Law

by Courtney L. Wymore

and Robert Zimmerman

Imagine that after an arduous search you find the perfect location to open a gourmet restaurant. You agree to pay a premium rent in exchange for flexible long-term options in the lease. You hire an overpriced interior designer and far exceed your budget with extensive renovations to create an exciting atmosphere.

After being open for a year, patrons are making reservations a month in advance and you have developed a reputation as the best restaurant in town. Then, you receive a call from your landlord informing you that the city is condemning the restaurant to make room for a new public improvement.

You quickly learn that there is no provision in your lease for condemnation, and that under Missouri law, you will not be reimbursed for any money invested in decorating and improving the restaurant. You are expected to merely pack up your furniture, trade fixtures and equipment, and be gone.

Normally, when a party enters into a lease, one of the most overlooked provisions is the one regarding the tenant's and landlord's rights upon a condemnation or "taking" of the property by the government through eminent domain.

However, if the property is "taken" during the term of the lease, these provisions are of vital importance in determining each party's rights in the condemnation proceeding.

In a condemnation proceeding, the award paid by the condemning authority is determined as though the property belonged to only one owner. Once the award is paid into the court, each party claiming an interest must file a motion for determination with the court and the court then determines each party's interest in the award.

The general rule is that when there is a written lease which contains specific provisions setting forth each party's rights in the event of a condemnation of the property, the provisions in the lease will determine whether a party has a compensable interest in the condemnation award.

This is true regardless of the term of the lease or the amount of money the tenant has spent fixing up the premises prior to the condemnation action.

In the event the lease does not address the rights of the parties to the condemnation award, Missouri case law controls division of the award. In order to determine each party's interest in the award, the leasehold interest must be valued and the award allocated between the landlord and the tenant.

There are several different methods for valuing the leasehold interest. However, the most common method involves determining the "bonus value," if any, of the lease. A "bonus value" is simply any difference between the rent amount in the lease and the estimated current market rent for the property.

According to the bonus-value principle, a tenant's interest in the property will only be compensable if the rent in the lease is below market value for the rent made on comparable properties at the time of the condemnation award.

Therefore, if the property is renting at fair market value at the time of the condemnation award, none of the condemnation award would be allocable to the tenant under the bonus-value principle. The burden of proving any bonus value falls on the tenant.

Even if there is no bonus value in the lease, the tenant may be able to recover the value of any fixtures taken by the condemning authority. There are two caveats to this rule.

First, the tenant must own the fixtures. If the fixtures become the property of the landlord under the lease, the tenant would have no compensable interest in the fixtures.

The second caveat is that if the condemning authority is not taking the fixtures and the tenant is allowed to remove the fixtures prior to the condemnation, the failure of the tenant to remove the fixtures does not give rise to a compensable interest in the fixtures.

The tenant is generally limited to compensation for the value of the fixtures which are owned by the tenant and taken by the condemning authority, and the bonus value under the lease, if any. Even if the condemnation forces the tenant to relocate its business, the tenant will not be able to recover for lost profits or injuries to business.

The general rule in Missouri is that "loss of profit" or "injury to business" are not specific compensable items in a condemnation action. In addition, Missouri courts have generally held that business profits cannot be considered in determining fair market value of the property taken.

The primary justification for this rule is that business profits are too uncertain, speculative and remote to be considered as a basis for determining the fair market value of the property. There is a narrow exception to this rule where the business is inextricably connected to the land, such as where the property is a parking garage or a rock quarry, and the taking of the land is a taking of the business.

Because a tenant can put himself or herself at a great deal of risk in starting up a business, it is important to address the issue of the allocation of the condemnation award when the parties negotiate their lease agreement.

Since the lease will generally control the division of the condemnation award, the lessee will want to negotiate some rights with respect to the condemnation award in the event of a taking. If the tenant is making leasehold improvements at its own cost, then the tenant will want to be compensated for its expenditures on the property.

The tenant may want to provide that the landlord cannot accept a condemnation award without the tenant's approval. And, the tenant may want to make special provisions in the lease to provide that the tenant retains ownership of any fixtures installed on the property.

By paying special attention to these provisions of the lease, the tenant may be able to ensure some recovery of its losses in the event of condemnation.

(Courtney L. Wymore and Robert Zimmerman are attorneys with the Springfield office of Husch & Eppenberger LLC.)

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