SB 18, which was approved by the Senate but died in the House in 2009, would have expanded compensation for property owners, required condemning entities to negotiate in “good faith” and allowed property owners to repurchase taken property that had not been put to a public use within 10 years.

Compensation for access to transportation
The factors that may be considered in awarding compensation to a property owner facing condemnation have been a subject of ongoing debate. State law allows owners of property subject to eminent domain to seek compensation for their property in court. In determining the amount of compensation, the court may consider certain evidence on the value of the property being condemned and net damages to any remaining property not taken. A particular focus of debate has been whether to allow damages for the impact of diminished access to transportation on the remaining property when a portion of property is taken.

Diversion of traffic. In a key Texas Supreme Court case in 1993, State of Texas v. Schmidt, 867 S.W.2d 769, two property owners in Austin filed for additional damages as a result of a State Highway 183 construction project that involved elevating lanes and taking seven feet of their property for right of way.The court found that the land owners, a portion of whose property was taken for road expansion, were not entitled, under Property Code 21.042(c), to compensation for diminished property value resulting from a diversion of traffic, increased circuitry of travel to the property, reduced visibility to passersby, or inconvenience from construction that was shared in common with the general community.

Diminished or impaired access. In May 2009, in State of Texas v. Bristol Hotel Asset Co, 293 S.W.3d 170 (2009), a hotel in San Antonio that lost a portion of its property for a road expansion sought damages for loss of a driveway and temporary loss of parking spaces due to construction. Overruling the appellate court in San Antonio, the Supreme Court found that the damages cited by the hotel were not compensable under Texas law because reasonable access to the property remained and the reduced access cited by the hotel did not rise to the level of a “material and substantial” impairment.

In 2008, the Texas Supreme Court in State of Texas v. Dawmar, 267 S.W.3d 875 (2008), had found that regardless of whether the loss of access to the abutting major highway changed the remainder property’s “highest and best use” from commercial to residential and thereby diminished its value, that did not constitute a “material and substantial” impairment because access to other public roads remained.

Past legislative efforts. Two bills recently debated in Texas would have revised the factors that may be considered in determining the value of property taken through eminent domain. The bills would have allowed evidence of the impact on the market value of remaining property when access was diminished or impaired.

HB 2006, considered in 2007, would have required that, for the purpose of determining compensation, evidence be considered on diminished access to a highway from the remaining property due to a state highway project, to the extent that it affected the property’s market value. The bill also would have defined market value as the price a property would bring when sold by a willing seller to a willing buyer. SB 18, considered in 2009, would have allowed evidence on a material impairment of direct access onto or off of the remaining property to the extent that it affected the property’s market value. It would not have allowed consideration of circuitry of travel or diversion of traffic that was common to other properties, upholding the legal distinction identified in Schmidt.

In vetoing HB 2006 in 2007, Gov. Perry said allowing consideration of evidence on diminished access and other damages to a landowner’s remaining property due to the exercise of eminent domain would result in unacceptable higher costs to taxpayers. The governor said the change would have added more than $1 billion in extra costs to taxpayers by creating a new category of damages after property owners already had received fair market value for taken land.

Requiring large payments for properties that continued to have access to transportation that was only diminished, but not eliminated, would have made many key public improvements prohibitively expensive, he said.

Critics of the veto of HB 2006 said the rights of Texans subject to eminent domain would have been enhanced by allowing fair payment for demonstrable damages to property. The bill would have clarified the range of acceptable damages that could be considered and would have accounted for the actual impact of takings on remaining property, which would promote fair negotiations from the outset. This, critics said, would have reduced excessive litigation that often results when condemning authorities make minimal offers based on a narrow range of factors affecting market value. Critics of the veto said the bill would have restored balance to an unfair process that gives advantages to condemning authorities, and it would have done so without any known cost having been identified by the Legislative Budget Board.

Right to repurchase
Property owners have sought authority to repurchase property at the original price they were paid by a condemning authority when their former property is not used after a certain period for the public use for which it was taken. Current law allows a property owner to repurchase land taken through eminent domain for a public use that is canceled before the 10th anniversary of the date the property was acquired. The possessing governmental entity must offer to sell the property to the previous owner or the owner’s heirs for the fair market value of the property at the time the public use was canceled, not at the original price paid by the entity.

To establish the constitutional authority for the right of repurchase at the original price paid, voters approved Proposition 7 in 2007 (HJR 30 by Jackson), authorizing governmental entities to sell land taken through eminent domain back to the former owner, the owner’s heirs, or other successors, at the price the entity paid when acquiring the property if:

• The public use for which the property was acquired has been canceled;
  
  
• No actual progress has been made toward the public use during a prescribed period of time; or
  
  
• The property is unnecessary for the public use.

A constitutional amendment was required to override the prohibition against a governmental entity granting anything of value to an individual or corporation unless otherwise specified in the Constitution.

HB 2006, vetoed by the governor in 2007, and SB 18, which died in the House in 2009, included a provision that would have implemented the constitutional amendment by allowing a property owner whose land was acquired for a public use that has since been cancelled or failed to progress to repurchase their property at the original price the condemning entity paid. Only the original owners and their heirs could have repurchased the property. The right of repurchase would have applied if the public use for the property was canceled or the governmental entity failed to begin operation or construction of the project within 10 years. If such legislation is enacted, it would allow the landowner to receive any appreciation in value accrued between the time the property was condemned and when it was repurchased by the landowner.

Supporters of allowing property owners to repurchase their property at the original price said it would create a disincentive against the speculative exercise of eminent domain authority by condemning entities. Condemning entities would be strongly discouraged from acquiring land through eminent domain for which they did not have immediate plans. Takings carried out on a speculative basis deprive owners of the future value of the property, and the option to repurchase at the original price would help rectify this grievance.

Opponents of allowing property owners to repurchase their property at the original price said it would allow “double recovery” for eligible property owners who had undergone eminent domain proceedings. This would confer a windfall on property owners who were compensated adequately for the original taking, they said. An owner who was eligible to repurchase at the price originally paid could accrue all the equity from appreciation of the value of the property since the time of the original taking without having to pay property taxes, maintenance expenses, and other costs normally incurred as part of property ownership.

Good-faith offers

Concerns about entities exercising the power of eminent domain providing fair initial offers for condemned property have led to recent attempts to require these entities to make “good-faith offers” at the beginning of the condemnation process and to establish meaningful sanctions when they do not. Supporters of a good-faith offer requirement point to the 2004 Texas Supreme Court decision in Hubenak v. San Jacinto Gas Transmission Company, 141 S.W.3d 172, claiming that case diminished the incentive for condemning entities to negotiate in good faith. That opinion resulted from a number of cases in which property owners claimed that condemning entities did not satisfy the requirement, under Property Code 21.012, that the authorities were “unable” to agree with owners on the amount of damages before beginning condemnation proceedings. Property owners argued the requirement could not be met unless condemning authorities established that they had engaged in “good-faith” negotiations with the owners before filing suit. The court found that the entities in Hubenak each had made a formal offer to purchase the properties and that this was sufficient to meet legal requirements to make an offer before filing a suit.

Supporters of raising the standards for what constitutes a good faith offer say that the current court interpretation of the law allows condemning entities to make low offers knowingly without facing the penalty of paying attorney’s fees and having to re-file a case as a consequence. Supporters say much expense and hardship could be avoided if condemning authorities made a fair offer for a property upfront. Many property owners accept initial offers because they fear the towering legal fees, time, and personal hardship that attend fighting for a fair award in court. An owner who is offered $2,000 an acre for land that has a market value of $3,000 an acre, for instance, may conclude that the difference is not worth a protracted legal fight.

Past legislative efforts. Two previous bills that were not enacted would have established requirements for good-faith offers. HB 2006 in 2007 would have required an entity attempting to take a property to make a bona fide offer, defined as an offer that was based on a reasonably thorough investigation and an honest assessment of the amount of just compensation due to the landowner. It would have allowed a court that found a condemning entity did not make a bona fide offer to dismiss a condemnation suit and require the entity to make such an offer. SB 18 in 2009 would have required a condemning entity to make a bona fide offer meeting several criteria, including obtaining a certified appraisal no higher than the offer made. A court finding that such an offer had not been made could have required a condemning entity to pay costs and reasonable attorney’s fees incurred by the property owner directly related to the failure to make a bona fide offer.

Distinguishing good-faith offers. Recent debate on good-faith offers has centered on how to distinguish good-faith offers from those aimed at coercing property owners into settling on an unfair price to avoid legal fees and hassles.

Some have proposed measuring the initial offer against the final award determined by special commissioners after court proceedings. They say the mere existence of an appraisal does not ensure a fair offer, as appraisals may vary widely based on the factors included in determining market value. Supporters of a provision to measure the initial offer against the final award say the final offer should not vary by more than a certain percent from the initial offer, perhaps 15 or 20 percent. Initial offers more than 15 or 20 percent lower than a final judgment should be prima facie evidence of bad faith. Supporters of such a provision say a strong, demonstrable measure such as a minimal variance percent is the only true means of ensuring condemning entities make good-faith offers upfront. Provisions that can be minimally satisfied on paper by ensuring certain administrative requirements are met do little to ensure a fair initial offer.

Opponents of a good-faith offer requirement based on the variance between initial and final offers say such a provision is too subjective and expects condemning authorities to predict a court’s behavior. They say it is impossible to predict how the special commissioners appointed by a court might decide a particular case. A condemning entity should not be held accountable for not predicting the exact market value of a property in a context of imperfect information.

Eminent domain process

Lawmakers have debated several revisions to the process for exercising eminent domain authority in recent years, including when an entity must disclose its authority and intention to take a property, whether to require condemning authorities to provide relocation assistance to displaced property owners, and the granting of statutory authority to use the power of eminent domain. Supporters of changing the process say property owners often are overwhelmed by the complexity of eminent domain proceedings and unaware of their rights.

Disclosure of intent

Recent legislation has involved changes to notice and the disclosure of intent requirements for taking property.

HB 1495 by Callegari, enacted in 2007, requires an entity with eminent domain authority to provide a landowner’s bill of rights to a property owner before initial negotiations to acquire property. As required by the law, the Attorney General’s Office drafted the landowner’s bill of rights to notify property owners of their rights in eminent domain proceedings under state law, including the right to a hearing and to appeal the offer made for the property. The bill of rights is available online at www.oag.state.tx.us/agency/landowners.shtml.

You must work to make your wishes come true In 2009, the Legislature followed up with HB 2685 by Callegari, which specified that an entity must provide a copy of the bill of rights at least seven days before making a final offer to purchase a landowner’s property.

HB 2006 in 2007 and SB 18 in 2009, which were not enacted, would have prohibited an entity seeking to acquire property from including a confidentiality provision in an offer or agreement to possess property. The intent was to prevent such entities from keeping key information, such as an appraisal, from property owners and other interested parties. They also would have required an entity that was not subject to open records laws but was authorized to exercise eminent domain, such as a private utility, to adhere to open records laws related to condemnation proceedings if records were requested by an affected property owner. The bills would have allowed a court to award a person who did not receive requested documents reasonable attorney’s fees to be paid by an entity that refused to produce the requested information.

Relocation assistance

The Legislature also has considered proposals to require assistance for people displaced by a taking of property. The federal Uniform Relocation Assistance Act (URAA) requires support for property owners displaced as part of projects that receive federal assistance, but this does not extend to takings where no such funds are involved. Current law in Texas permits a governmental entity to provide a relocation service and issue relocation payments in keeping with federal guidelines for an individual displaced by eminent domain.

Two bills previously considered but not enacted would have required relocation assistance. HB 2006 in 2007 would have required governmental entities to provide relocation assistance and payments to displaced property owners. SB 18 in 2009 would have required assistance payments and allowed special commissioners to consider evidence on whether a condemnation required the relocation of a homestead or farm and how much compensation would be necessary to allow the property owner to have a comparable standard of living or to be able to operate a comparable farm.

Supporters of requiring relocation assistance say assistance should not be limited to those projects that involve federal funding. People displaced by eminent domain, they say, are subjected to hardship and financial damages — such as moving a residence or business — that are not captured under current law determining adequate compensation. Opponents of required relocation assistance say terms such as “comparable standard of living” are too subjective and threaten to add unreasonable costs to taxpayers.

Who may exercise eminent domain

Recent efforts to revise eminent domain practice have included increasing requirements that must be met for empowering entities to take property and documenting which entities are empowered to use eminent domain in Texas. These efforts stemmed from a concern that it was too easy for an entity to be granted eminent domain authority and that some entities may possess it unnecessarily.

Proposition 11, the constitutional amendment adopted in 2009, raised the bar on granting the power of eminent domain to new entities by increasing the number of votes in each house of the legislature necessary to grant the power of eminent domain from a simple majority to two-thirds of all members. Supporters of this measure said that the power of eminent domain should be granted only if necessary and increasing the support threshold in the legislature would help protect against unnecessary expansions of this power.

Other initiatives have attempted to catalogue exactly what entities have this authority and for what purpose. SB 18, which died in the House, would have required entities created before 2010 to submit a letter to the comptroller acknowledging their authority to exercise the power of eminent domain in the state and identifying the legal source for that authority. The comptroller would have used the responses to generate a report on the entities and the source of their authority. Entities that did not submit this information to the comptroller would have their power of eminent domain revoked, in effect creating an exclusive list of entities possessing the power of eminent domain in the state.

In 2006, the Texas Legislative Council released a publication with a list of the types of entities that have the power of eminent domain and listing statutes that grant, prohibit, or restrict an entity’s exercise of this power. The publication is available at http://www.tlc.state.tx.us/pubspol/EmDomain.pdf.

Editor’s Note: This article was originally published by the House Research Organization in its “Interim News” publication.