When studying for the real estate exam we learn the government powers with the Acronym PETE:
- Police Power
- Eminent Domain
People often get confused regarding the difference between police power and eminent domain. Let me explain the difference:
The simple answer is that when property is taken under police power, as with zoning, compensation is not required; whereas with eminent domain, there must be payment of just compensation.
Let's go into more detail:
Police Power is the inherent power and constitutional authority of the government to adopt and enforce regulations and laws to promote public health, safety, morals, and general welfare.
In essence, it is an authority derived from individual state constitutions, which also vest the power in counties, cities, and municipalities to adopt and enforce appropriate local ordinances and regulations that are not in conflict with general laws.
Some examples of police power are:
- the right to tax
- the right to regulate land use through a general plan and zoning
- the right to require persons selling real estate to be licensed
- the right to regulate pollution, environmental control, and rent control.
Traditional concepts of police power have been broadened in recent years to include the furtherance of the aesthetic beauty of the community. For example, courts have upheld an ordinance restricting advertising in state parks and have upheld the regulation of the appearance of a community through design review boards.
Also derived from police power is the right to damage or destroy private property without compensation to the owner when it is necessary to protect the public interest. This may happen, for example, when a condominium unit is on fire and the fire department must destroy an adjoining unit to extinguish the fire and save the rest of the building.
Although the government would not be required to compensate an owner for such destruction, a valid claim may be filed against the insurance policy covering the burning unit or against the owner's own policy.
Eminent Domain is the right of the government to take private property. This can be used for public institutions such as schools, public utilities, highway construction, railroads and more.
However, the law will not allow compensation for lost profits and/or inconvenience, although severance damages may be awarded for a loss in value to the remaining property that is not actually condemned.
Through eminent domain the state may acquire land for streets, parks, public buildings, public rights-of-way, and similar uses. No private property is exempt from this exercise of government power.
If the government and the owner of the property cannot negotiate a satisfactory and voluntary acquisition of the property, the government can start a condemnation process to acquire the property. In this situation, an owner's basis for complaint would typically be that the intended use is not a satisfactory public use or that the estimation of value given to the property in the condemnation proceeding is unjust.
Upon the vesting of title in the government, all pre-existing liens and encumbrances are terminated. Anyone affected by this change, such as the lenders from a bank, must look to the condemnation money that was given to satisfy their claims against the property. A lessee is typically given the right to cancel their lease agreement when a significant portion of the property is taken under the power of eminent domain.