Daily Development for Thursday, March 1, 2001

EMINENT DOMAIN; COMPENSABLE INTEREST; LEASE PURCHASE OPTION: A purchase option in a lease is a compensable interest in the condemnation of a fee interest burdened by the lease, and the court will award to the tenant the value of the option and to the landlord the balance of the fair market value of the property.

Peerless Park v. Central Holding Corporation, 2001 Mo. App. LEXIS

310 (2/27/01)

Tenant leased the property for ten years in 1992. The lease gave to Tenant an option to purchase the leased property for a price of $120,000, subject to increase of 5% for each year of the lease. In 1998, the city condemned the property for urban renewal purposes, and the property was valued at $250,000. In Missouri, the fair market value of the property is the maximum that the condemning authority must pay, and various parties who hold interests in the property divide that.

The trial court awarded the tenant $40,000 for the loss of the purchase option. The balance was paid to the landlord. The City (why the City?) appealed.

Held: Affirmed. As a matter of first impression, the court concluded that the option was a compensable interest.

The appellant first had to contend with 1965 Missouri authority that had concluded that an option to renew a lease was compensable in a Missouri condemnation. Thus, where a tenant receives "bonus value," the computation assumes that the lease has been extended pursuant to the option. That 1965 case, however, distinguished, in dicta, the option to purchase from the option to renew, but did not indicate why it did so.

The court noted that the option to purchase here included the "power of disposition," which the court viewed as an important element in determining whether a compensable property interest is involved.

Regardless of whether the lease itself was assignable, the tenant, upon exercise of the option, could sell the fee, and thus dispose of the property. Thus the "power of disposition" existed. For the same reason, the option also carried with its, upon exercise, the "ownership" rights rights of user and exclusion. It was of no consequence to the court that these rights did not exist prior to the exercise of the option, although it did note that the option was part of a lease which did confer such rights presently.

Interestingly, in this lease, the parties had a provision dealing with condemnation, establishing that the parties would mutually resist condemnation and, if it occurred, would "join and cooperate in prosecuting their respective claims for damages. This is not the typical language that terminates a lease when condemnation occurs.

This feature of the lease became significant when the court discussed the damages computation. The trial court had assumed that the option would be exercised at the end of the lease, in 2002. This, of course, would have led to a higher option price, due to the escalator feature in the option, and thus to a lower award. The appeals court concluded that, although the option was not destroyed automatically upon condemnation by the lease language, it did terminate necessarily by operation of law. There necessarily was no further right of occupancy, and it therefore made no sense to expect that the option would be exercised as of some future time. Rather, the court concluded that the option ought to be treated as exercised as of the condemnation. It noted that the tenant was not required to give advance notice of intent to exercise, as required by the lease, because the condemnation precluded its ability to function under the lease.

The tenant had also appealed, demanding that it receive, in addition to the loss of the option right, the loss of the "bonus value" in the balance of the lease term. The court held that, although this might have been a valid argument had the court concluded that the option was exercisable as of the end of the scheduled lease term, the argument was mooted when the court assumed that the tenant would exercise the option as of the condemnation itself. Having exercised the option, the tenant would have paid no further rent, and there would be no "bonus value." The compensation for the loss of the option compensated the tenant for the loss of further occupancy as an owner.

Comment 1: Interesting case, with which the editor agrees. The analysis of the working out of the award is particularly useful.

Comment 2: For another case involving the compensability of a purchase option in condemnation, see Mount Juneau Enterprises, Inc. v. The City and Borough of Juneau, 923 P.2d 768 (Alaska 1996), the DIRT DD for 5/11/97 (on the DIRT website), which concludes that a purchase option (not in a lease) is compensable, but does not award compensation in the case because the terms of the option could not be established with adequate specificity.

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