Borough of Saddle River v. 66 East Allendale, L.L.C., A-126 September Term 2011; Supreme Court; opinion by LaVecchia, J.; dissent by Albin, J.; decided October 21, 2013. On certification to the Appellate Division, 424 N.J. Super. 516 (App. Div. 2012). [Sat below: Judges Rodriguez, Sabatino and Fasciale in the Appellate Division; Judge Polifroni in the Law Division.] DDS No. 26-1-1704 [59 pp.]

The court considers whether, in a trial on just compensation, it was proper to allow the jury to hear evidence on the likelihood of a zoning change without the trial court first determining outside of the jury’s presence that there was a reasonable probability of a zoning change.

East Allendale, L.L.C., owned a parcel of land in the borough of Saddle River. Part of the property was located in the office zone (O-1), which restricts improved lot coverage to 30 percent of the lot’s total area. East Allendale submitted an application to the borough’s Zoning Board of Adjustment for a permit to build a 10,000-square-foot bank building and parking lot on the property. The site plan required approval of a bulk variance.

The board initially denied the permit and East Allendale withdrew its application. The borough filed a complaint exercising its power of eminent domain to acquire the subject property for use as a public park. The court entered an order determining the just compensation for the taking to be $1,593,625. The parties appealed and demanded a jury trial.

The borough filed a motion in limine seeking to strike the reports of East Allendale’s expert witnesses as inadmissible net opinions on the reasonable probability of a zoning change for the property. In the alternative, the borough requested that the court perform its gatekeeping function pursuant to State by Commissioner of Transportation v. Caoili, and conduct a preliminary N.J.R.E. 104 hearing outside the presence of the jury to assess whether there was a reasonable probability of a zoning change. The trial court denied the motion.

Based on East Allendale’s experts’ opinion that there was a reasonable probability that a bulk variance would be granted, East Allendale’s appraiser testified that the property had a fair market value of $5.25 million. The borough’s experts proposed a site plan that provided for a 3,312-square-foot bank, which did not require a bulk variance and was appraised to have a $1.325 million fair market value. The court found a reasonable probability of a potential zoning change and that the jury may consider the possibility of a zoning change in determining the property’s value. The jury returned a verdict for just compensation of $5.25 million.

The Appellate Division affirmed. The panel concluded that there was sufficient evidence of a reasonable probability of a zoning change and that the jury could consider that evidence. The panel found that Caoili does not require the judge to conduct a pretrial hearing in every case and that the judge did not abuse his discretion in performing his required gatekeeping function before closing arguments, instead of before the jury heard the evidence. The panel also determined that there was a sufficient objective foundation for the experts’ opinions that the zoning board would likely grant a bulk variance.

The court granted the borough’s petition for certification.

Held: The jury heard evidence about the probability of a zoning change that should have been ruled on by the judge in advance and outside of the jury’s presence. A new trial on just compensation is required because the jury was allowed to hear speculative evidence that undermined the soundness of its property-valuation determination.

In a condemnation action, the determination of just compensation is a function of the value of the property in light of its highest and best use, which is ordinarily evaluated in accordance with current zoning ordinances. Certain circumstances may permit valuation to include an assessment of a change in the permitted use of a property, but only if there is a reasonable probability that a zoning change would be granted.

In State by Highway Commissioner v. Gorga, the court concluded that a potential amendment to a zoning ordinance may affect the value of the property. The court cautioned, however, that a court must first determine whether there is evidence of the probability of the zoning change before submitting the issue to the jury. In Caoili, the court established a two-step process for evaluating potential zoning changes. First, as a gatekeeping function, the court must determine whether there is sufficient evidence to support the conclusion that a zoning change is “reasonably probable.” After that determination is made, the jury determines whether a premium should be added to the value of the property based on the probability of the future zoning change. The goal of Caoili‘s gatekeeping function is to avoid having the jury hear and consider speculative evidence that a zoning change was reasonably probable when assessing just compensation.

In this case, the trial court’s failure to hold a pretrial hearing on the reasonable probability of a zoning change permitted the jury to hear speculative testimony about the reasonable probability of a zoning change authorizing a bulk variance for the property. That result was at odds with the two-step approach established in Caoili. The expert testimony was insufficient to support the reasonable probability of a zoning change because it did not address all the criteria that the board would have to find in order to grant a bulk variance. East Allendale’s experts’ opinions lacked a proper foundation for their conclusions that zoning change was reasonably probable.

The jury was allowed to hear evidence about the probability of a zoning change that should have been ruled on by the judge both in advance and outside of the jury’s presence. Only if the court first determined that there was a reasonable probability that a zoning change would have been approved based on the standards governing such approval should the evidence have been presented to the jury for its consideration in connection with the jury’s evaluation of just compensation. The evidence that the jury heard on the likelihood of the zoning change in issue here was not assessed properly in accordance with that standard, and the quality of the evidence that the jury was allowed to consider undermined the soundness of the jury’s property-valuation determination.

The judgment of the Appellate Division is reversed, and the matter is remanded for a new trial on just compensation.

Justice Albin, dissenting, joined by Chief Justice Rabner, expresses the view that the majority has failed to give proper deference to the trial court’s evidentiary rulings and the jury’s fact-finding. Justice Albin states that the record clearly supports the trial judge’s decision to admit the expert testimony and to submit the issue concerning the zoning variance to the jury.

Justices Hoens and Patterson join in Justice LaVecchia‘s opinion. Justice Albin filed a separate, dissenting opinion, in which Chief Justice Rabner joins. Judges Rodrìguez and Cuff, both temporarily assigned, did not participate.

For appellant — Robert J. Kipnees (Lowenstein Sandler; Kipnees and Natalie J. Kraner on the briefs). For respondent — Peter H. Wegener (Bathgate, Wegener & Wolf). For amicus curiae New Jersey State League of Municipalities — Matthew Weng.