Despite engaging in good faith due diligence, a buyer of real estate may miss some pre-existing property damage or a public improvement that was installed without permission or legal right. Does the buyer of the property have a cause of action for a taking or inverse condemnation when such a pre-existing condition is discovered after the sale?
The answer is maybe, maybe not.
At least one court has found that the buyer does not have a cause of action because the purchase of the property did not include the transfer of any takings claims, and as a result those claims remain with the prior owner of the property absent a clear intent to assign the claims.
A recent case in Los Angeles County Superior Court, NCP Imperial v. State of California, highlights how these types of situations can arise, and why certain buyers may have no recourse against a public agency.
The Facts of the NCP Imperial Case
In NCP Imperial, the plaintiff developer purchased property in Norwalk, California, with an eye toward re-developing the site. Before purchasing the property, they conducted a review of the property’s title, including any encumbrances reported, and also secured an ALTA survey.
After purchasing the property the developer discovered an unrecorded and undocumented 78” subterranean reinforced concrete sewer pipeline that a public agency was actively using for storm water management and flood control purposes. Upon discovering the pipeline, the plaintiff developer notified the public agency and demanded that it stop using the property for its pipeline because it interfered with the development potential of the land.
The public agency conceded the pipeline constituted a public improvement, and there was no easement or other right to occupy the property, but argued it could not relocate the public improvement.
Plaintiffs filed a lawsuit for inverse condemnation for the physical taking and damaging of their private property. The public agency in turn filed a demurrer, asserting the developer lacked standing to pursue its claim.
The Court Held That the Transfer of Property Doesn’t Include Assignment of Inverse Condemnation Claims
The trial court walked through the factors for proving a claim for inverse condemnation:
(1) the plaintiff owned the real property;
(2) the property was taken or damaged; and
(3) the cause was a public project.
The court explained that for purposes of standing, the claim accrues when the agency’s act causes immediate and permanent injury to the property. The court also found the claim belongs to owner of the property at the time of the taking or damage regardless of whether the property is subsequently transferred to another person. The inverse condemnation claim is not transferred to a buyer unless there is a “clear manifestation” of the transfer from the seller to the buyer.
In the case before the court, the judge held the new buyers of the property did not have standing to bring the inverse condemnation claim because they did not suffer injury as successors-in-interest.
They acquired the property long after the pipeline was installed, meaning after the taking or damage already occurred. As a result, the court granted the public agency’s demurrer, and the developer’s lawsuit.
The Take Aways from the NCP Imperial Holding
When buying real property, conducting a thorough due diligence is crucial. Moreover, to the extent the prospective buyer discovers there is a potential claim for inverse condemnation, it should make abundantly clear the transfer of the property includes an assignment of all rights, title and interest, including any takings claims.
While the buyer may have no recourse against the public agency, it may be able to pursue claims against the seller or the title insurance company, although those claims may be time-barred or have other barriers to recovery.
About Finkel Law Group
Finkel Law Group, with offices in San Francisco and Oakland, has more than 25 years of experience counseling buyers, sellers and developers in all manner of commercial and residential real estate transactions and entitlement actions.
When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with a real estate transaction or investment you may be contemplating for your privately owned business, please contact us at (415) 252-9600, (510) 344-6601, or info@finkellawgroup.com to speak with one of our attorneys about your matter.