In January of this year, the Arizona Supreme Court issued a decision of significance to the eminent domain community and worth a read for anyone else interested in real property rights.
The case – State v. Foothills Rsrv. Master Owners Ass’n, Inc. – arose out of the Arizona Department of Transportation’s acquisition of land to construct the Loop 202 South Mountain Freeway. In its decision, the Court held that the defendant property owners were entitled to a category of compensation called “severance damages” for the taking of certain easement rights that resulted in “proximity damages” to the remainder of their property not taken for the project.
Background Facts
The defendants in the case were a group of more than 500 homeowners in a master-planned community located south of metropolitan Phoenix. Like many residential developments, the defendants owned the lots on which their homes were constructed as well as easement rights in the community common areas. The common areas were owned by the HOA. The easement rights were created by certain declarations of covenants, conditions, and restrictions and included “negative easements” (also known as “restrictive covenants”) reserving the common areas as undevelopable open space for all residents in the community to enjoy.
In 2017, the State filed a lawsuit against the HOA to condemn the common areas, for which the State ultimately agreed to pay the HOA $6.5 million. However, in order to construct the freeway on the common areas set aside as undevelopable open space, the State also needed to condemn the homeowners’ negative easements.
As in most eminent domain cases, the primary fight was not over whether the State could condemn the easements, but how much the State would have to pay as just compensation. The HOA, on behalf of the homeowners, sought compensation for severance damages, which are damages that compensate a defendant for the diminution in value to the portion of the parcel not taken (called the “remainder”) caused by its severance from the condemned portion as well as by construction of the project.
Specifically, the HOA asserted that the homeowners were entitled to two components of just compensation as a result of the State’s taking and project: (1) damages for the loss of the easements, measured as the difference between the value of the defendants’ properties with and without the easements, and (2) the reduction of the value of the homes due to their proximity to the new freeway, which accounted for elements such as noise, pollution, and loss of view.
After the trial court ruled that the homeowners could pursue their claim for “proximity damages,” the parties agreed to a judgment so that the State could appeal the trial court’s decision. The judgment included two damage award options: (1) $6 million for the loss of the easements or (2) $6 million for the loss of the easements plus $12 million in proximity damages, if the trial court’s ruling was affirmed. In other words, the State and defendants decided to settle their dispute over the amount of proximity damages, but continued to fight over whether such damages are recoverable under the law.
The Court’s Ruling
On the first stage of the appeal, the State succeeded in convincing the Arizona Court of Appeals that the defendants were not entitled to proximity damages under Arizona statutory law. Relying on language from A.R.S. § 12-1122(A) that requires a jury to assess severance damages “if the property sought to be condemned constitutes only a part of a larger parcel,” the appellate court found that no severance damages were awardable because the homeowners’ easement rights were not parcels of land.
The Supreme Court accepted review of the case and framed the issue as “whether severance damages are available to landowners when their appurtenant easements are condemned but their physical real property is not taken.” In a unanimous opinion written by Chief Justice Ann Timmer, the Court concluded that the statute does indeed authorize severance damages in the circumstances described.
Significance to Eminent Domain Practitioners
The opinion issued by the Court of Appeals caused a stir among eminent domain practitioners. Many struggled to understand the court’s interpretation of the term “larger parcel” or how it could be applied in the context of other condemnation scenarios involving easement acquisitions.
For example, condemning entities regularly acquire easements for public purposes without acquiring fee title, such that the Court of Appeals’ decision created doubt over whether severance damages would continue to be available in those cases. Similarly, some landowner attorneys wondered whether the court’s interpretation of the statute might violate the constitutional mandate that just compensation be paid for the taking or damaging of private property in cases in which remainder parcels would unquestionably suffer damage as a result of an easement acquisition or project.
The Supreme Court’s reversal of the Court of Appeals’ decision helped allay these concerns and uncertainties.
Moreover, Justice Timmer’s opinion contained additional proclamations that will guide practitioners – including attorneys and appraisers – in future eminent domain matters.
First, the Court confirmed that nonpossessory interests in land, such as restrictive covenants, can form part of a “larger parcel” as that term is used in A.R.S. § 12-1122(A). The Court’s analysis of this issue, and especially the term “parcel,” created consistency with other eminent domain statutes. It also aligned condemnation law with general real estate principles by recognizing the various estates and interests that comprise the “bundle of sticks” associated with a given parcel of land.
Next, the opinion acknowledged that, for purposes of evaluating the availability of severance damages, the “larger parcel” is not limited to a single parcel. Instead, it can consist of varying interests held in multiple, distinct parcels of land, so long as the property rights held by the defendant are used for a common purpose.
Finally, in addressing the specific issue of whether severance damages are available where the condemnor acquires only a party’s easement rights but not the party’s physical property, the Court cited a handful of cases from other states tackling similar issues. The citation to and discussion of these non-Arizona cases – several of which involve the important topic of access rights – will likely spark new conversations among Arizona eminent domain practitioners and could lead to further developments in the law.
Good Read for the Rest of the Real Estate Community
The Supreme Court’s opinion is also a worthwhile read for the real estate industry in general. Chief Justice Timmer provided an excellent summary of the law concerning easement rights and how those rights may be impacted by eminent domain. And, even though the case involved residential property, the principles and legal issues discussed are equally applicable in the commercial context where restrictive covenants abound.
Click here to read Jennifer's article published by AZRE Magazine.
about the author
Jennifer Cranston is a shareholder and member of the Board of Directors at Gallagher & Kennedy in Phoenix, where she represents land developers and private property owners in condemnation and valuation disputes. She also assists condemning entities in acquiring property rights, which provides her with a unique perspective on eminent domain issues. Jennifer’s trial experience has resulted in two of the largest condemnation verdicts in the history of Arizona.
She is the co-host and organizer of the semi-annual Condemnation Summit, which attracts more than 100 eminent domain practitioners throughout Arizona.