DD 9/30/06 Tenant in Default Still Collects Condemnation Damages

>Daily Development for Friday, September 30, 2005
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Blackwell Sanders Peper Martin
>Kansas City, Missouri
>dirt@umkc.edu
>
>EMINENT DOMAIN; COMPENSATOIN; LEASEHOLDS; DEFAULT: Tenant has compensable interest in condemnation of landlord’s estate despite the fact that tenant is in default and has abandoned the premises at the time of the passing of possession to the condemnor. 

>
>Dames v. 926 Co., Inc., 925 So. 2d 1078 (Fla. App. 2006) (rehearing denied 5/7/06)
>
>The Dames purchased a coin laundry from another operator in 1998, and gave a chattel mortgage for part of the purchase price.  The purchase included ownership of the sellers’ corporation, transfer of ownership of all the equipment, and an assignment of the lease to the Dames individually.

>
>The business was failing, and in December of 2002, the chattel mortgagees, in the words of the court “sought to foreclose upon the mortgage.”  The court is very vague about what this entailed, but it appears that at some point the mortgagee seized all the equipment.  The City Redevelopment Agency deposited condemnation funds into an account and, according to the court, thereby obtained the right to possession of the premises, in July 2003.  But apparently the agency did not in fact take possession immediately 

>
>The court indicates that at the time the funds were deposited into court, the Dames were in possession of the premises, but were in default for failure to pay property taxes.  Thereafter, prior to the compensation hearing, the Dames abandoned the premises.  But the landlord never took legal action to terminate their lease.  It appears that the landlord may have believed that the foreclosure of the chattel mortgage, which included ownership of the laundry business entity, included the transfer of the lease.  But the court found that the lease did not belong to the entity, but to the Dames individually. 

>
>The actual hearing on the condemnation award was held in December of that year.  The landlord claimed that it was entitled to all the condemnation proceeds (over $650,000), and the Dames objected, claiming an apportionment for the value of their leasehold.  Although the trial court agreed with the landlord, the appeals court reversed.

>
>The appeals court found that the operative time for determining valuation of the condemned interests was the time that the agency had the right to possession, and that this was the time that it transferred funds into the condemnation account necessary to carry out the condemnation.  At that time, although the Dames were in default, they had not yet abandoned.  Their lease was still in effect and they had a right to share in the condemnation award.

>
>Comment 1: In general, this is a straightforward application of existing law, but the hitch has to do with the fact that the landlord may not have been aware of the fact that the city had the right to seize possession of the property as of the date of the deposit of funds, and, had it been so aware, it might have been able to terminate the lease more quickly.  The foreclosure of the chattel mortgage, which had occurred seven months before, was an independent event of default, in addition to the tenant’s nonpayment of taxes.

>
>Comment 2: The issue of whether post taking events might affect the tenant’s right to share in the proceeds is discussed in Friedman on Leases, Randolph Edition, in Section 13.5, at notes 97-100 and accompanying text.  In United States v. 26,699 Acres of Land,, 174 F.2d 367 (5 Cir., 1949), the court found that after the valuation of the property in a condemnation action, but before actual seizure of the property, the tenant and landlord voluntarily cancelled the lease, and that implicitly the tenant assigned his interest in the rent proceeds to the landlord.    Milton Friedman appears to have believed that this case states an appropriate rule in such cases, but the Maryland Court of Appeals disagreed in Veirs v. State Rd.s. Comm’n, 143 A.2d 613 (Md. 1958).  Of course, in our case, although arguably there might have been a surrender when the tenant abandoned after the state deposited the money, if the landlord took possession, there was no basis to conclude that tenant was w!

 aiving
 any rights to share in condemnation proceeds. 
>
>Comment 2: On the point that the tenant’s individually, and not their business entity, “owned” the lease, the editor is reminded of the now ancient case of Abbott v. Bob’s U Drive, 352 P. 2d 598 (Or. 1960), written by Kenneth O’Connell, one of the editor’s mentors.  That case found that were a corporation was occupying the premises and paying rent, there was an implied assignment from the “paper” holder of the lease to the true occupant and user.  The landlord might have exploited that theory here, had it thought of it.  Abbott and other cases on the point are cited in Friedman on Leases, Randolph Edition, at page 7-109 note 430. 

>
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