From Regulation to Contingency Bargaining

The per se taking doctrine of Lucas and the less-than-certain projections of sea level rise hinder the use of land use and environmental regulations in preventing and mitigating development on coastal properties threatened with gradual inundation and sudden storm damage.  In these areas, the regulatory approach may have to yield to more flexible negotiations regarding applications to build in vulnerable places.

These issues are discussed in my article for the Fordham Environmental Law Journal, Shifting Paradigms Transform Environmental and Land Use Law: The Emergence of the Law of Sustainable Development,[1] as well as in my article for the Brooklyn Law Review, Land Use and Climate Change: Lawyers Negotiating Above Regulation.[2]

Perhaps we are entering a transitional period where government will rely more on intelligent bargaining with coastal developers than on proscriptive regulations. It is doubtful that local officials will be convinced to adopt a no-build zone by their lawyer’s recitation of several prospective, theoretical defenses to a total taking challenge, even though such defenses are mentioned in Lucas dicta.[3] Even if land use regulators were willing to endure a test case, they also understand that there are practical, political, and equitable reasons to resist a total ban on development. They know that predictions of sea level rise and storm surges are uncertain; they will happen, but how fast and where is not known with certainty. These local officials also understand that local property owners acquired their properties knowing that they were zoned for housing development or other economical uses. They further understand that these owners have been paying local property taxes on their parcels, assessed at their market value as zoned. Additionally, they understand that property owners vote, have local political influence, and belong to industry groups that lobby state officials who control funding that localities need.

Accordingly, officials may be reluctant to adopt a no-build zone; instead, they might ask their municipal attorneys if there are any non-regulatory options to limiting development in vulnerable coastal areas. Although fraught with consequences of their own, there are alternatives to using regulations to severely prevent coastal development. Communities can pursue a non-regulatory approach by inserting a sea level rise component in their local comprehensive plans that embodies recent scientific facts and projections and describes the consequences to the public and private sectors of building in vulnerable areas. This component can incorporate by reference to the latest sea level rise, storm surge, and high risk area maps issued by state and federal agencies, including FEMA.

During the development review process, the local planning commission can require developers to submit site plan drawings that show buildings and infrastructure located outside portions of the site where projected sea levels will inundate them, or where storm surges may destroy them, during their useful lives. Imposing requirements of this kind skirt the many vexing issues raised by the Court’s recent Koontz decision, since they impose neither title nor monetary exactions as conditions of approval. Applicants can be required to show that they have adequate equity and debt financing, i.e., that investors will accept the risks of inundation and storm damage. They can be required to provide indemnification to the locality for any liabilities involved in approving a project in a high risk zone and to commit to removing destroyed buildings and relocating improvements required by inundation or storm damage, a commitment that must be backed by bonds or letters of credit. Should this process convince developers and their financial backers that the project is too risky to finance and build, wouldn’t this non- regulatory approach simply reveal the lack of a project’s economic viability rather than constitute a regulatory taking of all economic value?

Perhaps developing coastal properties in locations vulnerable to near-term sea level rise has reached the point where this type of negotiated project review is essential. Developers normally have short-term financial objectives, measured by the time it takes them to secure approvals, build, obtain a certificate of occupancy, and sell the buildings. Even where they retain title, their objectives are almost always shorter-term than the useful lives of their buildings or the time that it will take for sea level rise to inundate their projects. They, to be sure, will argue that their properties will not be damaged by climatic events and they may be able to back up their assertions with data produced by scientists who doubt main stream projections, have different maps of their own, or believe that climate change is a passing phenomenon. This is the problem with regulating at a time when scientific understanding of risks is evolving and when estimates of the dates that risks will occur are uncertain.

Contingency bargaining can be used in such situations. In business dealings, contingency contracts allow parties to accommodate disagreements about future events, such as sea level rise in our context or the number of likely viewers of a proposed television series in a more familiar setting. A deal is struck between the television network and the script writer based on an estimate of viewers, but the network gets a rebate or draws from an escrow fund if the viewers are fewer than projected. Alternatively, if the viewers exceed the projected number, a surcharge is stipulated to the benefit of the scriptwriter. In a similar fashion, negotiation between a developer and a local land use board can arrive at an agreement that the project may or may not be inundated or damaged by storm surges within an agreed period, with the local board taking the position that, if it is, there should be consequences, such as drawing funds to cover remediation costs from an escrow account or using a bond, insurance policy, or underlying indemnity agreement to secure the developer’s contingent liabilities.

This type of accommodation is difficult to achieve in adopting a zoning regulation, particularly a no-build zone, which has an all-or-nothing consequence. The regulator says, “because sea level is expected to inundate your property within X period, we are prohibiting all development and your property now has no value.” The developer says, “but those projections are contested, and there is doubt that sea level rise or storm surges will affect this particular area of the coastline that much.” If the regulator proceeds, the developer can bring a Lucas-style total takings case or a substantive due process action alleging that the regulation is arbitrary and capricious, leaving the matter in the hands of judges. Striking a bargain that allows some development on the condition that the developer carries the costs of any future damage or destruction blunts the Lucas challenge. If by some strange extension of Alito’s decision in Koontz, the imposition of such future costs is considered a monetary exaction, it will survive Nollan/Dolan scrutiny since the cost is calibrated to cover the damage inflicted, satisfying both nexus and proportionality requirements.

Not only is the negotiated, non-regulatory approach less likely to be litigated or won by the developer if it is taken to court, but it is consistent with evolving norms in the land use review and approval process in a growing number of states. Developers are accustomed to providing indemnities, bonds, insurance, lines of credit, and escrow accounts. Their current experience with these mechanisms is in a much lower risk context, to be sure, but the extreme risks that threaten coastal development call for appropriate responses. If proscriptive regulation cannot be one of them, negotiated settlements of disputes over coastal construction can be. The situation necessitates scaling up the use of familiar processes and techniques, and training lawyers and planners in the art of contingency bargaining.