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RAR Development Associates v. New Jersey Schools Construction Corporation


July 9, 2008


On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-9424-05.

Per curiam.


Argued October 31, 2007

Before Judges Cuff, Lisa and Lihotz.

Plaintiff, RAR Development Associates, appeals from the summary dismissal of its claims against defendants New Jersey Schools Construction Corporation and New Jersey Economic Development Authority.*fn1 The complaint alleged that the actions of these government agencies caused plaintiff to suffer the loss of a long-term tenant at the end of 2004. This conduct provided the factual basis for counts alleging tortious interference with contract, tortious interference with a prospective economic advantage, and a "taking" without just compensation. The trial court rejected these claims, as well as plaintiff's argument that the State should be estopped from avoiding responsibility for damage it caused.

We agree with the trial court that there was no compensable taking in this case, and that the record does not support plaintiff's tortious interference and equitable estoppel claims. Accordingly, we affirm.


Because the case comes to us by virtue of a summary judgment, we recite the facts applying the Brill*fn2 standard, in the light most favorable to plaintiff. Plaintiff owned property in Newark, consisting of two contiguous lots. Lot 1.02, comprising about one and one-half acres, was vacant. Lot 1.01 contained seven interconnected buildings comprising about 725,000 square feet. Prior to 2003, plaintiff leased about 472,000 square feet to six tenants, who used their respective spaces for manufacturing and storage purposes.

New York Folding Box Company (NYF) held the largest leasehold interest. NYF's use of its space, about 109,000 square feet, dated to at least 1976.*fn3 NYF renewed its lease periodically. Under the terms of a December 30, 1999 amendment to the most recent lease, NYF agreed to continue its occupation of the premises through December 31, 2004. NYF retained an option to renew the lease for an additional five-year term beyond that end date at a specified rental. The amendment required NYF to exercise its renewal right by May 15, 2004.

In March 2002, the State notified plaintiff of its intention to acquire Lot 1.01 for the construction of Newark East Side High School. Representatives of the State visited the buildings' tenants, including NYF, in October of that year to discuss the possible condemnation and to assess their relocation needs.

The State caused an appraisal to be conducted, which resulted in a valuation for the improved property of $17.5 million. On July 10, 2003, the State officially offered that amount to plaintiff for the purchase of the property.*fn4 Plaintiff declined the offer.

In the succeeding weeks, the State notified the tenants that the building would be under its control by January 1, 2005, at which time it expected to proceed with demolition. It informed the tenants that the State's relocation consultant would be available to explain the process and "the rights, benefits and moving reimbursement to which [the tenants] may be entitled under the law." The State advised the tenants to continue paying their rent.

NYF's operation included the use of substantial industrial machinery. NYF advised the State that the movement of this machinery to a new location would require at least one year, during which the presence of two technicians from the manufacturer of the machines would be required to oversee the dismantling, transporting, and reassembling of the machinery. The cost would also be substantial. To minimize the disruption to its business, NYF began searching for a new location.

It found a potential new location in Mt. Olive, and informed the State, which assured NYF appropriate relocation assistance would be given, consistent with the relevant statutory and regulatory provisions. The relocation officer expressed the State's continued hope to acquire the property without litigation, but added that "if negotiations prove fruitless the case will proceed to final condemnation if necessary, with [the State] ultimately owning the property in the very near future."

NYF subsequently changed its new location to one in Stanhope. To facilitate its move, NYF required financing. As a condition of that financing, the lender required NYF to produce a written guarantee from the State that it would pay relocation assistance. NYF obtained an estimate for its relocation costs in the amount of $5,039,100.62, which was approved by the State's relocation consultant. Accordingly, on November 6, 2003, the State issued a written assurance that it would reimburse NYF for relocation expenses not to exceed that sum. The lender approved the loan, and the dismantling of NYF's machinery commenced.

As NYF took these preparatory steps, the State continued to negotiate the acquisition of the property with plaintiff. The negotiations were unsuccessful. The State reevaluated its position and determined to abandon its attempt to acquire plaintiff's improved lot, and instead to acquire only the unimproved lot, upon which it would construct the new school facility. The State informed plaintiff of its decision on April 20, 2004.*fn5

The State notified plaintiff's tenants of its decision and advised them they would be able to remain in the property. Of course, NYF's relocation activities were well underway by that time. Recognizing that there was proper official authorization for NYF's actions, the State agreed to permit NYF to complete its relocation, to be paid for by the State in accordance with its guarantee.

NYF failed to renew its lease by the May 15, 2004 deadline. As contemplated, its move took about one year, and it completed its relocation on November 18, 2004.*fn6 The State paid NYF about $5 million as reimbursement for its moving costs. Plaintiff claimed an inability to replace NYF with another tenant. The State disclaimed any obligation to compensate plaintiff for the loss of future rental payments occasioned by NYF's departure.

Plaintiff filed this action on November 21, 2005. It alleged that the State's actions amounted to tortious interference with plaintiff's lease agreements, and that the inducements given to NYF to vacate the building effected an unconstitutional "taking." The matter came before the trial court on cross-motions for summary judgment. The court granted the State's motion and dismissed the complaint. The court denied plaintiff's cross-motion for partial summary judgment seeking a determination that the State's actions constituted a taking as a matter of law. After denying plaintiff's reconsideration motion, the court entered judgment on July 21, 2006 in favor of defendants, and certified its orders as final on August 28, 2006. This appeal followed.


Plaintiff argues that the trial court erroneously dismissed the tortious interference claims. It argues that NYF would have renewed the rental agreement for an additional five-year term but for the State's decision to subsidize NYF's relocation. The State, plaintiff alleges, should have known that this inducement would cause damage to plaintiff. It follows that the State should bear the burden to cover such damage.

The State argues that the Tort Claims Act does not carve out an applicable exception to the general rule of immunity. Even assuming that the common law immunity from suit does not apply here, the State argues that plaintiff's allegations do not set forth cognizable tortious interference claims. We agree with the State.

As an initial matter, viewing the facts in the light most favorable to plaintiff, we assume that NYF would have renewed its lease with plaintiff for an additional five years but for the State's actions and representations.

To set forth a cognizable claim for tortious interference with contract, plaintiff must demonstrate that the State intentionally interfered with plaintiff's contract without justification, and that the interference caused damage. 214 Div. 1994).

To prevail on a claim for tortious interference with a prospective economic advantage, "plaintiff must show that it had a reasonable expectation of economic advantage that was lost as a direct result of defendants' malicious interference, and that it suffered losses thereby." Lamorte Burns & Co. v. Walters, 167 N.J. 285, 305-06 (2001). As with the tortious interference with contract claim, "malicious interference" will be found only when "harm was inflicted intentionally and without justification or excuse." Id. at 306.

We conclude that the State did not act with the requisite bad intent, or without justification, in its negotiations with NYF. The State sought to acquire plaintiff's improved lot in order to construct a new public high school. Consistent with the Eminent Domain Act, the State attempted to acquire title or possession from plaintiff through "bona fide negotiations" and an appropriate written offer. N.J.S.A. 20:3-6. Assuming plaintiff accepted the written offer, or the State acquired the property at a later time through the filing of a condemnation action and a declaration of taking, NYF would have been entitled to relocation assistance payments under N.J.S.A. 20:4-4a and N.J.A.C. 5:11-3.9(a). Under the relevant regulations, however, Whenever a displacing agency determines that their activities shall cause a displacement of individuals or businesses that are eligible for relocation payments and assistance, the displacing agency shall notify those individuals and businesses, in writing, at the earliest possible date of the benefits and obligations of the Act and this chapter. Said notice shall be issued immediately upon the determination of the displacing agency that displacement shall occur. . . . [N.J.A.C. 5:11-4.2 (emphasis added).]

And, an additional regulation provides that the "eligibility date" for the provision of relocation assistance payments is "the date of the first written offer to purchase the property." N.J.A.C. 5:11-2.2(c).

The State dutifully followed these statutes and regulations. It discussed the possible condemnation of the property with the tenants prior to the receipt of the real estate appraisal. About two weeks after the State forwarded the written offer of purchase to plaintiff, it concluded that these activities would result in the displacement of plaintiff's tenants, including NYF. 214 Corp., supra, 280 N.J. Super. at 632. Accordingly, the State revisited the earlier discussions with the tenants concerning the provision of relocation assistance benefits. Within the unique circumstances of this case, however, NYF required about one year to find an alternate location and to dismantle and move its complex machinery. There is no evidence that the State, at that time, did not wish to acquire the improved property from plaintiff in order to construct the high school. The project parameters required that some type of special accommodation be given to NYF. As such, the State agreed to pay NYF's moving expenses.

Against this background, we conclude, as a matter of law, that the State's conduct did not constitute "malicious interference." The trial court did not err in dismissing the tortious interference counts.


Plaintiff alleges that the State induced NYF to vacate the building, without plaintiff's knowledge, despite the recognized duty to treat private parties with fundamental fairness. It argues that the State's course of conduct warrants the application of equitable estoppel. We disagree.

An equitable doctrine, estoppel is "founded in the fundamental duty of fair dealing imposed by law, that prohibits a party from repudiating a previously taken position when another party has relied on that position to his detriment." State v. Kouvatas, 292 N.J. Super. 417, 425 (App. Div. 1996). To succeed on an equitable estoppel claim, the plaintiff must prove that the party to be estopped "engaged in conduct, either intentionally or under circumstances that induced reliance, and that plaintiffs acted or changed their position to their detriment." Knorr v. Smeal, 178 N.J. 169, 178 (2003) (citing Miller v. Miller, 97 N.J. 154, 163 (1984)).

Although the doctrine of equitable estoppel should not be applied as readily against the public as against a private entity, it can be applied against a public body "where the interests of justice, morality and common fairness clearly dictate that course." Gruber v. Mayor & Twp. Comm. of Raritan, 39 N.J. 1, 13 (1962). There is no requirement that the public body act with a fraudulent intent. "'If the conduct works an unjust or inequitable result to the person it was designed to influence, the doctrine is applicable.'" Widmer v. Twp. of Mahwah, 151 N.J. Super. 79, 85 (App. Div. 1977) (quoting N.J. Suburban Water Co. v. Town of Harrison, 122 N.J.L. 189, 196 (E. & A. 1939)).

The record contains a number of statements by plaintiff to the effect that the State negotiated with the tenants without plaintiff's knowledge. According to plaintiff, the State, in the second half of 2003, either represented to the tenants that the acquisition of the improved property was a certainty or directed the tenants to relocate. Plaintiff disclaims any knowledge of these negotiations until the publication of an article in the Newark Star-Ledger in March 2005, more than three months after NYF completed its relocation and two months after the end of the lease agreement.

Given these undisputed facts, it is clear that the State's actions did not induce detrimental reliance on the part of plaintiff. Plaintiff's submissions, to the extent they argue that the State's actions were taken with the intention that plaintiff's tenants, rather than plaintiff itself, rely on them, demonstrate that this is the case. Because the undisputed facts cannot support the conclusion that plaintiff relied to its detriment on the State's conduct, Summer Cottagers' Ass'n of Cape May v. City of Cape May, 19 N.J. 493, 503-04 (1955), we agree with the trial court's rejection of plaintiff's equitable estoppel argument.


We now address plaintiff's takings claim. To remedy the State's alleged destruction of the lease agreement with NYF, plaintiff sought an award of "just compensation." Rejecting the claim, the trial court stated:

[T]his is a troublesome case under the particular fact pattern presented, but the first thing that I'll start with is the question of whether or not there was a taking, and as I do read the case law . . . to be a taking there has to be a substantial diminution of the value to virtually render the property valueless, which I don't think was the case here.

The [NYF] space was I guess approximately a quarter of the building, may not have quite been that. But it certainly, their leaving didn't destroy the building itself, and I don't think really destroyed the value of that space. It did have value as property that could be leased, if not to [NYF], to somebody else.

The gravamen of plaintiff's inverse condemnation argument is that the State's actions deprived plaintiff of its property rights under its lease with NYF and should be deemed a taking of that leasehold interest, as a result of which plaintiff should be compensated for its loss of expected income under the lease (subject to plaintiff's obligation to mitigate damages by making its best efforts to re-rent the space). The State initially argues that plaintiff held no compensable property interest in NYF's option to renew its lease and to future rental income it would provide. Alternatively, the State argues that even if the option to renew were deemed a compensable property interest, the State's actions did not constitute a taking. We agree with the State on both points, which we will discuss in that order.


The threshold question is whether plaintiff's expectation that the lease would be renewed constitutes a protected property interest, the "taking" of which requires an award of "just compensation" from the State. Stated differently, we consider whether the Fifth Amendment requires the State to compensate plaintiff for the dashed expectation that NYF would renew the lease.

The Federal and New Jersey Constitutions mandate that private property shall not be "taken" for public use without just compensation. U.S. Const. amend. V; N.J. Const. art. I, ¶ 20; Chicago, Burlington & Quincy R.R. Co. v. City of Chicago, 166 U.S. 226, 236, 17 S.Ct. 581, 584, 41 L.Ed. 979, 984 (1897) (applying the language of the Fifth Amendment to the States through the Fourteenth Amendment). It is axiomatic that the proponent of a takings claim must possess a "property interest" cognizable under the Fifth Amendment. Phillips v. Wash. Legal Found., 524 U.S. 156, 164, 118 S.Ct. 1925, 1930, 141 L.Ed. 2d 174, 183 (1998) (applying the definition of "property" developed in due process cases to takings cases); Story v. Green, 978 F.2d 60, 62 (2d Cir. 1992). It is equally clear that, even though the interest "may take many forms over and above the ownership of tangible property," Nicoletta v. N. Jersey Dist. Water Supply Comm'n, 77 N.J. 145, 154 (1978), the range of protected property interests is not limitless. Bd. of Regents v. Roth, 408 U.S. 564, 570-72, 92 S.Ct. 2701, 2705-06, 33 L.Ed. 2d 548, 556-58 (1972). The determinative question continues to be whether the claimant possesses a "legitimate claim of entitlement," not merely an "abstract need or desire" or "unilateral expectation," in the interest. Id. at 577, 92 S.Ct. at 2709, 33 L.Ed. 2d at 561. These entitlements "are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law." Ibid.

Contractual arrangements are an additional independent source of these entitlements. Lynch v. United States, 292 U.S. 571, 579, 54 S.Ct. 840, 843, 78 L.Ed. 1434, 1440 (1934) ("Valid contracts are property, whether the obligor be a private individual, a municipality, a State or the United States."). However, to create a protected property interest, the contract must establish rights more substantial in nature than the mere expectation of continued benefits. Our task is to assess the entitlements created by the contract between plaintiff and NYF.

The inclusion in a lease agreement of an express option to renew grants the tenant the right to extend the landlord-tenant relationship at its election. The taking of this right triggers the government's responsibility to provide just compensation to the tenant. United States v. Petty Motor Co., 327 U.S. 372, 380-81, 66 S.Ct. 596, 601, 90 L.Ed. 729, 736 (1946). But no interest attaches to the mere expectation, based on past experience, that the landlord will renew the lease. The Court noted that the fact that some tenants-at-will in that case "had occupied their leaseholds by mutual consent for long periods of years does not add to their rights." Id. at 380 n.9, 66 S.Ct. at 601 n.9, 90 L.Ed. at 736 n.9. Quoting Justice Holmes' opinion in a turn-of-the-century Massachusetts case, the Court concluded that "'[c]hangeable intentions are not an interest in land,'" and, notwithstanding a course of dealing establishing that the landlord and tenants were "'likely to keep on together,'" the landlord's likely intention to renew "'added nothing to the tenants' legal rights, and legal rights are all that must be paid for.'" Ibid. (emphasis added) (quoting Emery v. Boston Terminal Co., 59 N.E. 763, 765 (Mass. 1901)).

The Tenth Circuit reached the same conclusion in Scully v. United States, 409 F.2d 1061, cert. denied, 396 U.S. 876, 90 S.Ct. 152, 24 L.Ed. 2d 134 (1969). The tenant argued that the "fair market value" of his seized leasehold interest should have accounted for the expectation that the landlord would renew the lease. Id. at 1063. The lease did not provide for unconditional renewal. The court concluded that "the lessee of a one year term is not entitled to recover the market value added by a mere expectation that the lease will be renewed." Id. at 1065.

The Supreme Court of Alaska provided similar insight in Stroh v. Alaska State Housing Authority, 459 P.2d 480, 482 (1968):

A tenant's right of renewal of a lease refers to a legal right, and this exists only when the lease expressly grants to the tenant the option to renew the lease at the end of its term. A mere expectation, or even probability, that the lease will be renewed based upon past practice and present good relations between landlord and tenant, is not a legal right of renewal. It is nothing more than a speculation on chance. Intentions which are subject to change at the will of a landlord do not constitute an interest in land so as to confer upon the tenants something to be valued and compensated for in a condemnation action. [Emphasis added.]

The Supreme Court considered a unique application of this principle in Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 93 S.Ct. 791, 35 L.Ed. 2d 1 (1973). There, the lessee constructed a number of improvements on the leased property. When the government acted to take the property, including the improvements, the lessee argued that the fair market value of the improvements should reflect the purchaser's expectation that the lease would be renewed and that the useful life of the improvements would extend beyond the remaining seven and one-half years of the lease term. Id. at 471-73, 93 S.Ct. at 793-94, 35 L.Ed. 2d at 6-7. The majority, in a 5-4 opinion, agreed with this argument.

This opinion, however, did not disturb the earlier conclusion that there was no reason "to elevate an expectation of renewal into a compensable legal interest." Id. at 476, 93 S.Ct. at 795, 35 L.Ed. 2d at 9. As Justice Rehnquist's dissent noted, "[e]ven in its sharply limited reading of [Petty Motor] the Court concedes that the petitioner's expectation of having its lease renewed upon expiration is not itself an interest in property for which it may be compensated." Id. at 481, 93 S.Ct. at 798, 35 L.Ed. 2d at 12 (Rehnquist, J., dissenting). The majority opinion, and the case law that followed, suggest that the Almota holding should be limited to the calculation of the fair market value of leasehold improvements. Id. at 476, 93 S.Ct. at 795-96, 35 L.Ed. 2d at 9 (majority opinion); United States v. 27,223.21 Acres of Land, 589 F. Supp. 1121, 1126 (D. Colo. 1984); State ex rel. Miller v. Gannett Outdoor Co. of Ariz., Inc., 795 P.2d 221, 224 (Ariz. Ct. App. 1990).

We recognize that these cases address the legal protections afforded to the tenant's expectations of renewal, not the landlord's expectations that the tenant will choose to exercise its contractual right to renew. However, we see no reason to treat the latter situation in dissimilar manner. The underlying rationale is the same.

The lease agreement in this case does not grant plaintiff the right to force NYF to renew the lease. Absent this power, plaintiff had only an expectation, however probable it may have been, that NYF would elect to extend the rental agreement. Upon this election, there would have been a new contract with new obligations. Without this election, however, there was only a mere expectation on plaintiff's part of continued benefits. The fact that plaintiff had an interest in the continued operation of the prior lease does not mean that it held a protected interest in the renewal of the lease.

We hold that the landlord's expectation that the tenant will exercise the right of renewal does not confer on the landlord a recognized property interest subject to just compensation for its taking. Our assumption under the Brill standard that NYF would have renewed the lease but for the State's good faith efforts to acquire the improved property does not alter our conclusion that the Fifth Amendment does not protect this expectation. Unless and until the tenant actually exercised its renewal option, the landlord held no contractual right to the extended lease term. Hindsight cannot transform what could have happened into what would have happened but for the State's actions. Even if NYF can now say with assurance that it would not have moved without the State's inducement, it could not have been so assured prior to the renewal deadline. Other circumstances could well have induced NYF to refrain from renewing. Even if that was an unlikely prospect, it reflects the fundamental difference between an expectation and a right.


Although our determination that plaintiff held no compensable property interest in NYF's option to renew the lease is dispositive of the appeal, we nevertheless, for the sake of completeness, address whether, even if the option to renew granted plaintiff a compensable property interest, the State's actions constituted a taking.

"The paradigmatic taking requiring just compensation is a direct government appropriation or physical invasion of private property." Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537, 125 S.Ct. 2074, 2081, 161 L.Ed. 2d 876, 887 (2005). A taking may also occur, however, through the exercise of the power to regulate property rights, if the regulation "goes too far." Pa. Coal Co. v. Mahon, 260 U.S. 393, 415, 43 S.Ct. 158, 160, 67 L.Ed. 322, 326 (1922); Devines v. Maier, 665 F.2d 138, 141 (7th Cir. 1981). Under the Supreme Court's more recent iteration of this rule, a "regulatory taking" may be found if the regulation is "so onerous that its effect is tantamount to a direct appropriation or ouster." Lingle, supra, 544 U.S. at 537, 125 S.Ct. at 2081, 161 L.Ed. 2d at 887.

There are two circumstances in which the nature of the government regulation requires courts to find a so-called "categorical" or "per se" taking. The first arises from the government's use of regulation to compel a property owner to suffer a permanent physical invasion, however minor, of his or her property. See, e.g., Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 426, 102 S.Ct. 3164, 3171, 73 L.Ed. 2d 868, 876 (1982) (holding that New York law requiring landlord to permit cable company to place wires and equipment, the latter occupying about one and one-half cubic feet, on the roof of the landlord's property worked a permanent physical occupation and thus constituted a compensable taking). This is because the regulation effectively destroys the rights associated with ownership of property: the right to possess, the right to use, the right to dispose, and the right to exclude others. Id. at 435-36, 102 S.Ct. at 3175-76, 73 L.Ed. 2d at 882-83.

The second arises from regulations denying the property owner "all economically beneficial or productive use of land." Lucas v. S.C. Coastal Council, 505 U.S. 1003, 1015, 112 S.Ct. 2886, 2893, 120 L.Ed. 2d 798, 813 (1992). The Court set forth this rule within the context of state regulation banning construction in an ecologically fragile coastal zone. The Court noted that the regulation, "by requiring land to be left substantially in its natural state," effected an unconstitutional taking. Id. at 1018-19, 112 S.Ct. at 2894-95, 120 L.Ed. 2d at 814-15.

It is clear that the facts of this case cannot support the finding of either a "paradigmatic" or "categorical" taking. Plaintiff concedes that the State did not cause either itself or a third party to take physical possession, however minor, of any of its property. Nor did the State's action deprive plaintiff of all productive use of its property. Plaintiff was not deprived of the right to lease the property to another tenant. The most beneficial use of the property remained unencumbered.

According to plaintiff, however, the trial court erroneously limited its analysis to whether there was a complete denial of the property's economic use. Plaintiff asks us to apply the flexible test articulated by the United States Supreme Court in Penn Central Transportation Co. v. City of New York, 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed. 2d 631 (1978), to conclude that the State's actions effected a de facto taking. Applying this standard, we conclude there was no unconstitutional taking as a matter of law.

The Supreme Court continues to espouse the view that "[w]here a regulation places limitations on land that fall short of eliminating all economically beneficial use, a taking nonetheless may have occurred." Palazzolo v. Rhode Island, 533 U.S. 606, 617, 121 S.Ct. 2448, 2457, 150 L.Ed. 2d 592, 607 (2001). To consider whether a limitation on land use constitutes a taking, we consider "the magnitude of [the] regulation's economic impact and the degree to which it interferes with legitimate property interests." Lingle, supra, 544 U.S. at 540, 125 S.Ct. at 2082, 161 L.Ed. 2d at 889. This approach "necessarily entails complex factual assessments of the purposes and economic effects of government actions." Yee v. City of Escondido, 503 U.S. 519, 523, 112 S.Ct. 1522, 1526, 118 L.Ed. 2d 153, 162 (1992).

Eschewing the use of a set formula to determine when "justice and fairness" require the government to provide just compensation for its actions, the Court identified several factors to serve as the guideposts of any noncategorical takings analysis in Penn Central, supra, 438 U.S. at 124, 98 S.Ct. at 2659, 57 L.Ed. 2d at 648. These factors include the character of the governmental action, the economic impact of the regulation, and the regulation's interference with reasonable investment-backed expectations. Kaiser Aetna v. United States, 444 U.S. 164, 175, 100 S.Ct. 383, 390, 62 L.Ed. 2d 332, 343 (1979). This approach requires courts to conduct an "essentially ad hoc" factual inquiry specific to the particular circumstances of the case. Ibid. The courts of this State recognize the fact-sensitive nature of this approach. See, e.g., Bernardsville Quarry, Inc. v. Borough of Bernardsville, 129 N.J. 221, 232 (1992) ("The determination of whether a regulatory measure effectuates the taking of property requires a multifactor balancing test . . . ."); Rieder v. State Dep't of Transp., 221 N.J. Super. 547, 554 (App. Div. 1987) ("It must be borne in mind that commonly resolution of constitutional questions concerning inverse condemnation represents no more than a value judgment upon a given factual complex rather than an evident application of a precise rule of law.").

Plaintiff argues that the parcel alleged to be "taken" in this case was the part of the building rented by NYF, or, more precisely, plaintiff's leasehold interest in that parcel. Whether there has been a substantial denial of a property's economic use depends on the definition of the property interest. Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470, 497, 107 S.Ct. 1232, 1248, 94 L.Ed. 2d 472, 496 (1987). Starting with Penn Central, supra, the Court explained:

"Taking" jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses rather both on the character of the action and on the nature and extent of the interference with rights in the parcel as a whole . . . . [438 U.S. at 130-31, 98 S.Ct. at 2662, 57 L.Ed. 2d at 652.]

This approach was applied in Keystone Bituminous Coal, supra, to reject the plaintiffs' argument that a statutory restriction on the mining of particular coal was an unconstitutional taking. Even though the complaint set forth a facial challenge to the statute, the Court considered the application of the statute to about twenty-seven million tons of coal. 480 U.S. at 495-97, 107 S.Ct. at 1247-48, 94 L.Ed. 2d at 495-96. The Court concluded that there was "no basis for treating the less than 2% of petitioners' coal as a separate parcel of property." Id. at 498, 107 S.Ct. at 1249, 94 L.Ed. 2d at 497. It reasoned:

Many zoning ordinances place limits on the property owner's right to make profitable use of some segments of his property. A requirement that a building occupy no more than a specified percentage of the lot on which it is located could be characterized as a taking of the vacant area as readily as the requirement that coal pillars be left in place. [Id. at 498, 107 S.Ct. at 1248, 94 L.Ed. 2d at 496.]

The Court reiterated in Concrete Pipe & Products of California, Inc. v. Construction Laborers Pension Trust for Southern California, 508 U.S. 602, 644, 113 S.Ct. 2264, 2290, 124 L.Ed. 2d 539, 578 (1993), that the takings claimant cannot subdivide the parcel of property "into what was taken and what was left for the purpose of demonstrating the taking of the former to be complete and hence compensable." It noted, "To the extent that any portion of property is taken, that portion is always taken in its entirety; the relevant question, however, is whether the property taken is all, or only a portion of, the parcel in question." Ibid.

The courts of this State, and other states, follow this approach. See East Cape May Assocs. v. State Dep't of Envtl. Prot., 343 N.J. Super. 110, 126-29 (App. Div.) (agreeing with the trial court's definition of the affected "property"), certif. denied, 170 N.J. 211 (2001); Karam v. State Dep't of Envtl. Prot., 308 N.J. Super. 225, 236-40 (App. Div. 1998) (refusing to conclude that riparian part of the plaintiffs' land was the affected "parcel"), aff'd o.b., 157 N.J. 187, cert. denied, 528 U.S. 814, 120 S.Ct. 51, 145 L.Ed. 2d 45 (1999). See also Fla. Game & Fresh Water Fish Comm'n v. Flotilla, Inc., 636 So. 2d 761, 765 (Fla. Dist. Ct. App.) (noting that the state regulation affected only forty-eight acres of the "undivided whole" of 173 acres), review denied, 645 So. 2d 452 (Fla. 1994); Coast Range Conifers, LLC v. Or. State Bd. of Forestry, 117 P.3d 990 (Or. 2005) (addressing the prohibition against logging on nine acres of the plaintiff's forty-acre parcel).

At first blush, the case law suggests that plaintiff cannot define the relevant property interest as the small portion of the building previously rented to NYF. There are no facts to support the conclusion that the 109,000 square foot section should be treated as the whole "parcel" for the purposes of our Penn Central analysis. However, we need not resolve this issue because, even assuming that the particular cross-section of the improved property leased to NYF represents the "denominator" in the takings analysis, application of the Penn Central factors does not lead to the relief plaintiff seeks.

The character of the governmental action factor focuses primarily on whether the conduct "amounts to a physical invasion." Lingle, supra, 544 U.S. at 539, 125 S.Ct. at 2082, 161 L.Ed. 2d at 888. At the far end of the spectrum, the Loretto Court recognized the detrimental effect of the government's "permanent physical occupation of property" on the right to possess and use one's property to the exclusion of others. "[W]hen the 'character of the governmental action' is a permanent physical occupation of property, our cases uniformly have found a taking to the extent of the occupation, without regard to whether the action achieves an important public benefit or has only minimal economic impact on the owner." Loretto, supra, 458 U.S. at 434-35, 102 S.Ct. at 3175, 73 L.Ed. 2d at 882 (citation omitted). See also Nollan v. Cal. Coastal Comm'n, 483 U.S. 825, 832, 107 S.Ct. 3141, 3146, 97 L.Ed. 2d 677, 686 (1987) (concluding that a permanent physical occupation occurs "where individuals are given a permanent and continuous right to pass to and fro, so that the real property may continuously be traversed"); Hendler v. United States, 952 F.2d 1364, 1374-76 (Fed. Cir. 1991) (concluding that the government's installation of groundwater surveillance wells on the plaintiff's property, and ability to enter plaintiff's property to check these wells as it pleased, effected a permanent physical occupation, as the government essentially became a "co-tenant-in-possession").

Short of permanent physical occupation, it is clear that the government retains the broad discretion "to regulate housing conditions in general and the landlord-tenant relationship in particular without paying compensation for all economic injuries that such regulation entails." Loretto, supra, 458 U.S. at 440, 102 S.Ct. at 3178, 73 L.Ed. 2d at 885. This broad discretion encompasses the right to impose rent control ordinances, within reason, to protect particular groups of tenants. Pennell v. City of San Jose, 485 U.S. 1, 12 n.6, 108 S.Ct. 849, 857 n.6, 99 L.Ed. 2d 1, 14 n.6 (1988) (refusing the invitation to find that the enactment of rent control ordinances constitutes a per se taking); Hutton Park Gardens v. Town Council of W. Orange, 68 N.J. 543, 565-72 (1975) (noting that rent and price controls are not unconstitutionally "confiscatory" so long as they permit a "just and reasonable" return).

As a number of courts have noted, however, this broad discretion does not include the right to force landlords to house tenants not of their choosing. See, e.g., Cienega Gardens v. United States, 331 F.3d 1319, 1337-39 (Fed. Cir. 2003) (noting the impermissible effect of the government's restriction on the landlord's right to exclude government-approved, low-income holdover tenants); ConocoPhillips Co. v. Henry, 520 F. Supp. 2d 1282, 1312-15 (N.D. Okla. 2007) (finding that a statute requiring employers to permit individuals with firearms to enter their property resulted in significant deprivation of the employers' right to exclude); Ross v. City of Berkeley, 655 F. Supp. 820, 837 (N.D. Cal. 1987) (finding that the challenged enactment gave tenants "a leasehold interest of indefinite duration"). Of course, the State's conduct in this case did not result in plaintiff's forced acceptance of unwanted tenants. The State did not compel plaintiff over objection to rent its property or to refrain from terminating a tenancy.

Plaintiff likens the State's action in this case to the precondemnation activities discussed in Washington Market Enterprises, Inc. v. City of Trenton, 68 N.J. 107 (1975). The city in that case acquired property in 1963 in order to construct a downtown shopping mall. Id. at 111. It did not issue a blight declaration, but the plaintiff, an owner of a nearby multi-tenant commercial building, alleged that this preliminary activity, and the statements of public officials about the future condemnation of the entire area, caused its tenants to leave. Id. at 111-12. Plaintiff's property, and the surrounding land, was ultimately declared a blighted area in 1967. Id. at 111. The plaintiff's temporary tenants vacated and the area's economic vitality collapsed. Id. at 112. The city did not condemn the plaintiff's property, however, and, when the city abandoned the project in 1973, the plaintiff's property was virtually worthless. Ibid. Under the Court's prior precedent, the declaration of blight would not have worked a taking, and the absence of an official condemnation action would have precluded the plaintiff's recovery of damages. Id. at 113-15.

The Court nonetheless concluded that, even though a declaration of blight does not, in and of itself, constitute a taking, there could be a compensable taking "where, in addition to the declaration of blight, other related activities together with the passage of time are said to have shorn property of literally all or most of its value." Id. at 115. The statutory authority for the government's right to abandon a redevelopment project even after a declaration of blight could not insulate it "from the obligation to make just compensation in those instances where its activities have already practically destroyed the beneficial use of a particular property." Id. at 115-16. The Court remanded the matter to determine whether there was a taking, with the recognition that "where planning for urban redevelopment is clearly shown to have had such a severe impact as substantially to destroy the beneficial use which a landowner has made of his property, then there has been a 'taking of property' within the meaning of that constitutional phrase." Id. at 110.

We do not think the circumstances in this case rise to that level. The governmental action here consisted of a good faith effort by the State to act within the confines of the relevant statutory sections and administrative regulations to acquire property for the construction of a school. Extended lead time was needed for NYF's relocation, and the orderly process of the intended acquisition of plaintiff's improved property necessitated its early provision of relocation assistance. And, the State's conduct did not cause a substantial destruction of the property's beneficial use.

As the United States Supreme Court noted in 2005, "the Penn Central inquiry turns in large part, albeit not exclusively, upon the magnitude of a regulation's economic impact and the degree to which it interferes with legitimate property interests." Lingle, supra, 544 U.S. at 540, 125 S.Ct. at 2082, 161 L.Ed. 2d at 888-89. This language suggests that the takings claimant must show, as a threshold matter, "'serious financial loss' from the regulatory imposition in order to merit compensation." Cienega Gardens, supra, 331 F.3d at 1340 (citation omitted). "[A]t bottom what emerges is at least the basic notion that the government, under the guise of regulation, cannot take from a property owner the core economic value of the property, leaving the owner with a mere shell of shambled expectations." Hendler, supra, 952 F.2d at 1373.

The New Jersey Supreme Court summarized:

Diminution of land value itself does not constitute a taking. Similarly, impairment of the marketability of land alone does not effect a taking. Also, restrictions on uses do not necessarily result in takings even though they reduce income or profits. A regulatory scheme will be upheld unless it denies "all practical use" of property, or "substantially destroys the beneficial use of private property," or does not allow an "adequate" or "just and reasonable" return on investment[.]

[Gardner v. N.J. Pinelands Comm'n, 125 N.J. 193, 210-11 (1991) (citations omitted).]

We conclude that the evidential materials, read in the light most favorable to plaintiff, fail to demonstrate that the challenged conduct substantially deprived plaintiff's property of beneficial use. Plaintiff retains the freedom to rent its commercial space to other prospective tenants. We find no significance in the fact that there has been an allegedly premature end to the contractual history between plaintiff and NYF. The federal and state constitutions do not guarantee the most profitable use of property. See Andrus v. Allard, 444 U.S. 51, 66, 100 S.Ct. 318, 327, 62 L.Ed. 2d 210, 223 (1979) ("[L]oss of future profits-unaccompanied by any physical property restriction-provides a slender reed upon which to rest a takings claim."); East Cape May Assocs., supra, 343 N.J. Super. at 138. This is especially so when NYF did not exercise the right to renew within the prescribed time, and plaintiff knew nothing of the government's negotiations with NYF until March 2005.

We rely as well on the "bundle of rights" concept explained in Allard, supra. There, the Court rejected a challenge to regulations permitting the possession, but not the sale, of the parts, nests, or eggs of bald eagles and other migratory birds acquired prior to the effective date of two conservation statutes. 444 U.S. at 52-54, 100 S.Ct. at 320-21, 62 L.Ed. 2d at 214-15. The plaintiffs, owners of bird artifacts, argued that the regulations deprived them of "the opportunity to earn a profit from those relics." Id. at 64, 100 S.Ct. at 326, 62 L.Ed. 2d at 222.

The Court disagreed. Even though the regulations restricted one means of disposing of the items, the Court noted that "the denial of one traditional property right does not always amount to a taking. At least where an owner possesses a full 'bundle' of property rights, the destruction of one 'strand' of the bundle is not a taking, because the aggregate must be viewed in its entirety." Id. at 65-66, 100 S.Ct. at 327, 62 L.Ed. 2d at 222-23. The Court stated that the owners retained "the rights to possess and transport their property, and to donate or devise the protected birds." Id. at 66, 100 S.Ct. at 327, 62 L.Ed. 2d at 223.

This approach explains the Court's conclusion that restrictions on the plaintiff's ability to construct a multistory office building in Penn Central, supra, 438 U.S. at 130, 98 S.Ct. at 2662, 57 L.Ed. 2d at 652, and the plaintiffs' ability to exploit the "support estate" in Keystone Bituminous Coal, supra, 480 U.S. at 500-01, 107 S.Ct. at 1249-50, 94 L. Ed. 2d at 497-98, did not constitute "takings" of the respective "air rights" and rights in the "support estate." Insofar as the right to lease represents one strand of the bundle of rights attaching to fee simple ownership, we conclude that the loss of plaintiff's right to lease this subsection of its building to NYF does not effect a taking. The State did not destroy plaintiff's right to lease, possess of otherwise use this space.

We also liken the facts in this case to those in 767 Third Avenue Associates v. United States, 48 F.3d 1575 (Fed. Cir. 1995). The landlord in that case leased three sections of an office building to various organizations of the Yugoslavian socialist government. Id. at 1576. Due to ethnic strife in the Yugoslavian republics, the United States government blocked the property interests, and froze the assets, of the Yugoslavian government in the United States. Id. at 1577. Following this asset freeze, the Yugoslavian officials terminated their lease agreements. Ibid.

The landlord argued that the federal government's action constituted a regulatory taking. Id. at 1578. Even though the Federal Circuit concluded that there could be no reasonable investment-backed expectations in the continued contractual relationship with a foreign entity, id. at 1580-81, we highlight the court's additional conclusion that "no taking occurs when . . . expectations under a contract are merely frustrated by lawful government action not directed against the takings claimant." Id. at 1581 (citing Omnia Commercial Co. v. United States, 261 U.S. 502, 43 S.Ct. 437, 67 L.Ed. 773 (1923)). Even assuming that plaintiff enjoyed a reasonable expectation in continued rent payments after NYF failed to renew the contract by May 2004, we conclude that the frustration of this lease agreement, caused by the State's justified efforts to provide relocation assistance to NYF, did not effect a compensable taking. Id. at 1581-82.


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