Eminent Domain FAQ

View Eminent Domain/Condemnation FAQ
Eminent Domain FAQs about Eminent Domain Condemnation Law.

I - Introduction

Almost every commercial lease contains a condemnation clause. Typically, the condemnation clause will provide for some formula to accomplish two things:

First, to allocate the overall award between the lessor and lessee based on some negotiated formula tied to the extent of the taking and its consequences; and

Second, although this provision is sometimes omitted, where the lessee/tenant chooses to remain in possession or chooses not to terminate the lease because of the taking, there is a negotiated formula for an abatement or reduction in the rental representing some recognition of the impairment to the property. We emphasize “negotiated” since the reduction is purely a matter of negotiation between the lessor and lessee and is not necessarily reflective of the damage caused by the taking. As with any negotiated lease provision, it can reflect many other economic factors affecting the overall lease deal as well as the bargaining power of the respective parties.

Should this rent reduction or abatement provision have any meaning to the condemnation court in respect to quantifying of an award of just compensation for the taking of property?

II - The Valuation Significance

A condemnation clause in a lease is relevant only to the allocation of loss between the individual parties or to allocate the total award of damages between them when there are conflicting claims. It may be some evidence of, but is not dispositive of the damages (i.e., just compensation) for which the government is liable. The clause represents only the commercial arrangement between the parties, which they are free to fashion in any way they see fit. The condemnor is liable for the value of what was taken. It’s liable for payment of just compensation – the entire loss in the value of the property taken. The condemnation clause may provide a basis to allocate a total award of just compensation between conflicting claimants to the overall just compensation award. It does not quantify the government’s constitutional liability to pay just compensation.

The Court held in Mott Haven Houses, etc. [NYC Housing Authority], 33 Misc.2d 808, 227 N.Y.S.2d 858, aff’d 227 N.Y.S.2d 891 (1st Dept. 1960):

“In the language of the Court of Appeals “Why should the rule of damages be any different in a case where the lessee and its lessors agree to divide an award which must have been to one or the other but for their agreement?” (In re City of N.Y., North River Water Front, 193 N.Y. 117, 126, 85 N.E. 1064, 1066.) Unquestionably the rule is that ‘in fixing awards in condemnation proceedings, the value of what has been taken must be determined, and then that value must be divided among those whose interests are extinguished by the taking. Those interests may be defined by contract of the parties interested, and in the same way the parties may determine by agreement how compensation shall be divided upon the extinguishment of those interests by the sovereign.’ (In re City of N.Y. [Allen Street], 256 N.Y. 236, 242-243, 176 N.E. 377, 379).” (Emphasis Added)

The Mott Haven case derives from the Court of appeals holding in in re City of N.Y. [Allen Street], 256 N.Y. 236 (1931):

“Towards the sovereign exercising the power of eminent domain, the agreement of the parties could have no effect and was not intended to have effect. What the sovereign takes in the exercise of its power, it determines by its own decree. By statute the sovereign has decreed that all that constitutes real property, as defined by the statute, is appropriated by condemnation proceedings, and that all interests in the real property as so defined are extinguished by the taking. The agreement of the parties cannot change that definition...” (Emphasis Added)

This legal conclusion or principle is also dictated by simple logic. What if landlord and tenant had agreed that in the event of a taking the rent goes to zero or is reduced by 50%; would the government then be liable for the entire property or 50% of the value whatever its true effect on the overall economic loss? Obviously not. The government’s liability is for what it took; or, alternatively viewed, what was the total value of the property that was taken (i.e., just compensation) – not what the parties determine to allocate between themselves.

For questions or to discuss items presented in this topic, please contact Saul Fenchel.