Colorado Court Holds that Restrictive Covenants Not Compensable Property Interests in Eminent Domain

The Supreme Court of Colorado recently reaffirmed that, under Colorado law, restrictive covenants are not compensable property interests in eminent domain cases. The case arose when the town of Monument purchased property in a residential subdivision to construct a municipal water tower. Because the lot was subject to the subdivision’s restrictive covenants, which forbade the construction of improvements except for single-family residences on lots in the subdivision, the town filed a petition in state court to perfect its title to the property and remove the restrictive covenant from the lot. Several landowners in the subdivision intervened in the action, arguing that they were entitled to compensation for the decrease in value to their property caused by the elimination of the restrictive covenant from the lot purchased by the town.

The town pointed to a previous case from the Supreme Court of Colorado, Smith v. Clifton Sanitation District, 134 Colo. 116 (1956), which held that restrictive covenants are not compensable. The landowners argued that the Smith case should be restricted to its facts, which involved landowners imposing a restrictive covenant on land sought by a condemning authority after the authority had entered into negotiations to purchase the property. The trial court agreed with the landowners, holding that the Smith case is distinguishable and that the restrictive covenants at issue in the present case were compensable property interests.

The Supreme Court of Colorado disagreed. The court noted that the kind of claim asserted by the landowners would be different from the classes of takings claims currently recognized under the state constitution. It further noted that, on balance, public policy militated against requiring compensation for restrictive covenants. It noted that all value of the restrictive covenant has not been lost, as the landowners can still enforce the covenants against lots other than the one taken by the government, while forcing the government to pay compensation to every lot owner would place an enormous burden on the government and could thwart public development projects. It therefore reaffirmed its ruling that “neighboring property owners are not entitled to compensation under the Colorado Constitution when the government uses land it acquires in a manner that violates a restrictive covenant.”

The Colorado rule reaffirmed in the case is the minority rule in the United States. Other states, including Virginia, have held that a government’s breach of a restrictive covenant is a taking of a property right for which compensation must be paid. See Meagher v. Appalachian Electric Power Co., 195 Va. 138, 146 (1953) (“We are of the opinion, then, that the acts of the defendant are a breach of the covenants and restrictions binding on its lands in these subdivisions, and constitute a taking or damaging of property rights for which compensation must be paid.”).

The Colorado case is Forest View Co. v. Town of Monument, No. 18SC793, decided June 8, 2020.

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