|
View
.pdf of this article
The commercial lease
condemnation provision, with respect to the tenant's right
to compensation for the taking, is one of the least negotiated.
Though, much attention is given to defining a partial taking
with respect to the affect on the tenant, and much attention
is given defining when a taking is, or is deemed, total. More
often than not the undernegotiated provision will read similar
to this:
In the event
of any taking, this Lease shall terminate as to the part
taken, Landlord shall be entitled to any and all compensation
which may be paid in connection with such taking, and
Tenant waives all rights or claims incident to a total
or partial taking, and all compensation awarded or paid
upon such taking shall belong to and be the property of
Landlord; provided, however, in the event of a total taking
Tenant shall be entitled to claim and recover from the
condemning authority, but not from Landlord, such compensation
as may be separately made to Tenant for depreciation to,
and the cost of removal of, its merchandise and trade
fixtures.
The unclarified
use of the terms "taking" and "termination" create ambiguities
which can lead to dispute and litigation. The newer eminent
domain statutes provide for a "quick take". Under "quick take"
legislation the condemning governmental entity obtains title
to the real estate upon filing suit; nevertheless, possession
is not obtained until the court holds an evidentiary hearing
and concludes that the condemning agency is entitled to immediate
posssession, attempting to balance the condemning agency's
need to proceed with its project with the owner's need to
retain possession. The decision is usually favorable to the
agency. Therefore, if the lease provides that it terminates
upon taking, two questions are generally left unanswered.
First, when does the obligation of the Tenant to pay rent
cease? Upon the transfer of title, or upon the loss of possession?
Second, when must the Tenant quit the leased premises? In
addition, the proviso that the lease terminates upon
condemnation, without further elaboration, may well conflict
with the right of the Tenant to claim compensation for the
loss to be sustained by being deprived of possession and use
of the leased premises for the unexpired term of the lease.
This is usually an unintended result, and a "wind-fall" for
the Landlord, if this interpretation is sustained (this will
be better understood after considering the following discussion
of "just compensation").
Historically, the condemning
authority is obligated to pay "just compensation" to the party(s)
in interest. Examples of multiple parties could include the
ground lessor, the ground lessee, the fee holder, the mortgagee(s)
and tenant(s), and possibly others. The cost to the condemning
authority is the value of the condemned parcel as a whole,
as if there were but one party in interest. It is that single
award that the court in the eminent domain litigation then
apportions among the possibly several interests in the fee
simple estate. With respect to this article, the Landlord
is said to hold the "Leased Fee Interest" and the Tenant is
said to hold the "Leasehold Interest". In theory, these two
equal the fee simple interest.
Absent agreement
to contrary, a Tenant whose lease term is cut short by condemnation,
sustains several compensable economic losses. In general,
these include: (1) "Rent Reserve" [the difference between
the rent for the unexpired term (including extension options),
and the "market rental rate" (the value of higher rents for
similar leased premises over the unexpired lease term, due
to all economic factors, such as the lack of available sites
in a given geographic area, inflation, enhancing demographic
value, etc.)]; (2) the going concern or good will value of
the business; (3) tenant installations, alterations, additions,
improvements, and fixtures; (3) the cost of removal of its
stock in trade and its trade fixtures; and (4) "Business Interruption".
The first, Rent Reserve was defined above. The second, "going
concern or good will of the business" comes into play if the
Tenant can establish that the condemnation proceedings have
destroyed its business and it is unable to relocate [it should
be noted that this possible compensable loss has only recently
been permitted by a few courts, and to date is quite restricted].
Third, "installations, alterations, additions, improvements,
and fixtures", will depend upon local law and/or lease provisions
(as to whether or not they remain those of the Tenant during
the continued lease term, or become the Landlord's upon installation).
The fourth, relates to the Tenant's unattached tangible personal
property, such as the usual merchandise, furniture, furnishings
and equipment, and trade fixtures (as distinguished with real
estate fixtures, as difficult as definition of this term may
be under local real estate law). The fifth, and last, "Business
Interruption" is available in many, if not a majority, of
jurisdictions. "Business Interruption" is not a defined term,
is peculiar to each business operator, and it usually includes,
iter alia, (a) the extra cost of operating dual business facilities
pending removal from the condemned leased premises; (b) advertising
cost occasioned by the unexpected and unintended removal and
move to a new business facility; (c) overtime employee wages,
and related costs; and (d) possibly, the (tenant) business
owner's time similarly so required. Business Interruption
does not include lost profit.
[Though this writing
is not intended to be of any benefit to the Landlord's legal
counsel, in a sense of fairness, it should be pointed out
that a "Business Interruption" claim and a going concern or
good will of the business claim can not be asserted
by the Landlord against the condemning authority unless the
Tenant specifically assigns them to the Landlord, waiver is
not sufficient.] The Tenant may, by agreement with the Landlord
in the lease, assign all or a portion of its compensable economic
losses to the Landlord (or, for that matter, to anyone), as
they constitute a chose in action. It appears that courts
do not take issue with a Tenant's lease waiver thereof
as not operating as an assignment thereof to the Landlord.
It is astounding
to this writer that Tenants, especially those with economic
clout (vis-a-vie the Landlord; be it an anchor tenant, an
essential mix tenant, or a big box tenant, as examples), do
not, on a regular basis, demand (let alone negotiate) to retain
those items of compensable economic loss not often seen reserved
(Rent Reserve, Business Interruption and real estate fixtures).
Even one or two out of three would be a substantial economic
benefit to the Tenant, faced with enormous business interruption,
let alone the possible loss of customers and profit.
This writing is
devoid of cited authorities because the writer is a real estate
practitioner, not a condemnation specialist. At best, it is
the hope that the foregoing will arouse tenant lawyers (some
of who even possess clients with economic clout) to conspire
with the condemnation bar to avail themselves with the proper
knowledge to wage war with our over-bearing Landlord lawyer
brotheren.
Gary A. Taback, Esq.
Sommers, Schwartz, Silver & Schwartz
2000 Town Center, Suite 900
Southfield, MI 48075
Ph: (248) 355-0300
Fx: (248) 746-4001
Email: gtaback@s4online.com
© 2001 American Bar Association
To return to this issue's table of contents, click below
E-Dirt
Table of Contents
|
