By Andy S. Norin, Esq. and Joshua J. Franklin, Esq.
On March 13, the Appellate Division decided Iron Mountain Information Management Inc. v. City of Newark, 405 N.J. Super. 599, which addresses the scope of the Appellate Division’s prior ruling in Harrison Redevelopment Agency v. DeRose, 398 N.J. Super. 361 (2008), regarding notice requirements under the Local Redevelopment and Housing Law, N.J.S.A. 40A:12A-1 et seq. (LRHL). In DeRose, the court ruled that a landowner whose property was designated as an “area in need of redevelopment” retains the right to challenge that designation, even after the 45-day limitations period prescribed by the LRHL, unless the landowner receives written notice, at the time of the redevelopment designation, explaining that the designation authorizes the municipality to acquire the property by eminent domain.
In Iron Mountain, the court concluded that commercial tenants are not entitled to such notice because, in part, a leasehold interest is less important than a fee interest. At first glance, this appears to be a departure from DeRose. The Iron Mountain court, however, preserves a commercial tenant’s right to challenge a redevelopment designation in a subsequent condemnation proceeding. Thus, as a practical matter, after going to great lengths to differentiate fee owners and leaseholders, the court eviscerates the distinction between the two by providing commercial tenants a similar right to challenge redevelopment designations after the expiration of the 45-day limitations period.
The apparent victory for redevelopers and municipalities is therefore not a victory at all. Although the court declined to require that commercial tenants receive the enhanced notice outlined in DeRose, municipalities and redevelopers will feel compelled to provide such notice to both fee owners and commercial leaseholders at the time of the redevelopment designation in order to avoid a possible challenge to the designation in a subsequent condemnation proceeding.
Harrison Redevelopment Agency v. DeRose
Under the LRHL, a challenge to a redevelopment designation must be commenced no later than 45 days after the designation. In DeRose, the court was faced with the question of “whether a property owner who fails to challenge a redevelopment designation … within forty-five days of its adoption by a municipal governing body … may still challenge … the public purpose of the taking … by way of a defense in an ensuing condemnation action.” The court found that because the LRHL’s notice provisions fall short of fundamental guarantees of due process, under both the federal and New Jersey constitutions, a property owner maintains the right to contest a redevelopment area designation, beyond the 45-day period, unless the property owner is given contemporaneous written notice that goes above and beyond that stipulated in the LRHL. In order to pass constitutional muster, such notice must (i) alert the owner of the designation, (ii) state that the designation authorizes the municipality to acquire the property by eminent domain, and (iii) inform the owner of the time limit within which the owner may take legal action to challenge the designation.
The court reasoned that these enhanced notice provisions strike an appropriate balance between the practicalities of the redevelopment process and property owners’ rights, by affording property owners sufficient due process while providing municipalities and redevelopers the security of knowing that generalized attacks on the redevelopment designation will, in most instances, be time-barred after 45 days. In so doing, the court recognized that the need for finality early in the redevelopment process is critical to municipalities and redevelopers who invest substantial resources developing and implementing redevelopment plans after redevelopment areas are designated. Click here for the Harrision Redevelopment Agency v. DeRose Decision.
Iron Mountain Information Management Inc. v. City of Newark
In Iron Mountain, the Appellate Division considered whether to extend the DeRose holding to commercial tenants. The court concluded that a commercial tenant’s leasehold interest, in contrast to a fee title interest, is not a “protectable interest” for purposes of due process analysis and, therefore, is not entitled to the enhanced notice articulated in DeRose. The Iron Mountain court therefore held that commercial tenants cannot challenge the redevelopment area designation in a prerogative writ action filed after the 45-day time limit set forth in the LRHL.
The court, however, undercut this holding by determining that a commercial tenant may challenge the redevelopment designation in a subsequent condemnation action. Thus, despite stating that a lease is not a per se protectable interest, the court acknowledged, at least implicitly, what should be axiomatic: that a tenant for years, while not always entitled to the exact same procedural protections as a fee owner, is nonetheless entitled to basic due process rights, because the government can no more take such a tenant’s leasehold estate without just compensation and due process than it can an owner’s fee title. See Nichols on Eminent Domain §5.02[6][a], [c]. Click here for the Iron Mountain Information Management Inc. v. City of Newark Decision.
Reconciling DeRose and Iron Mountain
On the surface, Iron Mountain seems to be a victory for municipalities and redevelopers because it saves them the trouble of sending personal notice to each and every commercial tenant in a redevelopment area. Indeed, the Iron Mountain court seemed to think it was protecting municipalities and redevelopers when it stated that “requiring a municipality to ascertain the identity of each commercial tenant and provide individual notice to that tenant adds an enormous burden to the redevelopment process.”
However, the court fails to realize that allowing commercial tenants to attack a redevelopment designation in a condemnation proceeding is far more problematic for municipalities and redevelopers than the difficulty of noticing commercial tenants because it greatly increases the risk that a redevelopment designation will be overturned long after the municipality and redeveloper have invested substantial time and money in a project. Although there are certain practical difficulties involved in identifying every commercial tenant, such tenants need to be identified anyway if a condemnation action is filed because they must be joined in that action.
Additionally, the Iron Mountain court seems to overlook the fact that DeRose does not actually mandate that fee owners be given enhanced notice. Rather, it merely allows redevelopers and municipalities to provide constitutionally sufficient notice of the designation to affected property owners and thereby precluding them from challenging the designation in a condemnation action after the 45-day limit on prerogative writ actions.
The impact of Iron Mountain on commercial tenants is, therefore, no different than the impact of DeRose on fee owners. Prudent municipalities and redevelopers, though not obligated to do so, will, presumably, opt to provide the same enhanced notice to commercial tenants that they provide to fee owners in an effort to preclude challenges to the redevelopment designation after the 45-day limitations period. Nothing in Iron Mountain seems to prevent this, and, in fact, to interpret the case otherwise would yield a nonsensical result that, contrary to the court’s own ruling, provides leaseholders with greater protection than landowners.
Under DeRose, fee owners that receive enhanced notice have just 45 days to challenge a blight designation. Thus, if they intend to challenge the designation, they must mount their attack before knowing whether the municipality will ever actually attempt to condemn their property. Commercial tenants, on the other hand, would have the strategic advantage of being able to wait until the municipality files a condemnation action before challenging the designation. Certainly, this is not what the court intended.
Furthermore, if redevelopers and municipalities cannot avoid collateral attacks on redevelopment designations by commercial tenants by providing “DeRose” notice, it would conflict with the public policy stated in the LRHL, and expressly endorsed in DeRose, of resolving generalized attacks on redevelopment designations early in the redevelopment process. Thus, the Iron Mountain decision must be read to allow, but not require, municipalities and redevelopers to provide enhanced notice to commercial tenants so that commercial tenants are not in a better position than properly noticed landowners, and municipalities and redevelopers are assured that, generally, after the 45-day limitation period, the redevelopment effort cannot be derailed by a subsequent challenge to the designation. The Iron Mountain court’s concern that tenant turnover creates the possibility of “an almost endless cycle of challenges to the redevelopment process” can be easily dismissed. Just as a tenant that enters into a lease after the commencement of a condemnation action does not have a compensable property interest (Nichols at §5.02[6][e]), a tenant that enters a lease after the limitations period for challenging a redevelopment designation should not have the right to then challenge the authority to condemn.
Though Iron Mountain Information Management seemingly achieved a stealth victory in the Appellate Division, it has nonetheless appealed the decision to the New Jersey Supreme Court, which granted certification on May 21. We hope the Supreme Court takes the opportunity to clarify the internal inconsistencies in Iron Mountain and harmonize the decision with DeRose by confirming that tenants for years can challenge redevelopment designations during commendation actions, and that municipalities and/or redevelopers can preclude their ability to do so by sending enhanced notice to them in accordance with DeRose. Ultimately, however, it is not the role of the courts to prescribe specific notice requirements, but to decide whether legislative notice provisions are constitutional. Therefore, the Legislature should enact a comprehensive scheme addressing this issue so that redevelopers, municipalities, landowners, tenants and communities are not held in limbo for years. Until then, the courts will remain entangled in disputes over the precise scope and requirements of DeRose.
In the meantime, redevelopers and municipalities should consider sending “DeRose” notice to commercial tenants because doing so should preclude the tenant from challenging the blight designation in any subsequent condemnation action.
Norin and Franklin are associates in the real estate and land use practice groups of Drinker Biddle & Reath LLP in Florham Park, New Jersey.
Reprinted with permission from the JULY 6, 2009 edition of New Jersey Law Journal. © 2009 Incisive Media US Properties, LLC. All rights reserved. Further duplication without permission is prohibited.
I found your article interesting. … the government can no more take such a tenant’s leasehold estate without just compensation and due process than it can an owner’s fee title. ….
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