Rights of commercial tenants in eminent domain.

• Author: Reynolds, George, IV
• Position: Cover story

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Commercial tenants face many issues and consequences affecting their rights to compensation when an eminent domain acquisition is initiated against their leasehold. Among these, the provisions buried inside a written lease agreement may be the most important of all. You may initiate representation of a commercial tenant in an eminent domain condemnation believing the tenant to be well-positioned for receiving a large award, only to later discover that the terms of the lease agreement substantially limit the recovery of compensation. This article provides an overview of common issues related to compensation for commercial tenants during the eminent domain process, the effects that certain terms contained in a lease agreement may have on compensation, as well as suggestions for drafting eminent domain clauses in commercial lease agreements.

Apportionment of Compensation for Real Estate

It is common for professionally drafted condemnation clauses to exclude the commercial tenant's right to share in the real estate compensation. Even so, the clause should explicitly preserve the tenant's rights to compensation for statutory business damages, improvements installed by the tenant, and relocation assistance or move costs. Commercial tenants are considered "property owners" in the constitutional sense and, thus, may share in compensation for real estate encumbered by their leasehold. (1) This "sharing" is usually done pursuant to court order, mediated settlement agreement, or presuit settlement that apportions the compensation for the taken real estate between the fee-owner and leaseholder. Through what is known as the "unity rule," the acquired real estate is typically valued as if it were a single, unencumbered piece of property. (2) That total is then apportioned among the leasehold and fee interests to compensate both tenant and landlord for their respective interests in the real estate. (3) The "unity rule," however, is a default rule and may be modified by contract. Nevertheless, the modification must be clear and unambiguous because judicial policy disfavors forfeitures. (4) If the language contained in the lease agreement's condemnation clause does not definitively exclude a tenant from the compensation for the real estate, courts typically construe the clause in favor of apportionment. (5)

How a condemnation clause handles compensation for trade fixtures is also a fertile area for disputes regarding a commercial tenant's interest in real estate compensation. (6) If in the lease agreement the tenant waives his or her right to share in the real estate compensation, the tenant should make sure to explicitly preserve his or her right to recover for trade fixtures the tenant has installed on the leasehold. During the course of their leasehold, many commercial tenants install trade fixtures that can legally morph from personal property of the tenant to part of the real estate owned by the landlord, depending upon how they are installed. (7) If the commercial tenant is allowed to share in the compensation paid for the real estate, the tenant will typically recover the value of any lost fixtures less any salvage value as an element of severance damages. (8) On the other hand, if the equipment is determined to be personal property, no compensation is due for any reduction in value the equipment may suffer upon its removal and relocation. (9) Therefore, a condemnation clause that excludes the tenant from sharing in the compensation paid for the real estate and does not explicitly preserve compensation for trade fixtures may deprive the tenant of compensation for trade fixtures because, in order to be eligible to recover severance damages, the trade fixtures must be considered part of the real estate.

Courts in other states have created in their state's eminent domain jurisprudence a middle category of trade fixtures, which allows a tenant to recover compensation regardless of whether the installed equipment constitutes part of the real property; however, "[t]he lines marking the boundaries of this 'middle category' are anything but bright...." (10) Compensation for this "middle category" depends not on how the equipment is affixed, but its adaptability to the premises and suffering a disproportionate loss in value once severed there from. (11) It is unclear, however, whether this middle category is part of Florida's eminent domain jurisprudence.

In a 1997 decision, Rally's Hamburgers, Inc. v. State, Dept. of Transp., 697 So. 2d 535 (Fla. 1st DCA 1997), the First District Court of Appeal established certain factors the trial court on remand should consider in determining whether a commercial tenant could obtain compensation for the loss in value the tenant's business equipment would suffer as a result of being forced to relocate from the leasehold because of the taking. (12) The Rally's factors focused on the mode of annexation and intent of the tenant to permanently affix the equipment to the real property. (13) Additionally, the Rally's opinion does not mention a special "middle category" for trade fixtures damaged by an eminent domain acquisition. (14) In light of the Rally's decision and the perception that the boundaries of such a middle category are ambiguous, establishing an entitlement to compensation for lost trade fixtures based upon a "middle category" theory may be difficult. Therefore, practitioners representing commercial tenants should carefully review any condemnation clause of a lease agreement to determine whether it waives the tenant's right to compensation for trade fixtures.

Consequential Damages

When public works projects are constructed within close proximity, a commercial tenant's ability to maximize its use of the leasehold property may be impaired. The damages suffered from a government's impairment of the use of private property are referred to as "consequential damages" and can be separated into two general categories: 1) damages resulting from the inconveniences of construction (15) and 2) damages to items not considered property in the "constitutional sense." (16) No compensation for the first category is afforded because all property that abuts a public works project suffers temporary inconveniences of the same general nature during construction. These inconveniences, regardless of...