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Eminent domain is the power to take private property for public use, often enacted by the government. This part of the lease is often missed and only focused on when the situation occurs where the government gives the tenant or landlord notice that their space is going to be taken.
The government may choose to target certain commercial spaces for eminent domain, during which you would be forced to relocate and give up your space. Commercial real estate is prone to this as a result of highway widening and utility projects.
With this unfortunate circumstance, does come compensation once the right to take the space for public purpose has been officially declared. This limit to eminent domain exists due to the 5th Amendment Takings Clause in the United States.
This clause requires that just compensation is provided to the individual from whom the government is taking the real estate away from for public purpose. Property owners will often seek the help of an attorney during a situation involving eminent domain due to its complexity, in order to ensure that just compensation is received.
Zoning is the procedure during which the government designates the use of specific plots of land.
Generally, the county designates a variety of different zones that can be used differently such as industrial, agricultural, commercial, or residential.
When this designation is made, the type of buildings or structures that can be built there are in accordance with it. If your commercial space is in a zone that the government finds to be suitable for building a municipal park, constructing a highway or train line, or other structures, eminent domain may come into play.
The dispute and negotiation associated with eminent domain usually occurs between the landlord and the government.
However, if the space is being leased to a tenant, there is an existence of a leasehold relationship.
The leasehold estate is not a transfer of right of possession, but rather is a right on condition. This means that the tenant is being transferred the right of possession under the condition of their payment of rent in combination with other associated fees.
Although the tenant does not own the property, they are still entitled to compensation along with the landlord. Since the rights of the tenant are controlled by the lease agreement, the amount of compensation that the tenant can receive is set according to the lease agreement terms.
When the award of just compensation is being determined, it starts with a calculation based on what is called the unit rule or the undivided fee rule.
This rule is dependent on the state, and it takes into consideration the fair market value of the property being taken at the time.
This fee often ignores the property rights and only focuses on the market value.
The fair market value is dependent on factors such as size of the property, accessibility, zoning, level of development, and other characteristics (for example, a restaurant lease will have expensive fixtures and equipment).
Once the undivided award is decided upon, it is split up into proportionate shares. This is known as apportionment and is the final step during which the compensation is divided between the landlord and the tenant.
The lease agreement may address the circumstances of an eminent domain.
For example, it may state that in the case of an eminent domain, the lease is automatically terminated. If this is the case, the tenant is most likely entitled to being provided part of the compensation unless otherwise stated.
The lease must clearly state that the tenant is not entitled to compensation in order for that to be true. The lease may also specify the manner in which the compensation will be divided between the landlord and the tenant.
The tenant may also be entitled to compensation for improvements, fixtures, damages, and other expenses.
The tenant only has the right to recover business damages during the time that the tenant is in possession of the property. Another point to be careful of is abandoning the space before the date of the taking. If the tenant abandons the space prior to the date of taking, there is a chance they may be denied compensation.
This could be argued in the case that the tenant can prove that there were damages due to the threat of eminent domain, therefore causing early abandonment.
It is vital that the tenant considers the terms of the lease agreement in order to enact their rights to compensation.