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For tenants of commercial real estate, location is often at the forefront of factors for success. Unfortunately, location is always at risk of condemnation or changes in access to the property. The importance of the condemnation clause is often overlooked, leading to potentially unfavorable consequences. This is your guide to condemnation in a commercial lease.
Condemnation is when private property is seized by the government (local, state, or federal) for public use. This power is given to the government through what is known as Eminent Domain.
Eminent Domain is the right for the government to seize the property where as condemnation is the legal process used by the government to seize the property.
The condemning authority is required to provide “just compensation” and if the landlord believes that they amount being offered does not actually reflect the value of the property, they are able to take the matter to court.
If the property owner chooses to take it to court, they would be suing for more compensation or the right to keep the property. Prior to actually seizing the property, the government is required to appraise it, and even possibly pay a pro tanto award (a partial payment).
The government is also required to provide sufficient notice of the condemnation as well as a copy of the appraisal.
Condemnation most often occurs when the government wants to use the land for a public project such as a highway, or even a hotel that is expected to attract more business and generate tax revenue for the city.
If the government is looking to install powerlines or pipelines, the owner of the land remains the owner and the government can gain the right to install by gaining an easement.
If the condemnation clause is non existent in the lease, it is assumed that the tenant is entitled to share the award proportionately with the property owner.
However, it is more beneficially to include a condemnation clause in order to state to what extent the tenant participates in the condemnation proceeding and how much of the compensation of the leasehold interest they are entitled to.
The clause will not determine exactly what is compensable; however, it will discuss the following matters: leasehold termination, restoration obligations, apportionment (distribution of the award), bonus value and rent abatement.
There also needs to be a distinction between total takings and partial takings.
A partial taking is when only a small portion of the land is being taken, which may affect things like parking, conforming under zoning regulations, workability, and more.
Since a partial taking can heavily impact the business, it should be clearly addressed in the clause. As a tenant, you may want to request termination, restoration, or abatement in the event of a partial taking.
In addition to partial taking, arises the access issues.
Access issues refer to the readiness of safe and convenient access to the property in question.
Unfortunately, the modification of access is often overlooked. The modification of access is not considered a taking and is therefore not covered under eminent domain.
However, the government is able to regulate access without having to pay any sort of compensation. This is especially true in the case of properties near highways where the government must ensure a continued flow of traffic. A change in access can have great effects on a business by reversing traffic flow, and affecting delivery vehicle entrance. With this in mind, tenants should address this issue in their clause in the case of it affecting the business.