Daily Development for
Tuesday, January 28, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

EMINENT DOMAIN; DAMAGES; TENANT GOODWILL: Where statute provides that tenant goodwill is compensable in an eminent domain proceeding, provision in a lease that terminates the lease upon condemnation does not preclude tenant from recovering goodwill, as goodwill exists independent of tenant's property interests.

City of Vista v. Fielder, 54 Cal. Rptr. 2d 861 (Cal. 1996)

The California eminent domain statute, which was enacted in 1975, permits a tenant to recover for goodwill in addition to any recovery for taking of tenant's property interests. The statute also provides that the lease terminates upon the condemnation. The court here stated that the purpose of this provision in the statute is to make clear that the tenant is alleviated from any duty to pay rent upon condemnation of the property in eminent domain.

The lease in this case, which the parties adapted as a restaurant lease from a form designed for residential purposes, stated: "Should building be condemned thru [sic] no fault of tenant this lease will be terminated." The Court of Appeals had construed this provision to mean that the parties agreed by contract that the tenant had no lease upon exercise of eminent domain, and that therefore the tenant had no right to recover goodwill.

The Supreme Court, in an opinion fairly dripping with acid concerning the Court of Appeal's care in deciding this case, indicated that it was "dubious" that the lease provision in question actually should have been interpreted to terminate the lease contractually as the evidence showed that the parties in fact intended "condemnation" in the context of the provision to mean a government order prohibiting use of the building due to defects in the building (known to the parties at the time of contracting), and not to mean an eminent domain proceeding. Nevertheless, the court, for purposes of analysis, accepted the Court of Appeals construction of the lease, but nevertheless concluded that under the California Eminent Domain statute, the tenant was entitled to recover independently for goodwill even if the lease was terminated.

Comment 1: Many state eminent domain provisions do not provide compensation for loss of tenant goodwill, but lawyers in those states that do have such a provision will find this case valuable.

Comment 2: Regardless of the statutory language, most well drafted leases from the landlord's point of view will contain a clause terminating the lease upon exercise of eminent domain and providing that the tenant shall have no claim in the condemnation proceeds. Of course, in most states, the proceeds are only the proceeds from the loss of property interests.

In some jurisdictions, this language is particularly significant because state law "caps" recovery at the fair market value of the property regardless of the lease, and consequently if the tenant were to share in the recovery the landlord's interest could be cut back significantly. Even where a tenant might be entitled to an independent recovery, however, negotiations pertaining to the tenant's recovery often will complicate the landlord's recovery and the landlord has an interest in providing that the tenant shall not participate in the eminent domain action at all.

Comment 3: Some leases provide not only that the tenant's lease terminates upon condemnation but also that the tenant assigns any and all recovery as a consequence of condemnation to the landlord. In a footnote to the instant case, the California Supreme Court appeared to view such a clause as enforceable under the California statute. But the court does not indicate clearly whether this language, if clearly drafted, would assign to the landlord the tenant's recovery for loss of goodwill as well as any property interest.

There is some logic in permitting the landlord to recover for loss of goodwill in the tenant's lease. To the extent the goodwill is appurtenant to the location, as opposed to the tenant's name, condemnation destroys it. The landlord may have a relatively low rental flow at the time of condemnation, but the tenant may have built up so much goodwill at this location that it will pay handsomely for a new lease at renewal time, and in fact might pay even over the "market rent." Therefore, the parties appropriately should transfer this "goodwill" to the landlord if there is a condemnation, since it really belongs to the landlord's location.

"Goodwill" that is not location specific, of course, in theory should not belong to the landlord. But why shouldn't the parties be able to allocate it to the landlord if they wish? Such goodwill, however, may prove to be somewhat ephemeral. If it is not site specific, then one would assume that the tenant could have it at another location, and consequently the tenant has not lost it as a consequence of the condemnation.

Also see: Chhour v. Community Redevelopment Agency of Buena Park, 53 Cal. Rptr. 2d 585 (Cal. App. 1996) (Statute providing compensation where eminent domain proceeding deprives business owner of goodwill for the business applies to inverse condemnation claim made by tenant whose business is lost when landlord's fee is acquired by eminent domain.)

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