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.