Eminent domain is a phrase that can strike fear in the hearts of many landowners. It means that governments have the authority to ”take” property from an owner without their consent. It is, however, not an unlimited power. There are two caveats: the first is the owner must be paid just compensation for the property and the second is that the property must be used for public use.
How does eminent domain impact a commercial real estate lease? Well, it depends on the agreed-upon terms set in the lease. Commercial leases often include language that clarifies that any award made by a government entity in the case of loss of property due to eminent domain belongs only to the owner of the property and the tenant relinquishes any share of the award to the owner. A property owner may seek to offer tenants additional support, agreeing to allow the tenant to seek a separate claim from the condemning authority for such things as the tenant’s moving expenses or the unamortized costs of leasehold improvements that the tenant has paid for.
While that is certainly helpful, agreeing to this wording will severely limit the rights of the tenant to get fair compensation for its operation of business. If the tenant wants to rent a space in a comparable building, will he or she receive a rent adjustment if rates are more expensive than what they pay at their current space? What if the tenant has machinery that can’t be moved and will need to be repurchased? Large equipment like a crane can be very expensive to remove and reinstall. What about the loss of “good will” a tenant has earned over years of being a trustworthy and responsible lessee? What if the location of the building operations remain intact, but eminent domain causes the tenant to lose their parking lot, costing them customers and employees? If an anchor tenant is displaced by eminent domain while the smaller tenants remain, and the anchor business wants to challenge their right to keep their location in court, who pays for legal fees? Should it be the responsibility of the landlord to ensure their tenants are compensated for the eminent domain loss as well?
These are all important questions to consider when entering a commercial lease. Waiting until eminent domain becomes a reality to address them will likely leave you in a vulnerable position. When advising my clients, I encourage them to ensure their lease includes language that allows them the ability to seek their own award from the condemning authority in the event of an eminent domain seizure, provided it does not diminish any award of the landlord. Keeping the wording broad helps protect the tenant’s rights.
Loss of property due to eminent domain doesn’t occur often, but if it does happen to you, and you don’t have these protections, it could cost you a lot of money, or worse, your business and livelihood. Fortunately, McBride Corporate Real Estate faces challenges like eminent domain seizures day in and day out. If you have questions about this article, or any real estate topic, give us a call at 201-848-6108.