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CALIFORNIA EMINENT DOMAIN LAW BLOG

Eminent Domain Appeal Denied: Sacramento On Track For Kings’ New Arena, 4/21/14

After months of deliberation, negotiation and court appearances, the city of Sacramento won its appeal for possession of the former Macy’s building. The last piece of the puzzle completes the needed land for the new $448 million Kings arena scheduled to open in 2016.

But the battle for the ex-Macy’s building remains fierce. The City made an offer to the owners of the building, CalPERS and some mortgage certificate holders, for $4.35 million for the property. However, the ex-Macy’s owners believed the property is worth more than $10 million.

The disagreements during negotiations led the City to file an eminent domain lawsuit in January of this year. CalPERS was not against the City’s plans to acquire the property. However, the certificate holders were objecting to the plan. Their attorney, George Speir, raised the issue that the owners were not given a proper chance to object to the taking. He also argued that the City had incorrectly handled the eminent domain lawsuit. Ultimately, those arguments failed with the court holding that they City could proceed and the owners’ remedy was to challenge the amount of the compensation.

As the scheduled opening of the arena is in 2016, the Kings are wasting no time. The Kings future arena will be underway soon as demolitions begin in June. Sticking to a strict timeline, the NBA has stated that should the construction of the arena go beyond 2017, they have the right to buy the Kings from the City and move them out of town. Although Sacramento has acquired the property for the $448 million arena, it will be paid for by the Kings. The Kings have already spent $36 million on the Downtown Plaza for the rest of the needed property for the arena.

“Just compensation” for the property will be determined in trial and will include expert testimony on appraisal of the property. Meanwhile, the City still needs to complete its environmental review, create a financing package and develop an agreement with the Kings in regards to payment and development of the new arena. The development agreement will be introduced to the City Council late April or early May. The City has also indicated that it will be contributing a $258 million subsidy towards the project. Stay tuned for more updates on the new Sacramento King’s arena.

Author: A.J. Hazarabedian
To learn more about A.J. Hazarabedian, please visit http://www.eminentdomainlaw.net/aboutAJH.php.

Kelo, Landmark Eminent Domain Case: The Aftermath, 4/1/14

Nine years have passed since the controversial 5-4 decision of the United States Supreme Court in the eminent domain case of Kelo v. City of New London. What the advocates for economic development argued, fought for and supported has resulted in a 90 acre vacant wasteland where the homes of 7 small town residents once flourished.

Seizing the private property of the 7 Fort Trumbull residents would allow the City of New London to turn the property over to private developers to build luxury apartments, office buildings, retail space, restaurants and many more recreational hot spots. Pfizer, a leading pharmaceutical company, was also on board with the intent to build a research facility to generate new jobs and tax revenue for New London. The City seemed ecstatic about saving their “distressed municipality” which faced high rates of unemployment and economic decline and the Supreme Court ate up their sob story. To the Supreme Court, the idea of economic rejuvenation apparently outweighed the cost of the owners’ property rights and all American’s Constitutional liberties.

The 7 residents, including Susette Kelo, argued that taking private property and turning it over to a private company such as Pfizer “does not qualify as… public use.” However, the Supreme Court held otherwise stating that “the City’s development plan was not adopted ‘to benefit a particular class of identifiable individuals.’”

The Supreme Court, agreeing with the trial court, concluded that the City was rebuilding for growth and prosperity to benefit its citizens and that Pfizer “was not ‘the primary motivation or effect of this development plan’; instead, ‘the primary motivation … was to take advantage of Pfizer’s presence.’”

Pfizer was offered an 80-percent, 10-year property tax abatement for a $300 million research facility which the Supreme Court did not find suspicious.

So the residents were forced to take the compensation for the parcels they called home and the City was allowed to acquire the properties to turn them over to the developers to build their Pfizer project. If only this was a happily-ever-after story. Today the lots of those residents are filled with overgrown grass instead of high-rise buildings and upscale pedestrian “riverwalks.” In 2009, Pfizer backed out of its plan to build the research facility and redevelopment plans seized just as abruptly as they began.

The waters were a little murky; what does it matter? Possibly, those murky waters would have been forgotten if there was some type of redevelopment and economic growth in Fort Trumbull. But there wasn’t. The whole plan turned to nothing and the Supreme Court’s decision spiraled into a disaster. It shocked and scared many because it set precedent for private companies to take interest of citizen owned lands for their own economic interests. It caused many states, including California, to pass laws banning or restricting use of eminent domain for the purposes of economic rejuvenation. Indeed, in the wake of the backlash at Kelo, California did away with redevelopment agencies altogether.

In the end, all that is left are the memories of the once flourishing Fort Trumbull. Although there were no high-rise luxury apartments or gourmet restaurants, the residents of Fort Trumbull were happy with their home town. They fought a hard battle to save what was theirs; they pursued their rights to life, liberty and property. However, where there is no security for rights to property there is, consequently, no liberty.

On a somewhat brighter note for the future, dissenting Justice Antonin Scalia later predicted that the decision in Kelo would be overturned. He reportedly stated, “My court has, by my lights, made many mistakes of law…but it has made very few mistakes of political judgment, of estimating how far… it could stretch beyond the text of the Constitution without provoking overwhelming public criticism and resistance. Dred Scott was one mistake…Roe v. Wade was another… And Kelo, I think, was a third.”

Author: A.J. Hazarabedian
To learn more about A.J. Hazarabedian, please visit http://www.eminentdomainlaw.net/aboutAJH.php.

Rancho Cucamonga Moves Forward with Eminent Domain for New Shelby Place North Road, 7/12/12

By A.J. Hazarabedian

The city of Rancho Cucamonga began eminent domain proceedings to acquire a private dirt road from the Viramontez family, as reported by the Daily Bulletin.  The city plans on widening the road to 210 feet by 30 feet from Base Line to “connect the already developed Shelby Place, south of Base Line.”

According to the article, “Rancho Cucamonga proceeding with eminent domain for road,” the city offered $14,000 for the rights to the road and the Viramontez family made a counter-offer of $30,500, based on an appraisal obtained by the family’s hired appraiser.

Plans call for widening and paving the road, which as stated by the city’s director of engineering, Mark Steuer, would “provide better access to the subdivision tract, enhance traffic flow and provide access to public safety.”

For the Viramontez family, this private road has sentimental value as they have owned the land since the early 1940s and currently live on a 2.7 acre parcel near Baseline Road and Shelby Place.

It is important to note that a property owner is not required to accept the condemning agency’s offer. Instead, the property owner may make a counter-offer, as the Viramontez family did in this case, or may assert a higher value for his or her property if and when an eminent domain action is filed in court.

Often times property owners, tenants and business owners receive higher, and in some cases much higher, compensation than the amount of the condemning agency’s offer by asserting a claim for greater compensation.  An experienced eminent domain attorney should be contacted to evaluate each case on its own merits and assist in determining the appropriate course of action to the particular case.

At this point, if the City of Rancho Cucamonga rejects the Viramontez family’s counter-offer, the Viramontez family and the City will have to fight it out in the Superior Court – a prospect which given the relatively limited amounts involved, will probably not make much sense for either side.

Modesto Considers Using Eminent Domain for Pelandale Freeway Project, 5/23/12

By A.J. Hazarabedian

The City of Modesto will consider acquiring properties by eminent domain for the Pelandale Avenue freeway interchange project at tonight’s city council meeting.  According to the Modesto Bee’s article, “Modesto considers seizing sites for Pelandale freeway project,” the City has been negotiating with affected property and business owners since March, yet an agreement has been made with only one of the eight parcels required for the project.

The Pelandale Avenue project plans to “replace an inadequate three-lane span with a seven-lane crossing at a better angle for traffic, with new southbound ramps,” as reported by the Modesto Bee.  The interchange was not built for the amount of traffic it now receives due to the popular businesses in the area.

A few businesses will be affected by this project, including a Quik Stop gas station and convenience store, Dolphin Spas & Stoves, as well as a vacant commercial property.  Temporary construction easements for up to one year are needed from neighboring properties, of which one has agreed to an offer of $4,800.

Under California’s Eminent Domain law, the government is required to pay the “fair market value” of the property.  The fair market value of the property taken is the highest price on the date of valuation that would be agreed to by the seller, being willing to sell under no particular or urgent necessity for doing, nor obliged to sell, and a buyer, being ready, willing and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.

This is a bit different from the definition of market value used in the marketplace.  Put simply, owners in eminent domain proceedings are entitled to the “highest” price that might reasonably be expected.  This is determined by appraisal opinion, and the government’s and owners’ appraisers often differ substantially in their opinions of what the “highest” price should be.  The owners involved in this project are apparently dissatisfied with the City’s appraisals, so the City’s options are to either agree to pay the owners an amount that satisfies the owners, force the sales through eminent domain, or drop the project.

If the City decides to pursue eminent domain after tonight’s council meeting, these matters will then move into the hands of the Superior Court, and the owners will be entitled to a jury trial to determine the amount of compensation.  Stay tuned…

Cathedral City May Use Eminent Domain to Acquire Angel View Thrift Mart, 8/22/11

By A.J. Hazarabedian

A thrift mart in Cathedral City is facing eminent domain to make way for future downtown development, reports The Desert SunAngel View Thrift Mart has been operating at the East Palm Canyon Drive location since before the city was incorporated.  And now, if the city gets their way, the store will be forced to relocate.

The article, “Cathedral City plans to push Angel View move” quotes the store’s General Manager Tracy Powers stating, “[they] don’t want to stand in the way of the city accomplishing their goal [but they're] distressed in that the city is not more forthcoming in details on what they can do for [them].”

The thrift mart was offered $750,000 for their property but Powers says he is less concerned with the money and more interested in finding a suitable place to relocate the business which will maintain the store’s revenue.

As for a possible relocation site?  The city had offered Angel View another building on East Palm Canyon Drive over a year ago.  However according to the article, Powers and the city weren’t able to come to an agreement regarding the necessary repairs the building would have required.  Now, Powers has learned that this same proposed relocation site is slated for demolition.

Where does this leave the Angel View Thrift Mart?  For now, they’ll have to wait for Cathedral City’s council meeting on September 14th when the issue is expected to be discussed.

California Farmers Fear High-Speed Rail, 1/17/11

By A.J. Hazarabedian

California farmers are once again voicing their concerns about the potential high-speed rail project which has been a hot topic recently.  A route has yet to be determined, but one of the alternatives could displace 1,900 acres of property – of which 1,460 acres is farmland.

This morning’s Sacramento Bee featured an article, “Path of high-speed rail worries California farmers,” where both the farmers and the rail authority gave their arguments for and against the project.  Some of the farmers feel they are not being heard and that the rail authority is not giving them enough answers.  The authority’s deputy executive director, Jeff Barker, recognizes their fears however, and states “the authority cannot provide more specific answers until environmental reviews are completed on the route options.”  This February a draft environmental document is expected, which should discuss alternatives and provide some explanations of the plans.

The article explains the fears of the farmers.  It indicates that not only will their crops be disrupted, but they will have more challenges getting around, as the speed of the proposed train will prevent at-grade crossings.  This would mean the farmers would have to rely on new undercrossings or overpasses which may add inconvenience.

As an eminent domain attorney, I am interested in the issue of just compensation.  With farmers, taking land often means taking crops.  Valuing these crops and the loss of future business could be tricky.  The article briefly mentions the issue of compensation, addressing farmers concerns about whether they’ll be compensated only for the value of the land acquired, or “for future lost income from permanent crops like grapes, nuts or fruit crops.”  This particular issue is a prime example of why hiring an experienced eminent domain attorney is so important.  Eminent domain is an unusual area of the law and when dealing with your property and/or business, you want someone representing you who has extensive knowledge of the specific rules of eminent domain law.

Eminent Domain Okayed in Newport Beach, 6/10/10

By A.J. Hazarabedian

Newport Beach city council members voted to adopt a resolution of necessity this week to acquire a portion of Back Bay Court Property Co.’s property on Jamboree Road.

According to the Orange County Register article, “City OKs using eminent domain on mini-mall,” the sliver of land is needed for the Jamboree Road Bridge widening over State Route 73 project.  The property is located at 3601 Jamboree Road, which is a mini-mall right off the 73 freeway.

The article states, “Newport Beach offered $452,000 for the property along Jamboree Road at the 73 freeway, a figure that also includes compensation for temporary use of additional land during construction.”

The property owner said “a fair price hasn’t yet been established but that the city’s offer is insufficient.”  The article also mentions that the attorney for the property owner claims “the widening would result in removal of shopping center signs and construction of a retaining wall, resulting in ‘significantly less visibility’ for retail tenants.”

As we discuss in our “California Eminent Domain Handbook,” often times the government only needs a portion of a particular property, much like this situation in Newport Beach.  In these cases, just compensation is determined not only by the value of the part taken, but also by the damage to the remaining property.  Such damages are called “severance damages,” i.e., damages caused by severance of the remainder from the part taken.  Severance damages is one of those areas which is highly specific to eminent domain cases.  As such, it is imperative that only an appraiser experienced in eminent domain be retained to evaluate these damages.  Experienced eminent domain counsel, such as California Eminent Domain Law Group, can and do recommend to their clients such appraisers with whom the attorneys work on a regular basis.

Is There Eminent Domain in Cyberspace?, 4/30/10

By Glenn Block

We came across an interesting column in the Los Angeles Times today regarding what appears to be the first case of eminent domain – sort of – in cyberspace.  How is that possible?  A San Francisco company called Linden Lab has created a virtual world known as Second Life.  Their website purports, “a free 3D virtual world where users can socialize, connect and create using free voice and text chat.”

The “world” may be free; however, property (including islands, or other virtual real property) is purchased by users using real-world dollars.  A user then becomes the property owner and may develop it as he or she wishes.  That is, until Linden Lab changed their terms.

Originally, per the Los Angeles Times column, “A real-world battle over virtual-property rights,” citing a lawsuit filed in Pittsburgh, PA this month, Linden Lab, “repeatedly emphasiz[ed] that users would have indefinite ownership of any property purchased online.”  Users paid hundreds of real-world dollars, or more, to own property in this virtual world, with the promise it would be theirs and theirs alone for life.  This was what Linden Lab had claimed until the company, “quietly changed its contract terms to remove the concept of ownership and has confiscated the property of some users without compensation.”

Is this the taking of private property without payment of just compensation?  In situations involving real property (pun intended), the Fifth Amendment of the United States Constitution protects private property rights.  The government can only take private property for a “public use” and only upon payment of “just compensation.”  But does the Fifth Amendment extend to the virtual world?

In the virtual world of Second Life, if Linden Lab is the “government” do they need a “public use” to take virtual property?  Not likely.  Even though Linden Lab may be the “government” of its virtual world, it is not the government in reality and therefore not bound by the federal or state Constitutions.  As we point out in our “California Eminent Domain Handbook,” traditional examples of “public uses” for which the government might exercise its power of eminent domain include such things as schools, roads, libraries, police stations, fire stations, etc.  How about payment of “just compensation”? Again, they are not bound by the constitutional requirement of “just compensation.”  They may however, have a contractual obligation to pay compensation or damages.

According to the Los Angeles Times, “[t]he lawsuit seeks more than $5 million in damages for what it says was fraud and violations of California consumer protection laws,” as well as, “a judge’s determination that Second Life users do indeed own the property they purchase online, and as such they enjoy the same right as real-world property owners.”

Second Life property owners may want to consider hiring virtual eminent domain attorneys.

VISTA: Member breaks rank with Vista redevelopment panel; The North County Times, 3/17/10

By Cigi Ross

A member of a Vista redevelopment committee is being chastised by his colleagues for distributing a letter to downtown merchants and homeowners that warns their property may be in danger of being seized by the city.

Jerome Hymes, a member of the Project Area Committee, recently distributed the letter to about 35 downtown businesses alleging the city is trying to “seize private property from unwilling sellers” by using eminent domain.  It also states that the city has “no intentions to treat property owners as partners” in the redevelopment process.

Eminent domain is a process that allows a government agency to take private land for public use or development, as long as it pays fair market value as determined by a court.

The letter, dated Feb. 1, is addressed to Vista’s Director of Redevelopment and Housing Bill Rawlings, though Rawlings said in a Feb. 4 response that he had never received a copy of the letter until he learned of it through a newspaper reporter.

Rawlings said Hymes misunderstands redevelopment laws and the processes the redevelopment agency must follow.

During a meeting of the committee Monday, Hymes told fellow panel members he was dissatisfied with Rawlings’ response and decided to hand out copies of the complaint letter as a way to provide information to downtown property and business owners.

“Sometimes it takes a public to get government or cities to listen,” Hymes said.  “If other people are asking, maybe you’ll see it as important.”

Other committee members promptly took Hymes to task for distributing the letter and said it was full of inaccuracies.

“It’s a total laundry list of all the urban myths of redevelopment,” member David Nilson said.

Janet Puckett, a committee member and executive director of the Vista Village Business Association, called the letter a “scare tactic.”

“Going out and scaring these people with information that is incomplete or inaccurate is not what I (as a PAC member) should be doing,” she said.

In the letter, Hymes cites the agency’s attempt to purchase the Vista Riviera Motel and lease the property to a nearby car dealership, North County Ford.  Redevelopment officials are currently negotiating a purchase with the motel owners, who have said they don’t want to sell the property, and the City Council authorized the agency to proceed with eminent domain if an agreement isn’t reached.

Hymes also said other committee members have an insensitive attitude to property owners who might not want to sell their properties to the agency — citing a remark Nilson made at a Jan. 11 meeting to “bulldoze” a property.

“I have a rude sense of humor,” Nilson said on Monday.  “I didn’t really mean it.”

“We all understand David was just making a flip comment,” Puckett said.

Rawlings said last month that the assertions Hymes is making about redevelopment are simply not correct.  He said Vista’s redevelopment plan has language that prohibits residentially zoned property from being taken through eminent domain and that the redevelopment agency is required by law to go through several steps, including negotiations with owners and City Council approval, before acquiring a property through eminent domain.

Rawlings said city officials would meet with individual property owners if the city becomes interested in their property.

“This effort has not been surreptitious, but has been very open and transparent,” Rawlings wrote in his response letter.

But Hymes said Rawlings’ and other members’ comments had not eased his concerns.

“I won’t accept your statements that (the letter was) inaccurate.  I won’t say I won’t write another letter,” Hymes said.

Rawlings said the city will begin unrolling a communication plan in May or June that will give property and business owners more information about redevelopment in the Paseo Santa Fe Corridor.

The redevelopment agency last month sold $36 million in bonds to begin purchasing property in the corridor, which stretches along South Santa Fe Avenue from Monte Vista Drive in the south to Orange Avenue in the north.

The redevelopment agency plans to purchase parcels it can bunch together, then sell them to private developers who will construct mixed-use buildings with ground-floor retail topped by offices and condos.

The North County Times: http://www.nctimes.com

Condemnation Clauses in Real Estate Agreements: Los Angeles Lawyer, 9/2005

By Glenn L. Block and Robert T. Flick

 

Certain client instructions should alert counsel to consider taking a different tack. Real estate practitioners must be particularly wary when they hear, “Don’t nit pick the document, just make the deal.” Or, “Forget about the condemnation provision—this property will never be taken.” Wise counsel know that in every real property transaction, it is worthwhile to pause, concentrate and get everything right when it comes to the issue of eminent domain.

As California’s population continues growing and the competition for the use of its real estate becomes keener, cities and other governmental agencies are reaching more frequently for their eminent domain tool. They are doing so as a means to expand their education infrastructure[1], upgrade their economic base through the addition of new retail stores or other projects that generate high revenue and jobs, and mitigate ever-growing transportation woes. The U.S. Supreme Court’s recent decision in Kelo v. New London[2] constitutes icing on the condemnor’s cake and raises the specter of condemnation in virtually all real estate transactions.

While often overlooked, typical condemnation provisions in real estate transactional documents can have unexpected and unintended consequences if an eminent domain proceeding affects the subject property. A real estate agreement cannot prevent a condemnation from occurring, but a little attention paid to the condemnation provisions can provide greater certainty, help to assure desired outcomes, and manage the parties’ expectations in the event of an eminent domain action.

All private property in California is subject to the power of eminent domain—the government’s right to acquire, or take, private property for public use.[3] The power can be exercised by all governmental entities—including cities, counties, school districts, redevelopment agencies, and transportation agencies—and is very difficult to repel. Although it is possible to attack successfully a decision to take private property, most challenges merely delay the inevitable. Compensation usually is the focus for a party whose property is condemned, and a well drafted condemnation clause can ensure that the party is compensated to the extent required by law for the taken property.

The taking entity must pay “just compensation” for the condemned real property, including all interests in the property and improvements to it.[4] A business operated on the property also may be compensated for loss of business goodwill and is entitled to relocation benefits.[5] The property owner in a condemnation action must be “put in as good position pecuniarily as he would have occupied if his property had not been taken.”[6] Just compensation typically is computed on the basis of the fair market value of the property that is being taken.[7] Fair market value, in turn, is defined as the highest price the property would bring in the open market based on the property’s “highest and best use.”[8]

Although the obligation to pay just compensation in a condemnation action is controlled by California’s Eminent Domain Law,[9] a party’s entitlement to compensation will be affected by the provisions of a condemnation clause in a real estate agreement.[10] Depending on the nature of the agreement, a condemnation provision may:

  • Allocate compensation between or among the parties to the agreement.
  • Maximize the amount of compensation payable.
  • Specify which parties are allowed to participate in the compensation process.
  • Provide assurances—usually in the form of representations and warranties—regarding the threatened or actual existence of an eminent domain proceeding.

Provisions for Common Contracts
A variety of clauses may achieve these objectives. Different approaches may be needed for each of the most common contracts involving real property—leases, purchases and sale contracts, options to purchase, deeds of trust, easements, and covenants, conditions, and restrictions (CC&Rs).

Leases. Landlords and tenants have separate and distinct interests in real property. In a condemnation action, however, the potential exists for the intermingling of these interests. Practitioners should draft lease condemnation clauses to ensure that the interests of landlords and tenants are separately compensable and that the condemnation award flows to the intended party or parties.

A lease condemnation clause should address:

  • The allocation between landlord and tenant of compensation for “improvements pertaining to the realty.” The Eminent Domain Law uses this term and deems these improvements to be compensable.
  • The allocation between landlord and tenant of compensation for any leasehold bonus value.
  • The rights and obligations of the parties in the event of a partial taking.
  • The allocation between landlord and tenant of compensation for any purchase option that may be contained in the lease.

When the entirety of the property subject to a lease is condemned, the lease terminates, and the tenant’s obligation to pay rent ceases.[11] Nevertheless, the tenant’s entitlement to compensation in the condemnation action survives and is not affected by the lease termination.[12] The condemnation clause, if one is present, generally will control the rights of the parties to compensation in the condemnation action.[13] In the absence of condemnation clause, entitlement to compensation may be determined by examination of other lease provisions, such as those for alteration or termination. Unfortunately for the tenant, however, there is a good chance that a tenant will not be compensation for improvements it owns unless the condemnation clause property provides for compensation for them. In particular, the issues of compensation for improvements and for leasehold bonus value must be addressed specifically in the condemnation provision to avoid unexpected and undesired results for either the landlord or the tenant.

“Improvements pertaining to the realty” is a statutory term of art defined as items installed by any method for use on the real property that cannot be removed without substantial economic loss or causing substantial damage to the property.[14] These items may include buildings, structures, machinery, equipment, furnishings, and fixtures. Improvements pertaining to the realty are compensable notwithstanding the fact that the tenant under the lease may have the right or obligation to remove them upon expiration of the lease.[15] Also, while these items may be considered personal property in the contract between the landlord and the tenant, for purposes of condemnation proceeding they are compensable as party of the realty.[16]

“Improvements pertaining to the realty” may be a meaningful term of art to those who litigate eminent domain but not to those who negotiate leases. In lease condemnation clauses, these improvements generally are referenced by terms that are common in the real estate industry, such as “tenant improvements” or “trade fixtures.” These real estate terms are not mentioned in the Eminent Domain Law, so issues related to whether tenant improvements or trade fixtures are compensable, and who is entitled to compensation, are litigated frequently. These differences in terms are more than semantics. They can have surprising outcomes that can be avoided by simply referring to tenant improvements and trade fixtures in the condemnation clause of the lease as improvements pertaining to the realty and clearly stating which party is entitled to compensation.

Also compensable in a condemnation action is the loss of the right to possess the premises for the rent provided for in the lease during the remaining unexpired term of the lease, including any option terms (whether or not the options have been exercised at the time of commencement of the condemnation action). The value of the lease possessory right often is referred to as the leasehold bonus value and is apportioned from the compensation for the fee interest in the property.[17] A leasehold bonus value claim typically is not negotiated in advance by the parties, but it may entitle the tenant to a significant share of the compensation for the fee and thus lead to an unexpected and severe result. Fortunately for the landlord, a tenant may waive its right compensation for leasehold bonus value, and many condemnation clauses include such a waiver.

The appropriateness of a tenant waiver of leasehold bonus value depends on the nature of the lease. For example, it is not uncommon for long-term ground leases to be subject to a significant leasehold bonus value claim, because the market lease rates often increase over time at a rate that exceeds the rent amounts scheduled in the lease, resulting in the tenant having the right to possess the premises at below market rents. The leasehold bonus value claim in the context of a ground lease may amount to 50 percent, or more, of the compensation awarded for the fee title to the real estate. Given the tenant’s long-term use and possessory expectations, as well as the fact that ground leases usually delegate to the tenant many of the risks of ownership, the tenant’s receipt of some or all of this compensation is not necessarily unfair or unwarranted. IN shorter commercial leases (5 or 10 years), however, the leasehold bonus value claim—which may still amount to several hundred thousand dollars depending on the schedule lease rate and the length of the remaining unexpired term—is less likely to be an appropriate part of the tenant’s expectation. The landlord typically asserts that the landlord, not the tenant, is in the business of owning the property and taking the risks and reaping the rewards associated with that ownership. Accordingly, the landlord should receive all compensation paid for taking of fee title to the property whether arising from increases in market rents or otherwise.

These issues can be addressed as part of a lease’s condemnation clause with the following language:
Any award for the taking or damaging of all or any part of the Premises under the power of eminent domain, or any payment made under the threat of the exercise of such power, shall be the property of the Landlord, except that Tenant shall be entitled to compensation separately awarded to it, if any, for improvements pertaining to the realty owned by Tenant, loss of business goodwill and relocation benefits.

The foregoing clause effects a waiver by the tenant of its leasehold bonus value claim, but preserves the tenant’s entitlement to compensation for its improvements pertaining to the realty.

When only a portion of the property subject to a lease is condemned, it may be appropriate for the lease to be terminated or for the terms of the lease to be modified. Examples of partial takings include the loss of spaces in a parking lot, or the taking of portions of a building or part of an industrial yard, each of which may or may not prevent the tenant from using the premises for the tenant’s intended purposes. If the lease does not address termination upon a partial taking, the Eminent Domain Law leaves the issue up to the judge,[18] specifying that the lease terminates if the court determines “than an essential party of the property…is taken or that the remainder…is no longer suitable for the purposes of the lease.”[19]

The court in a partial taking action may not find in a particular case that an essential party of the property has been taken or that the reminder is no longer suitable for the intended purposes, or the court may make such a finding in a situation in which the landlord or the tenant would prefer that the lease remain in effect, with modifications. Therefore, the possibility of a partial taking should be addressed in the condemnation clause during the negotiation of the lease agreement, when the parties are able to negotiate the circumstances under which a termination, partial termination, or modification of the lease would be appropriate. As alternatives to termination, the condemnation clause may provide the landlord the opportunity to restore, repair, or reconstruct any improvements or otherwise mitigate the impact of the taking to reserve the tenancy and identify specific circumstances or events that would justify the termination of the lease, even if the statutory partial taking termination standard is not met. A well-drafted condemnation provision that addresses partial termination should include a waiver of the parties’ statutory right to terminate the lease if the parties want a different standard to apply.

Purchase and sale contracts. For a typical commercial real estate purchase and sale contract, in which the entire time period from execution of the agreement to closing typically does not exceed 90 days, condemnation is primarily a buyer’s due diligence concern. Although there is no centralized clearinghouse for information regarding potential eminent domain proceedings, there are several steps that practitioners can take on behalf of their buyer (or tenant) clients to gain access to all the available pertinent information:

  • Conduct a review of the preliminary title report to determine if the property is within a redevelopment area. Title reports may or may not show this information. Indeed, title companies may take the position that filed descriptions of redevelopment areas are not party of the public record they are required to search, disclose, and insure. Thus counsel should consider the preliminary report to be only one of the available resources.
  • Round up the usual suspects. Contact local agencies that may be likely condemnors, such as counties, cities, school districts, water districts, Caltrans, and local redevelopment agencies. Inquire about proposed projects, including parks, schools, public facilities, and street and highway expansions or improvements. It may not be practical to contact every conceivable agency, but cities, counties, redevelopment agencies, and school districts are among the most common condemning authorities and should be contacted in each instance. Common sense and a property-specific diligence plan will help determine the appropriate scope of due diligence.
  • Ask the seller to represent and warrant in the purchase and sale agreement whether the seller has been contacted by any governmental agency or other entity regarding the possible acquisition of all or a portion of the property, and whether any governmental agencies or other entities have requested or conducted environmental investigations or appraisal inspections. Governmental bodies generally conduct environmental investigations and appraisal inspections in advance of making a condemnation offer.

The condemnation clause in a purchase and sale contract also should address which party bears the risk of loss—and which party is entitle to the condemnation award if the property is condemned before the transaction is completed. In the absence of a relevant contractual provision, the party who bears the risk of loss at the time of the condemning authority may take possession of the property generally is entitled to the owner’s portion of the award.[20] If neither legal title nor possession has been transferred to the purchaser by the time the condemning authority may take possession, the seller receives the award.[21] The statutory scheme may appear fair at first blush, but it may create an undesirable result for many reasons. The seller and purchaser may agree that the purchaser can enter the property early to make repairs, begin planning, or even commence a work of improvement. If a full or partial condemnation occurred, it would be unexpected and unfair for the purchaser to receive the condemnation proceeds simply by virtue of having an early possession right. Additionally, the parties may desire that payments for partial takings be handled contrary to the statutory protocol, such as by allowing the purchaser to continue with the transaction and receive an assignment of, or credit for, proceeds payable to the seller.

Finally, a condemnation clause in a purchase and sale agreement should provide that the property conveyed includes all actions, causes of action, and all rights to insurance and condemnation proceeds pertaining to the property. This makes certain that the purchaser may participate in and receive any award from a condemnation proceeding, even one that may have commenced before the closing of the purchaser’s acquisition.

Options to purchase. The owner of an unexercised option to purchase real property or improvements possesses a compensable property right in a condemnation action. In the absence of a clause in the option agreement to the contrary, the measure of damages to the optionee is the excess, if any, of the condemnation compensation above the option purchase price.[22] Once again, many option agreements fail to address the possibility of condemnation, and a landowner might be surprised to find a portion of the compensation flowing to the optionee—a situation that could have been prevented by including the optionee’s waiver of compensation in the agreement.

Deeds of trust and financing agreements. The condemnation clause in a deed of trust or other financing agreement should address how the outstanding obligation is to be satisfied, including interest and attorney’s fees, in the event that all or a portion of the collateral is taken by eminent domain. The lienholder generally has a priority interest in the condemnation award to the same extent as it would have a priority interest in the proceeds of a typical sale. Under California law, however, the lender is not entitled to enforce a prepayment penalty provision in a condemnation action.[23]

The lender should become a party to the action, whether or not it is named or served, as a “person” who claims an interest in the condemned property.[24] An adequately collateralized loan usually can be satisfied from the initial deposit of probable compensation that the condemning authority places with the court in order to obtain possession.[25] The lienholder can seek an order in the condemnation proceeding authorizing distribution of the proceeds that are necessary to satisfy the lien.[26] Often, the borrower’s attorney will facilitate satisfaction of these obligations from the deposit to minimize the accrual of interest and to avoid, or at least minimize, the borrower’s obligation for the lienholder’s attorney’s fees. When the borrower is cooperative, the distribution can be accomplished by a stipulated order. The loan documents should include the right of the lienholder to have condemnation proceeds paid to the lienholder, because this will be a necessary allegation to obtain an order.

If the deposit is insufficient to satisfy the outstanding balance or if there are other disputes, the matter may be resolved in a judicial apportionment of the final condemnation award.[27] In unusual circumstances, when a loan is significantly undercollateralized and the borrower walks away from the property, the lienholder actually may choose to be the one to defend the action (in the borrower’s name or otherwise) to seek greater compensation and maximize recovery on its loan. The Eminent Domain Law does not specifically provide this right, so the lender can protect itself by including this right in the deed of trust or financing agreement.

For partial takings in which a significant portion of the property is condemned, impairment of security may also be an issue. Under the Eminent Domain Law, a lienholder is entitled to share in the condemnation award for a partial taking “only to the extent determined by the court to be necessary to prevent an impairment of the security.”[28] This statute applies even if a condemnation clause provides otherwise.[29] The lien will remain on the property not taken. The Eminent Domain Law also addresses the allocation of an award for a partial taking among senior and junior lienholders.[30]

Rather than attempting to deal with the issue of allocation for a partial taking, the deed of trust or financing agreement—or the subordination and intercreditor agreement if there are multiple loans secured by the same property—may be better served by focusing on the use of funds and the effect of the taking on the contractual relationship. Specifically, the parties may prefer to apply the condemnation award for a partial taking to the repair, restoration, or reconstruction of the property and improvements. Alternatively, if the taking exceeds a certain percentage or dollar value, the parties may choose to have the proceeds used to pay down the loan and have the lending relationship terminate.

Easements and CC&Rs. Condemnation clauses are often conspicuously absent from easement agreements or agreements establishing CC&Rs. Easements or CC&Rs should address compensation for the different interests and the rights and obligations of the parties in the event of a taking. In the absence of an agreement to the contrary, if the servient tenement is acquired, or the dominant tenement’s interest is otherwise extinguished or damaged, just compensation will be determined as the diminution in the value of the dominant tenement measured before and after the taking.[31]

The characterization of a condemnation provision as boilerplate tends to diminish the attention that parties should be willing to devote to it as they negotiate their real estate agreements. A condemnation clause can materially affect the rights of the parties. By crafting carefully tailored condemnation provisions, practitioners can help their clients avoid unpleasant surprises and unintended consequences from an eminent domain proceeding involving the subject property.



 

[1] For example, the Los Angeles Unified School District has a plan that calls for the development of a $14 billion campus building program to be completed by 2012, with eminent domain as one of the contemplated acquisition tools. See, e.g., Cara Mia DiMassa, An Education in Expansion, L.A. Times, Nov. 23, 2004, at A1.

 

[2] Kelo v. New London, 125 S. Ct. 2655 (2005). In a 5-4 decision, the U.S. Supreme Court ruled that the taking of property by the government from one private party to give to another private party constitutes a “public use” so long as it is done with the hope of creating jobs, increasing tax revenue, or otherwise providing economic stimulation. Justice O’Connor, writing for the dissent, sees the decision as an abandonment of the public use restriction on the government’s eminent domain power, leaving open the possibility that any property may be taken by the government: “Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

 

[3] U.S. Const. amend. IV; Cal. Const. art. 1, § 19.

 

[4] Code Civ. Proc. §§ 1263.010, 1263.205.

 

[5] Code Civ. Proc. § 1263.510; Gov’t Code §§ 7262 et seq. Generally the rights of a business to compensation for loss of business goodwill and relocation benefits are not directly affected by a condemnation clause.

 

[6] United States v. Miller, 317 U.S. 369, 373 (1943).

 

[7] Code Civ. Proc. § 1263.310.

 

[8] Code Civ. Proc. § 1263.320. In certain limited situations, such as property owned by nonprofit organizations and special use property, valuation is computed based on the replacement cost of the taken property. Code Civ. Proc. § 1263.321.

 

[9] Code Civ. Proc. §§ 1230.010 et seq.

 

[10] See Code Civ. Proc. § 1265.160; Dix Box Co. v. Stone, 244 Cal. App. 2d 69 (1966) (lease provided that tenant would not share in condemnation award notwithstanding that statutory sharing might have been available); City of Beverly Hills v. Albright, 184 Cal. App. 2d 562 (1960) (lease provision by which tenant divested itself of right to fixtures operated to bar tenant from compensation when the fixtures were taken).

 

[11] Code Civ. Proc. § 1265.110.

 

[12] Code Civ. Proc. § 1265.150.

 

[13] Code Civ. Proc. § 1265.160. See also City of Vista v. Fielder, 13 Cal. 4th 612, 618 (1996) (“[I]f the lease does not provide to the contrary, the rules in question [Eminent Domain Law] apply.”).

 

[14] Code Civ. Proc. § 1263.205. See also County of San Diego v. Cabrillo Lanes, Inc., 10 Cal. App. 4th 576 (1992) (providing judicial interpretation of § 1263.205).

 

[15] Code Civ. Proc. § 1263.210.

 

[16] Concrete Serv. Co. v. California ex rel. Dep’t of Pub. Works, 274 Cal. App. 2d 142 (1969).

 

[17] Code Civ. Proc. §§ 1260.220, 1265.150. At trial, the jury will first determine the amount of compensation to be paid by the condemnor for the taking of the real property. Once the amount of compensation is determined, in the same proceeding the jury will “determine the respective rights of the defendants in and to the amount of compensation awarded and shall apportion the award accordingly.” Code. Civ. Proc. § 1260.220(b).

 

[18] Code Civ. Proc. §§ 1265.120, 1265.130.

 

[19] Code Civ. Proc. § 1265.130.

 

[20] Redevelopment Agency v. Maynard, 244 Cal. App. 2d 260, 265 (1966). See generally Civ. Code § 1662 (Uniform Vendor and Purchaser Risk Act).

 

[21] Brick v. Cazaux, 9 Cal. 2d 549 (1937); County of Santa Clara v. Curtner, 245 Cal. App. 2d 730 (1966).

 

[22] County of San Diego v. Miller, 13 Cal. 3d 684 (1975).

 

[23] Code Civ. Proc. § 1265.250.

 

[24] Code Civ. Proc. §§ 1250.230, 1250.320.

 

[25] The condemnor must make a deposit of probable compensation, in the amount of its highest appraisal, in order to secure prejudgment possession of the property. Code Civ. Proc. §§ 1255.010, 1255.410.

 

[26] Code Civ. Proc. § 1255.210.

 

[27] Code Civ. Proc. § 1265.220.

 

[28] Code Civ. Proc. § 1265.225 (a).

 

[29] Code Civ. Proc. § 1265.225 (b) & Law Revision Commission cmt. (providing that the lienholder and the borrower may agree “after commencement of the proceeding” to apportion the condemnation proceeds without regard to impairment of security).

 

[30] Code Civ. Proc. § 1265.230.

 

[31] Redevelopment Agency v. Tobriner, 153 Cal. App. 3d 367, 372 (1984).

 

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COPYRIGHT © 2010 Arthur J. Hazarabedian, Esq.