Price adjustments in times of peril.
Pandemics are bad for a whole host of reasons. First (and foremost) they kill people, which is objectively bad. Second, they have massive economic repercussions – both directly from the people who are impacted by the disease, and as a consequence of public health measures.
As a result, during pandemics – like the current COVID-19 crisis – real estates values go askew. Typically in a moment of public peril, real estate prices go down, as we lose the economic activity that underpins robust market value. In the open market, deals fall apart as some buyers elect to save their money rather than invest in an illiquid asset. Listed properties begin to demand (and realize) lower amounts, as the would-be sellers look for an exit from their real estate position. See, e.g., here. Depending on the severity and length of the crisis, values can be depressed for months or years. But prices do generally recover back to historic averages.
In Eminent Domainland, this causes a problem. On the one hand, the constitutional mandate to provide just compensation is pegged to fair market value on a particular date of value (often the date of service of the summons). On the other hand, if there is a rogue dip in the market, it may not seem “fair” in the human sense of that word to penalize a landowner whose property was going to be acquired one way or the other. The determination of just compensation during a time of temporarily depressed values, then, becomes a question of who should bear the burden caused by neither the government nor the landowner.
Prior downturns provide some guidance here. During the Great Recession of 2008, landowners argued that the properties should be valued consistent with pre-crash values. Governments often replied that the market is what it is, and that the landowner in an eminent domain case should not receive a bonus unavailable to other market participants. There is, however, one key distinction between a condemnee in an eminent domain case – in that the transfer of land is mandatory. Unlike a market participant who would elect not to sell until the values recovered, the condemnee has no choice. Ostensibly then, the courts may take into account the fairness of applying present market value as opposed to some other market value that may be more “fair”.
One factor in whether present market value will result in a “fair” market value for providing just compensation is to look at the reason for the depressed value. As stated in Nichols on Eminent Domain § 12B.06, when weighing how to account for depressed land values, “courts have drawn a distinction between a depression that is purely temporary in character and one that has attained some degree of permanency.” For the former, the courts tend to “disregard the effects of the depression.” Id. By contrast, for sustained downturns, where the depressed prices have become normalized, the courts tend to accept that the depressed market value is the appropriate fair market value for determining just compensation. This is not universally applied, and even where applied can be difficult.
During the Great Recession, the market normalized at lower prices, and the recovery was slow. Thus, for condemnations that took place in 2010 or 2011, those lower prices were generally held to be sufficiently normalized to satisfy the “fair” market value analysis of just compensation. But in the early stages of the recession, in 2008 and 2009, the “temporariness” of the situation was far less certain.
On the whole, the newness of this moment may make it difficult to determine whether the courts will or should disregard depressed values that are likely to occur over the next few months. I expect that this will be an issue in every condemnation case brought in the near future.
As always, these issues can be complicated and backed by numerous competing lines of authorities. Any landowner or government engaged in eminent domain matters should seek and obtain good legal counsel from a qualified and licensed attorney in their jurisdiction.