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Rights of commercial tenants in eminent domain.

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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 differences of degree, come with the privilege of benefiting from governmental public works projects. (17) As for the second category, certain assets, such as customer goodwill, traffic flow, and convenient access, which affect the value of the property, are not constitutionally recognized as property. (18)

By statute, governmental entities in Florida must compensate for lost profits, goodwill, and other intangible business damages under certain circumstances. (19) The loss of traffic flow or convenient access, however, is generally noncompensable. (20) Although a property's location may have value due to certain levels of traffic flow on abutting roadways and convenient access to those roadways, Florida law does not afford any constitutional or statutory protection when these locational aspects are lost. (21) Regulations prohibiting U-turns or left turns, establishing one-way traffic, or specifying the location of driveways in and out of abutting property are all the subject of governmental police power. (22) However, if construction substantially diminishes physical access to the property, a taking has occurred. (23)

The Florida Supreme Court has noted that it takes a level of "resiliency" for businesses to survive the construction of massive highway projects on their doorsteps. (24) Therefore, upon notice that a portion of the leasehold may be acquired to construct improvements or expansions of public infrastructure, commercial tenants should seek an amendment to the lease agreement to provide the option of terminating the leasehold upon 30 days written notice if the tenant determines that operating at the site is no longer feasible. Fla. Const. art. X, [section]6, only provides compensation for property that is "taken" and not for property that is damaged by governmental conduct. (25) Unless the conduct rises to the level of a taking, the government may impair the use of private property without creating a cause of action for damages. (26) And absent any statutory provision for damages, shouldering the burdens of these impairments is considered part of "the privilege of receiving the benefits of life within a municipality or other governmental jurisdiction.." (27) A lease provision that allows the tenant the option of terminating the lease upon 30 days' notice once an eminent domain acquisition has occurred provides the tenant the flexibility of continuing business operations at the site during construction while also providing the option of relocating if the inconveniences become too great.

Business Damages

The statutory provision requiring condemning authorities to compensate for business damages is found in F.S. [section]73.071(3)(b). The statute requires compensation only when a taking damages an established business that has conducted business for at least five consecutive years on land that adjoins the taken property. If the business qualifies to recover statutory damages, it is entitled to recover the probable damages that denial of the use of the property taken may reasonably cause. This statutory allowance for business damages does not apply to all entities with eminent domain powers, but only to governmental entities when condemning right-of-way. (28) Longstanding Florida Supreme Court precedent characterizes the statutory provision for business damages as analogous to waiving sovereign immunity. (29) The statute is, therefore, "narrow" and strictly construed against awarding damages unless undoubtedly consistent with legislative intent. (30)

The provisions of a lease agreement can also have adverse effects on the right of a commercial tenant to recover business damages. Occasionally, a lease agreement will include a condemnation clause that terminates the leasehold upon an eminent domain acquisition of either all or a part of the property. The inclusion of this type of clause is not advised and converts your client to a tenant at sufferance once the property is acquired, thereby removing all protections of a written lease agreement--including continued possession. (31) One of the most vital elements determining business damages is the length of time a commercial tenant is legally entitled to possess the property. (32) A commercial tenant whose leasehold is transformed to a tenancy at sufferance on the date of taking potentially faces a large forfeiture of compensable business damages. (33) Consequently, another advantage to a provision allowing the tenant to terminate the lease upon 30 days' notice in the event of an eminent domain acquisition is that it extends the date of possession past the date of acquisition and thereby preserves any potential business damage claim.

In addition to understanding how a termination provision contained in a lease agreement may affect a commercial tenant's rights to business damages, the practitioner should also be familiar with judicial interpretation of the statutory eligibility requirements. Three important and frequent areas of dispute regarding eligibility are discussed in this article.

Five Years' Continuous Operation Requirement

One of the largest eligibility cracks in [section]73.071(3)(b) is the five years' continuous operation requirement. To recover business damages, a commercial tenant must have operated a business on site for five consecutive years prior to the date of taking. (34) However, it does not need to be the exact same commercial venture for all five years, and a change in ownership does not negate a tenant's ability to recover business damages. (35) Judicial interpretation of the statute allows commercial tenants to tack onto time previous businesses operated on site as long as the previous business was purchased by the new tenant. (36) For purposes of [section]73.071(3)(b), purchase of a "business" has been defined as buying "the activity, the energy, the capacity, and the opportunities by which results are reached--a condition rather than a fixed tangible object from which a condition arise." (37)

Because of the multiple ways different types of "businesses" are bought and sold, there is no prescribed form that the transaction must take. (38) For purposes of Florida's business damages statute, it appears that any transfer of going-concern value is sufficient for commercial tenants to tack onto a previous business's operations on site. (39) However, there must be a transaction between the present commercial tenant and the previous business; otherwise, there cannot be any transfer of going-concern value. (40) Reopening a closed business under the same name and for the same commercial venture, regardless of presence of abandoned inventory and trade fixtures and the return of old customers, is merely the leasing of a business location and not the purchase of going-concern value. (41)

The length of time a commercial tenant has been in business at other locations before it began operations at the site of the eminent domain taking is irrelevant. (42) The essential inquiry is whether the claimant has operated a business at the site of the taking for five continuous years prior to the taking. (43) Any disputed issues of fact regarding whether a commercial tenant meets the five-year continuous business requirement may be submitted to a jury. (44)

Causation Requirement

Business damages are limited to the probable financial impact reasonably suffered as a result of being denied use of the land taken. (45) Section 73.071(3)(b) is not intended to provide "a windfall unconnected with any out-of-pocket loss"; thus, the "sine qua non" of eminent domain business damages is the actual harm suffered as a result of the taking. (46) Among an assortment of other financial impacts attributable to the taking, these damages may include lost profits, moving expenses and increased rent, costs associated with obtaining replacement property, and down time productivity losses. (47) If a commercial tenant chooses to relocate due to the taking, this relocation must be taken into account when determining the appropriate award of damages. (48) However, commercial tenants who can no longer operate at the site because of the taking are under no duty to relocate their operations and may chose to close their business. (49)

There is no statutory definition of "business damages," and judicial interpretation generally indicates that if the alleged damages are attributable to losing the use of the taken property, the amount of compensation is to be determined by a jury. (50) In a recent case, the Florida Supreme Court disapproved of a portion of a Third District Court of Appeal opinion that held that damages caused by "down time" and fees charged by real estate agents in finding a suitable replacement property were noncompensable. (51) The court reiterated that because there is no one-size-fits-all formula that can be mechanically applied to produce proper results, business damage claims are inherently fact-intensive. (52)

Occasionally, a commercial tenant will choose to close its business or opt against a planned expansion due to notice of a government's planned acquisition. Whether the business closed due to the threat of condemnation is a jury question. (53) Conversely, prior to presenting to the jury any alleged plans for an expansion of business operations prevented by the taking, the claimant must show "affirmative steps taken in time, money, or energy towards the proposed expansion of its store." (54) It is improper "to speculate on what could be done to the land or what might be done to make it more valuable and then solicit evidence on what it might be worth with such speculative improvements at some unannounced future date." (55)

Requirement that Business Be Located on Lands Adjoining the Taken Property

There is no obligation to pay business damages if the government takes all of the land on which the commercial tenant operates its business. (56) If the government acquires only a portion of the property leased to a commercial tenant, the tenant must show that it "solicited, accepted, or conducted" business on the portion of the leasehold not taken to qualify for business damages. (57) In one case, the Second District Court of Appeal held that when only a portion of the parking lot was left encumbered by the leasehold after the taking, the tenant was only entitled to business damages for any commercial conduct that occurred solely in the parking lot. (58) Any commercial conduct that occurred inside the building accompanying the parking lot was not compensable because [section]73.071(3)(b) limits the recovery of business damages to established businesses located on land adjoining the property taken. (59)

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Move Costs and Federal Relocation Assistance

In addition to business damages and compensation for the real estate, "move costs" under Florida's full compensation clause and federal law may be available as part of the eminent domain process. For commercial tenants, reimbursements for the costs of moving personal property awarded as part of full compensation, more colloquially known as "move costs," are limited to cases in which the tenant incurs costs moving personal property from the taken property to the remainder of the leasehold. (60) If the commercial tenant completely relocates from the site, reimbursements for the costs incurred in moving are not available as an element of full compensation guaranteed under Fla. Const. art. X, [section]6. (61) If the condemning authority expects to use federal funding for the project, however, federal law requires the condemning authority to reimburse the tenant for some costs incurred in moving and reestablishing a business. (62)

The U.S. Congress enacted the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, 42 U.S.C. [section][section]4401-4655, based on findings that the displacement of businesses often results in their closure and that "minimizing the adverse impacts of displacement is essential to maintaining the economic and social well-being of communities." (63) The act requires local, state, and federal governmental entities to provide certain relocation assistance to displaced businesses when eminent domain powers are used for public works projects that receive funding from the federal government. (64) If a local government is receiving federal funding for its public works project but is not providing effective relocation assistance, the taking may be enjoined until adequate relocation assistance is provided. (65) Because federal relocation assistance applies to "displaced persons," it cannot be waived pursuant to any provision in the tenant's lease agreement with its land lord. (66) If the tenant is evicted for cause due to serious or repeated violations of the terms contained in a lease or extended possession agreement, however, relocation assistance may be withheld. (67)

The following list is not comprehensive, but provides a general overview of the assistance provided to displaced businesses under the act: 1) Current and continuing information on the availability, purchase price, and rental costs of suitable commercial properties; (68) 2) payment of actual reasonable and necessary moving expenses; (69) 3) payment for storage of personal property not to exceed 12 months, unless the agency determines that a longer period is necessary; (70) 4) reimbursement of the reasonable costs incurred attempting to sell an item that will not be relocated; (71) 5) reimbursement of actual expenses associated with searching for a replacement site to a maximum of $2,500; (72) and 6) reimbursement of actual expenses associated with reestablishing a small business to a maximum of $10,000. (73) Alternatively, commercial tenants may be eligible to receive a fixed payment in lieu of reimbursements for moving and reestablishment expenses. (74) The fixed payment should equal the business' average net earnings over the previous two taxable years, but it cannot be less than $1,000 or exceed $20,000. (75) These benefits are not intended to create additional elements of value or damage in condemnation proceedings; therefore, they are not part of a condemnation trial in circuit court. (76) Appeals regarding the amount of or eligibility for relocation assistance are reviewed by the agency administering the relocation program pursuant to the Administrative Procedures Act. (77)

Conclusion

The constitutional and statutory protections afforded to commercial tenants faced with eminent domain acquisitions may be waived by contract. However, a condemnation clause contained in a commercial lease agreement can and should be drafted to preserve the claims a commercial tenant may have for business damages, trade fixtures, or other improvements installed by the tenant, such as trade fixtures, and any reimbursements for move costs that may be available. Once you have received notice that your client's leasehold may soon be subject to an eminent domain acquisition, you should review your client's lease agreement and determine whether seeking an amendment to the lease is necessary.

(1) Winn-Dixie Stores, Inc. v. State, Dept. of Transp., 839 So. 2d 727, 729 (Fla. 2d D.C.A. 2003).

(2) State, Dept. of Transp., v. Powell, 721 So. 2d 795, 797 (Fla. 1st D.C.A. 1998).

(3) Id.

(4) Trump Enterprises, Inc. v. Publix Supermarkets, Inc., 682 So. 2d 168, 170 (Fla. 4th D.C.A. 1996).

(5) Id.

(6) See generally Sweeting v. Hammons, 521 So. 2d 226 (Fla. 3d D.C.A. 1988).

(7) Sweeting, 521 So. 2d at 226.

(8) Mulkey v. Div. of Admin., State of Fla., Dept. of Transp., 448 So. 2d 1062, 1065 (Fla. 2d D.C.A. 1984) (severance damages are measured by the reduction in value of any remaining property); Rally's Hamburgers v. State, Dept. of Transp., 697 So. 2d 535, 537 (Fla. 1st D.C.A. 1997).

(9) State, Dept. of Transp. v. Sun Island Boats, Inc., 510 So. 2d 603, 604 (Fla. 3d D.C.A. 1987).

(10) In re Brooklyn Bridge Southwest Urban Renewal Project (Project No. NY-R-67), Borough of Manhattan, City of New York, 274 N.Y.S.2d 719, 722 (Sup. Ct. 1966).

(11) Id.

(12) Rally's Hamburgers, 697 So. 2d at 537.

(13) Id.

(14) See id. at 535-537.

(15) Rubano v. State, Dept. of Transp., 656 So. 2d 1264, 1270-2171 (Fla. 1995).

(16) System Components Corp. v. State, Dept. of Transp., 14 So. 3d 967, 976 (Fla. 2009).

(17) Rubano, 656 So. 2d at 1270-1271.

(18) System Components, 14 So. 3d at 976; State, Dept. of Transp. v. Fisher, 958 So. 2d 586, 589 (Fla. 2d D.C.A. 2007).

(19) See generally Fla. Stat. [section]73.071(3)(b) (2010).

(20) Fisher, 958 So. 2d at 589.

(21) Id.

(22) Weaver Oil Co. v. City of Tallahassee, 647 So. 2d 819, 822 (Fla. 1994).

(23) Fisher, 958 So. 2d at 589.

(24) Rubano, 656 So. 2d at 1270.

(25) Village of Tequesta v. Jupiter Inlet Corp., 371 So. 2d 663, 669 (Fla. 1979).

(26) Id.

(27) Rubano, 656 So. 2d at 1270.

(28) Fla. Stat. [section]73.071(3)(b) (2010).

(29) Tampa-Hillsborough Expressway Auth. v. K.E. Morris Alignment Serv. Inc., 444 So. 2d 926, 928 (Fla. 1984).

(30) System Components, 14 So. 3d at 977 (citing K.E. Morris, 444 So. 2d at 929).

(31) Fla. Stat. [section]83.04 (2010); In re Atkins, 237 B.R. 816, 819 (Bkrtcy. M.D. Fla. 1999) (holding that creation of a tenancy at sufferance transfers right of immediate possession from tenant to landlord).

(32) Seminole County v. Sanford Court Investors, LTD., 743 So. 2d 1165, 1169 (Fla. 5th D.C.A. 1999).

(33) See Sallas v. State Road Dept., 220 So. 2d 378 (Fla. 1st D.C.A. 1969).

(34) K.E. Morris Alignment, 444 So. 2d at 929.

(35) American Dive Center, Inc. v. State, Dept. of Transp., 632 So. 2d 277 (Fla. 4th D.C.A. 1994).

(36) Hodges v. State, Dept. of Transp., 323 So. 2d 275, 277 (Fla. 2d D.C.A. 1975).

(37) Id.

(38) See Hick v. State, Dept. of Transp., 541 So. 2d 1309, 1311 (Fla. 4th D.C.A. 1989).

(39) Id.; Robert Hart & Sons, Inc. v. State, Dept. of Transp., 559 So. 2d 302 (Fla. 2d D.C.A. 1990).

(40) See State, Dept. of Transp. v. Lake of the Woods, Inc., 404 So. 2d 186 (Fla. 4th D.C.A. 1981).

(41) Hodges, 323 So. 2d at 276.

(42) K.E. Morris Alignment, 444 So. 2d at 929.

(43) Id.

(44) Tampa-Hillsborough Expressway Auth., v. Casiano-Torres, 659 So. 2d 1125 (Fla. 2d D.C.A. 1995).

(45) Fla. Stat. [section]73.071(3)(b) (2010).

(46) System Components, 14 So. 3d at 967.

(47) Id. at 981; see also Murray v. State, Dept. of Transp., 687 So. 2d 825, 827 (Fla. 1997).

(48) Systems Components, 14 So. 3d at 967.

(49) Id. at 984-985.

(50) Id. at 979; see also Murray v. State, Dept. of Transp., 687 So. 2d 825, 827 (Fla. 1997).

(51) System Components, 14 So. 3d at 981, fn. 20.

(52) Id. at 979.

(53) Pinnacle Floor Covering, Inc. v. State, Dept. of Transp., 16 So. 3d 919 (Fla. 2d D.C.A. 2009); Coleman v. Escambia County, 405 So. 2d 227 (Fla. 1st D.C.A. 1981).

(54) State, Dept. of Transp. v. Target Corp., 937 So. 2d 703, 707 (Fla. 4th D.C.A. 2006).

(55) Id. at 706 (citing Yoder v. Sarasota County, 81 So. 2d 219, 221 (Fla. 1955)).

(56) 9863 West Atlantic Ave., Inc. v. State, Dept. of Transp., 851 So. 2d 191 (Fla. 4th D.C.A. 2003); PalmBch. County v. Awadal lah, 538 So. 2d 142, 144 (Fla. 4th D.C.A. 1989).

(57) Id.

(58) Night Flight, Inc. v. Tampa-Hillsborough Expressway Auth., 702 So. 2d 538, 539-540 (Fla. 2d D.C.A. 1997).

(59) Id.

(60) Rally's Hamburgers, 697 So. 2d at 537, fn. 2.

(61) See Id.

(62) 42 U.S.C. [section]4621(b) (2010).

(63) 42 U.S.C. [section]4621(a) (2010).

(64) 42 U.S.C. [section]4621(b) (2010).

(65) Bethune v. U.S. Dept. of Housing & Urban Dev., 376 So. 2d 1074 (W.D. Mo. 1972); 42 U.S.C. [section]4525(a) (2010).

(66) C.f. Forman's Dairy Palm Nursery v. State, Dept of Transp., 608 So. 2d 76, 79 (Fla. 4th D.C.A. 1990) (requiring assistance where acquisition merely results in displacement, but is not the direct cause).

(67) 49 C.F.R. [section]24.206 (2010).

(68) 49 C.F.R. [section]24.205(c)(2)(iii) (2010).

(69) 49 C.F.R. [section]24.301(a)(1) (2010).

(70) 49 C.F.R. [section]24.301(g)(4) (2010).

(71) 49 C.F.R. [section]24.301(g)(15) (2010).

(72) 49 C.F.R. [section]24.301(g)(17) (2010).

(73) 49 C.F.R. [section]24.304 (2010).

(74) 49 C.F.R. [section]24.305 (2010)

(75) Id.

(76) 42 U.S.C. [section]4602(b) (2010); State, Dept. of Transp. v. Grant Motor Co., 345 So. 2d 843, 846 (Fla. 2d D.C.A. 1977).

(77) 49 C.F.R. [section]24.10 (2010); Ackerley Communications of Fla. v. Henderson, 881 F.2d 990 (11th Cir. 1989).

George S. Reynolds IV is assistant legal counsel for Blueprint 2000 Intergovernmental Agency in Leon County. He received his J.D. in 2008 from Florida State University College of Law.
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