United States Supreme Court Rules Takings Clause Applies to Legislatively Created Land-Use Permit Fee Schedules

Last Friday, the Supreme Court issued its decision in Sheetz v. County of El Dorado, No. 22-1074, holding that the Takings Clause limits governments’ power to impose conditions or fees on building permits—either legislatively or through individualized ad hoc review (typically by an agency). The Court’s unanimous decision addressed only the applicability of the Takings Clause to legislatively imposed fees and did not address the validity of the underlying fee. But the impact of that determination could be significant—especially in states like California that saw decades-old caselaw overturned.

Sheetz is the newest entry in Takings Clause jurisprudence on permit conditions. In Nollan v. California Coastal Commission and Dolan v. City of Tigard, the Supreme Court applied the Takings Clause to limit government agencies’ ability to impose conditions on building permits. To prevent governments from abusing the permitting process, the Court required both an “essential nexus” with the government’s legitimate land-use interest and “rough proportionality” between the condition and the proposed development’s impact on the government’s land-use interest. This test applies to fees as well as other conditions, like easements.

Applying Nollan/Dolan, the California Supreme Court ruled several times that generally applicable or property-class-based permit conditions enacted by legislatures were subject to a more lenient standard. (Several other state supreme courts, including Arizona’s, had reached the same conclusion.) For instance, in Santa Monica Beach, Ltd. v. Superior Court, the California Supreme Court held that rent control legislation is not subject to Nollan and Dolan’s framework. Similarly, in San Remo Hotel L.P. v. City & County of San Francisco, the court held that Nollan/Dolan did not govern review of legislative “housing replacement fees,” which are charged to hotels that seek to convert residential units to tourist use.

Sheetz dealt with a traffic-congestion fee enacted by El Dorado County’s legislature, which required all new developments in the County to fund road improvements. The fee amount was determined using a schedule that accounted for the type of development and its location. The Court unanimously held that the Nollan/Dolan two-part test applies to legislatively enacted land use regulations like the County’s traffic-congestion fee. That holding abrogates the California State Supreme Court’s Santa Monica Beach and San Remo Hotel decisions. All of California’s legislatively enacted land-use regulations, whether state-level or by a locality, are now subject to the more rigors Nollan/Dolan two-part test. Any branch of any government will have to show that its permit conditions or fees have an “essential nexus” with a land-use interest and they are “roughly proportional” to the impact of potential development.

But the exact contours of how Nollan/Dolan will apply to legislative land-use regulations remain unclear—a point made by several Justices in their separate concurrences to the Court’s unanimous opinion. Justice Kavanaugh, joined by Justices Kagan and Jackson, clarified that because the Court only ruled on Takings Clause applicability and did not decide what becomes of the actual underlying permit condition (fee) at issue, the Court also did not “address or prohibit the common government practice of imposing permit conditions . . . based on reasonable formulas or schedules that assess the impact of classes of development.” This common practice might save some permit conditions or fees, but not first without more litigation regarding whether the practice is permitted and, if so, what is a “reasonable” formula or schedule. Justice Gorsuch took issue with this view, however, and wrote separately to explain that he believes Nollan/Dolan test has to apply exactly the same to individualized land-use decisions and to legislative land-use regulations. Separately, Justice Sotomayor questioned whether El Dorado County’s traffic-congestion fee would even count as a taking at all if it was imposed outside the permitting context. This “threshold question” might also be front-and-center in challenges to rent-control laws, for example.

The Court remanded Sheetz for the California Court of Appeal to consider the fee’s validity in light of the Court’s opinion. Whatever the result of that inquiry, the Court’s holding means that there will be more Takings Clause suits (whether residential, commercial, or industrial) challenging legislatively enacted permitting conditions or fees. Given the Court’s unanimous agreement that Takings Clause analysis does not vary based on what branch of government is allegedly taking property, there could be challenges to judicial takings on the horizon.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Matt Kline, an O'Melveny partner licensed to practice law in California; Charles Lifland, an O'Melveny partner licensed to practice law in California; Dimitri D. Portnoi, an O'Melveny partner licensed to practice law in California; Jonathan P. Schneller, an O'Melveny partner licensed to practice law in California; Dawn Sestito, an O'Melveny partner licensed to practice law in California; Buzz Thompson, an O'Melveny of counsel licensed to practice law in California; Colin Stanton, an O'Melveny counsel licensed to practice law in the District of Columbia; Heather Welles, an O'Melveny counsel licensed to practice law in California; and Ryne M. Cannon, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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