Lease Condemnation Clauses The Landlord's Windfall!

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Lease Condemnation Clauses The Landlord's Windfall! Powered By Docstoc
					                             LEASE CONDEMNATION CLAUSES ...
                               THE LANDLORD'S WINDFALL !
                                   By Gary A. Taback, Esq.

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.