When the government needs to acquire private property for public use, it can do so through a procedure known as eminent domain. The Fifth Amendment to the United States Constitution prohibits the government from taking property from a private individual or business “without just compensation.” Eminent domain is intended to provide a means of determining fair compensation. When the government exercises eminent domain over real property that is subject to a lease, both the property owner and the lessee are entitled to compensation. A California appellate court recently ruled on a dispute between a former property owner and its former tenant in the aftermath of an eminent domain proceeding. The court’s decision addressed the various types of property that can be involved in an eminent domain or other condemnation action.
Eminent Domain in California
The California Eminent Domain Law (EDL) limits the government’s use of eminent domain to situations in which it needs private property for public use. If a civil action for eminent domain is necessary, the government must name all owners of record as defendants along with anyone else the government knows “to have or claim an interest in the property.” This includes individuals or businesses that occupy the property under a lease.
Condemnation Clauses in California Commercial Leases
A lease creates a real property interest for the lessee who is also known as the tenant. When real property is primarily used for commercial leasing purposes, lessees often stand to lose the most in eminent domain since they are the ones who will be displaced by the procedure. Therefore, many leases contain condemnation clauses, which address matters like the distribution of compensation if the property becomes unavailable or unusable because of government actions like eminent domain.
The Landlord-Tenant Dispute
In the California appellate court case mentioned earlier, the Los Angeles Unified School District (LAUSD) condemned a property leased to a business to run as a restaurant. It filed a lawsuit naming both the property owner and the business. Both entities settled with the LAUSD. The property owner received compensation for the property itself, while the business received compensation for the value of the lease, its business goodwill, the value of fixtures and equipment it had placed on the property, and various expenses.
After the court entered a judgment closing the eminent domain case, the property owner sued the business. It claimed that the condemnation clause in the lease included an assignment by the lessee of any and all proceeds from an eminent domain action.
The Court’s Ruling
The trial court ruled that the condemnation clause gave the property owner the right to compensation received by the lessee for the value of the lease, but not compensation for assets like business goodwill. It also found that the doctrine of collateral estoppel barred the property owner from making a claim after the end of the eminent domain action.
The appellate court affirmed this ruling. It held that a business that loses its business location through eminent domain “is entitled to compensation for loss of goodwill resulting from the taking” and the property owner has no claim to this compensation “absent a contractual provision to the contrary.” It then ruled that the property owner should have raised these issues during the eminent domain action itself.
Salar Atrizadeh, Esq. has more than a decade of experience representing real property owners, landlords, and tenants. Please contact us online or by calling our law firm to schedule a confidential consultation.