California real estate and deed of trust disputes | courtroom war stories and lessons learned

Eminent Domain: “Goodwill” Usually Belongs to the Tenant

In the world of eminent domain, compensation for “lost goodwill” is often a tricky and contentious issue.  New opinions from the Court of Appeal addressing goodwill tend to get a lot of attention.  For example, see this Money and Dirt post from earlier in 2019: California Court Clarifies Recovery of Goodwill in Eminent Domain Cases.

In a recent case from California’s Second Appellate District — Thee Aguila, Inc. v. Century Law Group, LLP — the court addressed a dispute between a commercial landlord and tenant regarding entitlement to the “goodwill” component of an eminent domain award.

Facts: commercial landlord and tenant scrap over entitlement to goodwill damages arising from condemnation

In 2008, the owners of a restaurant signed a 15-year lease for commercial property in South Gate, near Los Angeles.

The lease contained a “condemnation clause” providing that if the premises, or any portion thereof, were taken by the power of eminent domain, the lease would terminate as to the part taken, and that “all awards for the taking of any part of the Premises … shall be the property of the Landlord, whether made as compensation for the diminution in value of the leasehold or for the taking of the fee or as severance damages, provided, however, that Tenant shall be entitled to any award for loss or damage to Tenant’s trade fixtures and removable personal property.”

In 2009, the Los Angeles Unified School District filed a complaint in eminent domain seeking to have the property condemned.  Both the landlord and tenant claimed rights to any loss of goodwill.

The trial court’s judgment awarded the property to the District, provided for payment to the landlord for its lost interest in the real property, and awarded over $6 million in compensation for lost goodwill and other items to the tenant.

The landlord filed a separate action seeking to recover the goodwill award from the tenant pursuant to the lease’s condemnation clause.  After a two-day court trial, the trial court concluded that the goodwill compensation belonged to the tenant, not the landlord.

The landlord appealed.

Court of Appeal’s Opinion: goodwill award belongs to tenant

The Court of Appeal began by observing that under Code of Civil Procedure section 1263.510 and recent case law (including the Yum Yum Donut Shops case covered in the prior Money and Dirt post), “the owner of a business conducted on property taken by eminent domain is entitled to compensation for loss of goodwill resulting from the taking.”

Thus, the goodwill award goes to the tenant “absent a contractual provision to the contrary[.]”

Turning to the lease language at issue, the court concluded that the condemnation clause did not shift goodwill compensation to the landlord.  The clause only addressed awards for the “taking of the property,” which could encompass the tenant’s “leasehold interest.”  But a leasehold interest is not the same thing as a tenant’s interest in goodwill “as owner of a business.”  (Emphasis original.)  “Goodwill can exist apart from a leasehold, and a leasehold can exist apart from goodwill.”

The court concluded that “a business owner’s goodwill for a business operated on property taken by eminent domain is compensable separate and apart from the parties’ interests in the property taken.”  The lease language was not enough to defeat the tenant’s right to compensation for lost goodwill .

Lesson

In eminent domain, compensation for lost goodwill to a business tenant leasing the condemned property will presumably belong to the tenant, not the landlord.

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