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CALIFORNIA EMINENT DOMAIN LAW BLOG

Business owners don’t want to budge: The Fresno Bee, 9/23/07

By Matt Leedy

 

The Baskin family has been fixing up car seats and selling parts in downtown Fresno for 90 years, and fourth-generation owner Bruce Baskin has no interest in moving the business.His voice and temper rise when he talks about eminent domain and the city’s plans to replace Baskin’s Auto Supply and other businesses just south of Chukchansi Park with town homes and apartments.

“We don’t want to go anywhere,” says Baskin, 48.

 

Baskin’s is in the middle of a six-block area that the Fresno Redevelopment Agency has targeted for homes, stores and fountains promised by Cleveland-based developer Forest City Enterprises.

 

The redevelopment agency — which plans to buy the land and lease it to Forest City — has the power of eminent domain and can acquire the property from landowners whether they want to sell or not.

 

Many buildings in the six blocks are vacant, boarded up and fenced off. The area has been labeled blighted by the agency.

 

But some businesses thrive, including Baskin’s — where Bruce and his father Richard Baskin often are busy installing new upholstery in classic cars.

 

“When everyone moved north and fled downtown, we stayed here and stuck it out,” says Bruce Baskin from inside his Broadway Avenue business. “Now all these big shots want to do something downtown, and they’re going to make us leave. Well, I don’t think that’s right.”

 

Fresno City Council members and redevelopment agency officials say eminent domain would be used only if property owners won’t sell willingly or join the project.

 

But it’s important to Forest City that the city has the option.

 

Forest City had been in talks with the city several years ago about a different version of the project. Plans later were changed to emphasize residential over retail and company officials said the project was put on hold while they waited for the outcome of Proposition 90, a state ballot measure that would have severely limited the use of eminent domain.

 

The proposition failed to win voter approval last year, and Forest City was back in City Hall last month presenting plans that won praise from the council.

 

There are about 40 properties that the city must either purchase or get the owners to participate in the six-block project, considered the first phase. And there are many more in Forest City’s full project area, which spans another two phases and 85 acres southeast of the baseball stadium. The company only has a timetable for the six blocks. It hopes to finish the initial $232 million project in four years.

 

In January, the council plans to vote on a spending plan that could include a $100 million public investment in the project. Forest City also must complete a yearlong environmental review, which will include suggestions for three buildings on the local historic registry. Those suggestions could include preserving the buildings, moving them or preserving only their facades, said redevelopment agency executive director Marlene Murphey.

 

The redevelopment agency won’t attempt to buy property in the south stadium area until the environmental review is finished. And then it will first try to acquire the property without using condemnation powers. Agency officials predict that if necessary it would take two years for the eminent domain process to start.

 

Landowners don’t have to sell. They can choose to participate in the redevelopment plans by making all the changes and improvements required by the city.

 

This could be a daunting task for several businesses. Required changes could be as extensive as adding second-floor apartments, and local businesses would have to foot the bill. Redevelopment agency officials said they would help secure small business loans or government grants.

 

But Richard Baskin said it would likely be too costly to conform his building to the city’s plans.

 

“If the city wants to pay for it, fine. Maybe we could do that. But for me to do it, I don’t see how it would be possible,” Baskin said.

 

If landowners balk, the eminent domain process could begin.

 

The agency would hire a team of appraisers that would meet with owners and determine the highest possible value of the targeted property.

 

Property owners could hire their own appraisers and be reimbursed for up to $5,000 of the cost. Murphey says the agency must consider these appraisals but isn’t required to use them.

 

The agency would then need approval from the council for each property it buys, paying the highest possible value determined by the appraisers.

 

Closing costs are paid by the agency, which also must help find a new home for the businesses and pay moving expenses.

 

Once landowners find a new location they pay the same property taxes charged on their previous property.

 

Murphey says eminent domain is rare in Fresno.

 

In the last 10 years, the agency has bought about 250 properties, she says, and 98% of them have been voluntary sales.

 

The agency used eminent domain to buy a liquor store to make room for the Kearney Palms Shopping Center near Fresno Street and Highway 99, which opened in 1999.

 

“Of course, eminent domain is absolutely, positively the option of last resort,” City Council Member Larry Westerlund says. “I hope there will be folks who are willing sellers. Certainly they must realize the area around them is very depressed. And we have the opportunity to create something really great for downtown, and all of Fresno, with a vibrant, living, breathing area.”

 

Reviving downtown is a good justification for eminent domain, agrees Bill Higgins, a legislative representative for the League of California Cities.

 

“If we’re going to invest in our inner cities, we need to make sure the investment works,” says Higgins, adding that eminent domain power helps ensure cities can assemble large pieces of land and market them to developers willing to build big projects.

 

But eminent domain has plenty of critics.

 

The Howard Jarvis Taxpayers Association is collecting signatures for a ballot initiative that would prohibit governments from using eminent domain to buy property that would be turned over to private companies. Cities under the proposal still would be allowed to use condemnation powers to build hospitals, schools, roads and other public-use projects.

 

“The abuses in eminent domain occur when city councils and redevelopment agencies pick winners and losers in the private-development game,” says Jon Coupal, president of the association. “The losers are usually local property owners and family businesses.”

 

In downtown Fresno, a handful of families may prove to be stubborn holdouts.

 

Rick and Nanette Stockle own Mecca Billiards and have sold pool tables from their Fulton Street building for 21 years. Mecca has become well known, in part, for the colorful paint job on the Stockles’ building. It’s pool-table green and decorated with giant billiard balls and a pool cue.

Nanette Stockle does not want to start over in another location.

 

“We’ve prospered down here, but it took us a while to get established,” she says.

 

The Mecca building is 7,500 square feet and has a parking lot of an equal size. Stockle doubts she can afford a similar-sized setup anywhere else.

 

“Where are we going to go?” she asks.

 

Larry Kragh doubts he can move his Arrow Electric Motor Service from its Broadway Street locale just south of the stadium.

 

Kragh’s 55-year-old company started by his father repairs air conditioners and turbines that farmers use to move water to their crops. He says most of his machines are old and wouldn’t survive a move. And some of his equipment can’t be used legally at another location. The city would be required to move it, but not to offer further aid.

 

Kragh uses two ovens to burn off insulation so old turbines can be repaired. One is 33 years old; the other 22 years old. He has permits to use them in his 22,500-square-foot building. But Kragh says new air pollution control regulations would prohibit him from getting permits for the ovens at another location.

 

Kragh also fears he would lose customers if he moved.

 

“I have a business that’s been here since 1952. I grew up with my Dad in this business and I’ve worked all my life here,” Kragh says.

 

“Everyone knows where I’m at. Why would I want to move?”

The Fresno Bee: http://www.fresnobee.com

Money flows into competing eminent domain measures: Capitol Weekly, 9/20/07

By Malcolm Maclachlan

Republicans were able to head off a Democrat-backed eminent domain measure in the closing days of session last week, despite a huge lobbying blitz by the League of California Cities and other proponents. The measure’s supporters say Republicans got most of what they wanted in amendment negotiations–and probably shot themselves in the foot by rejecting it.

The two sides will now be heading into a ballot initiative battle next year. The League is pushing a narrow measure what they say would protect homeowners. A competing initiative from the Howard Jarvis Taxpayers Association would make more far-reaching changes–such as abolishing rent control in California.

ACA 8 by Assemblyman Hector De La Torre, D-South Gate, would have placed an initiative on one of next year’s ballot, probably in June, that would have put several limits on the use of eminent domain by local governments in California. Because it would have altered the state constitution if approved by voters, the measure needed a two-thirds vote in the Assembly, or a total of seven Republican votes. De La Torre said he went into the September 11 vote thinking he had at least some of the Republican votes he needed.

In the end, he got zero–and a couple of Democrats abstained as well. De La Torre said he became worried a few months ago when Assembly Republican leader Mike Villines, R-Clovis, appointed Assemblywoman Mimi Walters, R-Laguna Niguel–a hardliner on eminent domain–as lead negotiator with the League on the bill. Walters pushed ACA 2, a competing eminent domain effort that would have placed numerous restrictions. This including allowing owners to challenge eminent domain efforts even after they had accepted payment for their property. It stalled in the Assembly Judiciary Committee in early July.
California

“It was never really clear whether the [Republican] Caucus took a position on this or whether members were free to vote their conscience,” De La Torre said.

This led to a rather strange floor debate, De La Torre said–one in which Republicans complimented him, then urged defeat of his measure.

“Never have I been praised so much and gotten so little,” De said after the vote.

The opposition was led by the Howard Jarvis Taxpayers Association. The organization’s president, Jon Coupal credited Walters with leading the charge against the bill in the Assembly. He said his group’s goals go beyond defeating what he said was an initiative the lacks needed protections. Coupal pointed to a $1.2 million in lobbying fees paid by the League in the first six months of this year. Much of this money went to lobbying for ACA 8.

The California Redevelopment Association (CRA), another supporter of ACA 8, paid $272,000 over that time, much of it to Nielsen Merksamer, a prominent lobbying firm that also represents several counties. The League and the CRA are supported by taxpayer funds, he said. He likened spending taxpayer funds on this lobbying to “giving ammunition the enemy.”

“Clearly, that’s not in the best interests of taxpayers,” Coupal said.

Both sides said that the end-of-session standoff came despite months of negotiations. The League talked extensively to both Walters and Coupal–and eventually gave them most of what they wanted. ACA 8 was originally written to protect only single-family homes from being taken by eminent domain and then sold or given to private interests for redevelopment. De La Torre took amendments to include churches, small businesses and farmland as well.

When Republicans started bringing up protections for vacation homes, De La Torre said, he knew the other side wasn’t negotiating in good faith–because there are few vacation homes in the kind of blighted areas where eminent domain is usually exercised.

“There were so many red herrings it fouled the water,” De La Torre said.

“Republicans lost an opportunity to pass an eminent domain reform package that we know polls in the 70 percent range,” said Mike Madrid a Republican consultant and adviser to the League of Cities. “Now they are taking their chances on the Jarvis measure that is far less popular with voters and likely to fail. Ultimately, what this comes down to is Republicans still don’t know how to take a win.”

Coupal tells a different story. It was the League that brought issues near the end that scuttled negotiations–specifically demands from environmentalists that a poison pill be placed into the measure.

Because it is a constitutional amendment and not a bill, ACA 8 is eligible to come back next year. But De La Torre said that he might not bring it up, given that the League and the Jarvis group will probably have competing initiatives on ballots next year. The League is backing a narrow measure that would protect only single family homes. It has been cleared for signature gathering by the Secretary of State.

Meanwhile, the Jarvis group is pushing a more-far reaching measure that would, among other things, abolish rent control in California. According to the summary on the Attorney General’s website, the Jarvis initiative “Prohibits rent control and similar measures. Prohibits deference to government in property rights cases.” Coupal said that he sees eminent domain and rent control as aspects of the same issue.

“There are different ways for the government to take your property,” Coupal said.

Just as the legislative battle led to big spending, both sides on the initiative campaigns are loading up as well. The Jarvis initiative is being pushed by a Jarvis backed group, No New Taxes, that has loaded up with $635,000 in mostly-small donations since the beginning of 2004–not counting $73,000 the Taxpayers Association put in on Sept. 6. The Jarvis group has also spent $628,000 on lobbying this year–again, much of it aimed at ACA 8.

The League and it’s allies have also been spending big. The League put in over $3.5 million to help narrowly defeat Proposition 90 last year–and put another $50,000 into Californians Against the Taxpayer Trap, the group they used to fight Prop. 90, back in May. They’ve put nearly half a million into their PAC since last year.

Capitol Weekly: http://www.capitolweekly.net

Council to vote on eminent domain: Ventura County Star, 9/17/07

By Anna Bakalis

On the heels of a report suggesting one-third of the properties in Moorpark’s project area are blighted, the City Council is set to vote Wednesday night on reinstating eminent domain authority.

The council is expected to consider and adopt eminent domain authority over the city’s project area — about 1,200 acres, including downtown High Street, Walnut Canyon Road and south to the Arroyo Simi. Extending as far east as Condor Drive and west to Gabbert Road, city officials are hoping to rehabilitate the area for more cohesive development and economic growth.

A Redevelopment Agency staff report concludes there is a significant amount of blight in the area and it cannot be eliminated without the use of eminent domain.

This week the council will consider reinstating the agency’s lapsed eminent domain authority, also known as Amendment No. 2, as set by Moorpark voters in 1989. If it is adopted, the Redevelopment Agency will be able to acquire commercial and industrial properties only. Moorpark will not have authority to acquire residentially zoned property and certain other properties being used for residential purposes.

The five council members make up the Redevelopment Agency. They will be using the blight report, which details physical and economic neglect in the project area, and other documentation to reach their decision on reinstating the agency’s eminent domain authority for another 12 years.

Eminent domain is the power of a public agency to forcibly acquire private property at fair market value for public use.

One of the main goals of the city’s redevelopment plan includes eliminating blight. The agency’s eminent domain authority expired in 2001, and city leaders have ramped up efforts to get the issue to a council vote for the past two years.

Ventura County Star: http://www.venturacountystar.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).

 

Eminent domain mulled for parcel: Crescenta Valley Sun, 9/7/07

By Charles Cooper

Photo by Mary O’Keefe

The city of Glendale is apparently approaching the point when some legal decisions can be reached on the future of Mountain Oaks, a 40-acre open space parcel in La Crescenta.

Those decisions could include the possible use of eminent domain by the city, according to attorney and Mayor Ara Najarian.

The mayor did not specify when the city might move to acquire the property through legal proceedings, a possibility not mentioned before by city officials.

City Atty. Scott Howard said he will present a legal opinion to the city within the next two weeks on the status of the property and city options. “It probably should have been done 30 years ago,” he said.

The property, which adjoins Crescenta Valley Park, has been the object of community concerns since plans were announced to develop 15 acres of it into a school and condominium development. The land was purchased by a Canadian company, M. Jorjezian Investments Inc.

A group known as Friends of Mountain Oaks, led by local resident Dave Meyers, has been campaigning to have the city buy the land for open space. Council members signaled a willingness to do just that, but a lot of details remain that need to be worked out.

City Manager James Starbird said the city has not been able to discover the sale price of the property, if it in fact has been sold and is not in escrow. Based on past experience, Starbird said, he is estimating the cost at $30,000 to $50,000 an acre to the city.

Most of the property is hillside land and is un-developable, but a flat portion known as the Meadows could be built on. No one seemed sure how much land that entails; various figures were tossed out, from 3.5 to 9 acres.

The major reason the property remains undeveloped is that an illegal subdivision took place many years ago, as a marketing stunt, creating hundreds of unbuildable paper lots.

Howard said the council could rezone the property by a 4/5 vote, but his office is still researching the legal impact of the earlier subdivision.

Glendale has been looking at ways to finance open space purchase, including development fees and assessment districts. The property could be used for park purposes, as a trail head to the Verdugo Mountains and for equestrian uses.

Crescenta Valley Sun: http://www.crescentavalleyonline.com

Bill targets government condemnation power: North County Times, 9/7/07

By Dave Downey

A proposed amendment to the state constitution that would bar cities and counties from condemning homes, churches or small businesses so they could be bulldozed to pave the way for private development is headed for a key vote.

The state Assembly is expected to take up the bill, Assembly Constitutional Amendment 8, early next week. If it passes, it will go to the Senate as lawmakers scramble to wrap up their 2007 session by the middle of the month.

If Gov. Arnold Schwarzenegger were to sign the legislation, the measure would appear on the state ballot next year — in either February, June or November — as a constitutional amendment.

Sponsored by Assemblyman Hector De La Torre, D-South Gate, the legislation is a reaction to the landmark 2005 U.S. Supreme Court decision Kelo v. New London. That 5-4 ruling said the city of New London, Conn., was within its rights in forcing Susette Kelo and her neighbors to sell their modest waterfront homes to make way for a hotel-condominium project that promised to fill city coffers with tax dollars.

The legislation aims to stop any California city from exercising its power of eminent domain to make way for a similar project or shopping center. Eminent domain is a court process through which a government agency can force unwilling property owners to sell their land at its appraised value.

As originally written, the legislation targeted residential properties and businesses that employ 25 or fewer people. A provision added late last week sought to protect churches from such land grabs, too.

It was a good idea to include houses of worship, said Rev. Jonathan Maxey, pastor of Grace of Temecula Valley AME Church on Diaz Road, near Rancho California Road.

“A lot of local governments are opposed to churches, especially when they move in to commercial areas because they don’t provide the tax base that businesses do,” Maxey said.

He said the legislation would prevent cities and counties from replacing churches with stores.

“Also, it would reinforce the autonomy of churches and the leaders within the churches, to be able to oppose a county or civil government on an issue without fear of this being used against them as a tool of retribution,” he said.

Cities and counties throughout the country long have held the power to condemn private property for publicly owned roads and parks. But over the decades, that power has expanded to private redevelopment projects deemed in the interest of the community.

In California, the green light can be given for such projects if a property is defined as “blighted.” And the bar for making such a determination is low. Any of several conditions, such as a property’s use being incompatible with a use next door, can trigger a finding of blight.

Southwest County officials said eminent domain power should not be used that way.

“It should only be used for public projects — road improvements, infrastructure, things of that nature — and then only after the property owner is provided fair market value for his property,” said Lake Elsinore Mayor Bob Magee. “I believe that a man’s home is his castle. And to have a government entity step in and take his property and give it to another entity for a for-profit enterprise is just wrong.”

In response to a question, Magee said it would not be a mistake to put into effect a blanket ban that barred condemnation even when properties were truly blighted. He said that, even in those cases, families get thrown out on the street.

“You haven’t made their problem better, you’ve made their problem worse,” he said. “Now, they’re scrambling for a place to live.”

Magee said the best way to spruce up run-down neighborhoods is to spend money patching streets, sidewalks and public landscaping and to offer financial incentives for homeowners to fix up properties.

Riverside County Supervisor Bob Buster said it also helps to enforce local building codes, so properties don’t deteriorate to the point that they are unsafe.

Buster said the whole idea of exercising eminent domain for development is misguided.

“We’re hitting one property owner and just rewarding one other private entity,” he said.

At the same time, Buster and Magee said they have not endorsed the legislation, as they are unclear about the breadth of its effect. They said they remember all too well Proposition 90, last year’s failed initiative that sought to neutralize the Supreme Court decision’s impact on California but also to curb local land-use planning authority.

Murrieta Mayor Doug McAllister, who opposes the bill, said he worries that it might lead to follow-up measures that take away cities’ authority to condemn private property for widening roads.

“I have to assume that there is an agenda beyond the bill,” McAllister said.

The mayor said the legislation is unnecessary.

“It tries to solve a problem that doesn’t exist in California,” McAllister said. “I’d be willing to bet that that (the condemnation of private property for a private development) will never happen in Murrieta.”

However, something did happen in Murrieta in 2004 that spurred cries of abuse.

As it prepared to widen Jefferson Avenue to four lanes between Murrieta Hot Springs Road and Juniper Street, the city initially offered nothing for a half dozen properties required for the project. Later, following an outcry, the city offered the owners a total of $684,000.

Kathy Fairbanks, a spokeswoman for Californians for Eminent Domain Reform, a statewide coalition of business, homeowner and labor groups that backs the bill, said the goal is to “protect people from eminent domain abuse.” Fairbanks said no one has raised the specter of curbing condemnation power for roads or parks.

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

Senate OKs flood control bill: Appeal-Democrat, 9/6/07

By Robert LaHue

A controversial flood control bill cleared the state Senate on Wednesday and is headed to Gov. Arnold Schwarzenegger.

AB 930, by Assemblyman Dave Jones, D-Sacramento, will give the Sacramento Area Flood Control Agency the power to acquire land easements, including those outside SAFCA boundaries.

The bill passed the Senate 24-11, with all 11 no votes coming from Republicans.

Sen. Sam Aanestad, R-Grass Valley, whose district includes Yuba and Sutter counties, opposed the bill, saying such easements would allow SAFCA to flood areas of rural counties to ease pressure on levees protecting urban Sacramento.

Speaking against the bill on the Senate floor, Aanestad said the legislation would “destroy” development in the two counties.

“We know that in the winter when it rains, and in the spring when the snow melts, the water has to go somewhere,” he said. “But the solution proposed by (SAFCA) is to have it go into my district. Folks, we’re talking only about my district.”

Aanestad said he was also concerned about how eminent domain may come into play in the acquisition of easements.

“I admit it’s a willing seller proposition by SAFCA – but it will be done in coordination with the state Department of Water Resources – which does have the power of eminent domain,” he said.

Aanestad also echoed concerns of the Sutter County Citizens’ Advisory Committee for Flood Control Funding about the county’s veto power.

“It’s not clear,” Aanestad said in a phone interview following the vote. “The wording is such that the supervisors think they have veto power.”

But Aanestad said the veto could be on the end of an eminent domain end-around.

“If you get two or three willing sellers in a flood plain, and there’s five or six (property owners), it’s feasible DWR would go to those remaining property owners and say, ‘Hey, look, half your fellow owners (are selling).’”

Aanestad was pleased with the 11 no votes, including two from members of the Natural Resources and Water Committee who earlier voted for the bill.

“At that time, there was no opposition,” Aanestad said. “It kind of slipped through.”

The bill passed the Assembly 65-8 in June. Assemblyman Doug LaMalfa, R-Richvale, who represents Sutter County, voted no. Yuba County’s representative, Assemblyman Rick Keene, R-Chico, did not vote.

During their Aug. 14 meeting, Sutter County supervisors voted 3-2, with Stan Cleveland and Jim Whiteaker in the minority, to send a letter to SAFCA and to Jones in appreciation for bill amendments, including the veto power.

Today, Yuba County supervisors will vote on sending letters to Aanestad and to Jones asking for rights of first refusal if SAFCA seeks to acquire an easement in the county.

The last day to amend bills is Friday, said Russ Brown, Yuba County’s communications & legislative affairs coordinator.

But since the AB 930 passed Wednesday, there’s not much chance for such wording to be added. But the board will still consider sending the letter since it could still be seen by Schwarzenegger.

“It’s still important to let it be known where Yuba stands,” Brown said.

Aanestad said he has no idea what Schwarzenegger will do with the bill.

“I intend to send him a letter showing him that several members of the Senate have opposed this bill, and I’m hoping he will veto it,” the senator said. “However, with environmental issues such as this, its really hard to predict which way he’ll go.”

Appeal-Democrat: http://www.appeal-democrat.com

COPYRIGHT © 2010 Arthur J. Hazarabedian, Esq.