The Fifth Amendment of the United States Constitution states that private property may not be taken for public use without payment of “just compensation.” And, likewise, Article 1 section 19 of the California State Constitution allows that private property may not be taken or damaged by the government unless it pays “just compensation.”
The constitutional requirement of just compensation doesn’t only apply to the owner of the property, but to anyone whose property interest is acquired by the government. As an example, a commercial tenant on property slated to be acquired by eminent domain may be entitled to compensation for the value of the leasehold interest, the value of equipment, and fixtures, as well as loss of business.
Many leases will include a “condemnation clause,” stating the entitlement to compensation between the property owner and the tenant.
Business and property owners are entitled to have just compensation determined by a jury, under the California State Constitution.
California’s Eminent Domain Law defines fair market value as: “The fair market value of the property taken is the highest price on the date of valuation that would be agreed to the seller, being willing to sell but under no particular or urgent necessity for doing, nor obliged to sell, and a buyer being ready, willing and able to buy but under no particular necessity for so doing, each dealing with the full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.”
Fair market value usually consists of evidence gathered and presented to the jury by real estate appraisers retained by both parties. Appraisers often disagree in their statements of value. It is not uncommon for the owner’s appraiser and the government’s appraiser to disagree by thousands or even millions of dollars.
In the event that a property is leased or rented, both owner and tenant may be entitled to compensation, depending on whether or not the lease provides an enforceable condemnation clause. If there is no condemnation clause, the property will most likely be valued as a whole and that value will then be divided among the owner and the tenants according to their interests in the property. Many property owners may not know that if their property is leased at below market rent, and their lease does not have a condemnation clause, the tenant of that property may be entitled to receive a portion of any compensation paid for the actual real estate.
As is often the case, the government may need only part of a particular property, such as a strip of land for widening a street. In such a case, just compensation would be determined not just by the value of the piece taken, but also by the damage done to the remaining property. These damages are called “severance damages.”
Not only are owners entitled to compensation for their property, but also for “improvements pertaining to realty.” The improvements might be anything from a fence or pavement to machinery and furniture.
The law requires the government to pay fair market value “in place” of such improvements. Value “in place” usually means the value of the improvements as part of a going concern, rather than a replacement cost or salvage value.
Unlike the laws of many other states, California’s Eminent Domain Law provides that a business owner may be entitled to any loss of business caused by the taking of the property that the business is located on. The Eminent Domain Law describes this “business goodwill” as:
“The benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in the probable retention of old or acquisition of new patronage.”
Goodwill is generally valued based on the income flow generated by the business. The goodwill value of that income is determined through eminent domain business appraisers. The value varies based upon factors such as:
- Length of time in the business
- Customer base
- Nature of the business
- Reputation
- Economic conditions
- Security of occupancy
- Risk associated with the business
- Nature of the business’ fixed assets
It is possible for some businesses to have no goodwill value, while others may have tens or even millions of dollars in goodwill value.
It’s important to remember that a business owner is only entitled to compensation for loss of business goodwill if all of the following can be proved:
- The loss is directly caused by the taking of the property or alteration to the property of the business location;
- The loss cannot be prevented by the relocation of the business or by any other means to preserve the goodwill; and
- Compensation for the loss will not appear or be duplicated in any other payments made to the business owner.
In summary, a business owner must take all reasonable steps to try to relocate the business if the relocation would result in retaining all or part of the business’ goodwill value. Even if a business is relocated, it can still suffer a loss of goodwill. Relocation can result in loss of clients or customers, loss of income, or cause higher expenses. It should be noted that California courts have held that if a business experiences higher operating expenses at a new location, the business may be entitled to a loss of goodwill based on the loss of the net income, even if the business has not seen a decline in customers as a result of the taking.
One thing you should know is that in order to protect your rights you should avoid giving any information about your business income to the condemning agency until you have consulted with your attorney. As the saying goes, “anything you say, can, and will be held used against you” by the condemning agency.
This concludes our Three Part series on Eminent Domain. The subject of Eminent Domain is very complicated. There may be very rare occasions where a business or property owner might be able to negotiate a fair market price without legal representation. However, you most likely will receive an overall better net result, with more money in your pocket, when you are represented by competent, knowledgeable legal counsel. For most of us, our real estate or business is our largest asset. Don’t sell yourself short—make sure you are properly represented. |