THE CALIFORNIA EMINENT DOMAIN HANDBOOK

The constitutional requirement of just compensation applies not just to the record owner of the property, but to anyone whose property interest is acquired by the government agency. For example, a business tenant on property to be acquired by eminent domain may be entitled to compensation for the value of his leasehold interest, the value of his fixtures and equipment, and the loss of business goodwill suffered as a result of the government agency’s acquisition.

Many leases include a “condemnation clause” which spells out the entitlement to compensation as between the owner and tenant. These clauses generally specify whether the tenant is, or is not, entitled to any “leasehold bonus value” — that is, the value of the tenant’s leasehold interest. Courts have virtually uniformly held such condemnation clauses to be enforceable. Even under these provisions, however, the tenant is still often entitled to the value of his own fixtures and equipment and business goodwill.

Under the California Constitution, property and business owners are entitled to have just compensation determined by a jury.

The government is required to pay the “fair market value” of the property it acquires by eminent domain. California’s Eminent Domain Law generally 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 by 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 other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.”

Evidence of fair market value is generally presented to the jury by real estate appraisers retained by each of the parties. Real estate appraisal is not an exact science, and as such, appraisers often differ in their opinions of value in a particular case. In fact, in a great many cases, the government’s appraiser and the owner’s appraiser may disagree by tens of thousands, hundreds of thousands, or even millions of dollars!

It is particularly important in this regard to retain appraisers who have significant experience in eminent domain matters. Experienced eminent domain attorneys, such as those at California Eminent Domain Law Group, have appraisers with whom they work and will recommend to their clients. Eminent domain appraisals must comply with statutory and case authority peculiar to eminent domain matters. Working with an appraiser or attorney who is inexperienced in eminent domain can be a very costly mistake.

When property is appraised, the appraiser must provide an opinion of value as of a particular date. California law provides several possible dates of value, depending on the circumstances of the particular case.

In most cases, the date of value will be the date the government makes a deposit of probable compensation into court. Alternative dates are either the date the eminent domain complaint is filed in court, or the date of trial.

Which particular date applies in your case will depend on the specific facts of your case.

When a property is leased or rented, both the owner and tenant may be entitled to compensation, depending on whether the lease contains an enforceable condemnation clause. If there is no condemnation clause, the property is generally valued as a whole and that value is then divided among the owner and the tenants according to their respective interests in the property. What many property owners do not realize is that if their property is leased at below market rents, and their lease does not contain a condemnation clause, the tenant may be entitled to receive a sizeable portion of any compensation paid for the real estate.

It should be noted that the government can alternatively require that each party’s interest be separately valued, rather than valuing the property as a whole and then dividing that whole. This is, however, rare.

Often, the government needs only a portion of a particular property, such as a strip of land needed for street widening. In those cases, just compensation is determined not only by the value of the part taken, but also by the damage to the remaining property. Such damages are called “severance damages,” i.e., damages caused by severance of the remainder from the part taken. “Severance damage” as a general proposition, is the amount of damage to the remaining portion of the parcel which is caused by the severance of the remainder from the part taken, or by the construction and operation of the project for which the property is taken.

Severance damages may be minimal or non-existent in some cases. In others, they can be quite high — sometimes approaching the value of the entire property.

As with appraisal for eminent domain in general, severance damages is one of those areas which is highly specific to eminent domain cases. As such, it is imperative that only an appraiser experienced in eminent domain be retained to evaluate these damages. As noted previously, experienced eminent domain counsel, such as California Eminent Domain Law Group, can and do recommend to their clients such appraisers with whom the attorneys work on a regular basis.

Owners are entitled to compensation not only for their property, but also for “improvements pertaining to realty.” These improvements can be anything from pavement and fencing to furniture and machinery, depending upon the facts of a particular case.

The government is required to pay the fair market value “in place” of such improvements. Value “in place” generally means the value of the improvements as part of a going concern, as opposed to salvage value or replacement cost.

The fair market value of improvements pertaining to realty is generally determined through obtaining appraisal reports. Ultimately, the jury decides value if the parties cannot reach settlement prior to trial.

California’s Eminent Domain Law — unlike the laws of most other states — provides that a business owner may be entitled to any loss of business “goodwill” caused by the taking of property on which the business is located. Business “goodwill” is defined in the Eminent Domain Law 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.”

Generally, goodwill is valued based on the sustainable income flow generated by the business. How that income translates into goodwill value is determined through experienced eminent domain business appraisers. Generally, value varies based upon factors such as length of time in the business, nature of the industry, customer base, economic conditions, reputation, security of occupancy, nature of the business’ fixed assets, and risk associated with the business. Some businesses possess no goodwill value. Others may possess thousands or even millions of dollars of goodwill value.

It is very important in eminent domain cases to work only with business appraisers who are experienced in eminent domain valuations. Experienced eminent domain counsel, such as California Eminent Domain Law Group, can refer the business owner to these appraisers with whom they work on a regular basis. Hiring inexperienced eminent domain counsel or an appraiser inexperienced in eminent domain matters can be a very costly mistake.

A business owner is only entitled to compensation for loss of business goodwill if he proves all of the following:

1. The loss is caused by the taking of the property or injury to the property on which the business is located;
2. The loss cannot reasonably be prevented by a relocation of the business or by taking steps and procedures which a reasonably prudent person would take in preserving the goodwill; and
3. Compensation for the loss will not be included or duplicated in any other payments made to the business owner.

Thus, a business owner generally must take reasonable steps to try to relocate the business if the relocation would result in retention of all or some of the business’ goodwill value. However, it should be noted that even if a business is relocated, it can still suffer a loss of goodwill. Relocation can result in loss of patronage, loss of income, or higher expenses. California courts have held, for example, that if a business experiences higher expenses at a relocation site, the business may be entitled to a loss of goodwill based on the resulting decline in net income, even if the business loses no patronage at all as a result of the taking.

One thing which must be kept in mind in order to protect your rights to recover business losses is that you should avoid providing information about your business income to the condemning agency until after you have consulted with experienced eminent domain counsel. Anything you say can – and will – be used against you by the agency.

The government must generally pay interest on the amount of any award of just compensation from the earlier of the date it takes possession of the property, or from the date of judgment. The amount of interest is variable, and changes every six months. The amount applicable to any six month period is determined by a procedure set forth in the Eminent Domain Law.

Most eminent domain cases are handled on a contingency fee basis, though some clients opt for an hourly fee arrangement.

Usually, the contingency is based on the amount over and above the government’s initial offer which the attorney is able to obtain for you. You therefore bear no risk of exposure to paying attorneys’ fees unless the attorney obtains greater compensation for you. If the attorney does not obtain greater compensation than the amount of the government’s initial offer, you will not be responsible for attorneys’ fees. If the attorney does obtain greater compensation than the amount of the government’s offer, then the attorney is entitled to a percentage of that excess. You will, however, generally be responsible in any event for out of pocket costs and fees paid to third party appraisers.

Normal court costs, such as filing fees paid to the court, deposition fees paid to court reporters and certain witness costs are generally reimbursed to the property owner at the conclusion of the case. In addition, in some cases, all or a portion of the attorneys’ fees and appraisal fees may be recoverable from the condemning agency at the conclusion of the case. If, for example, the property owner 20 days before trial makes a reasonable settlement demand, and the condemning agency makes an unreasonable offer, then the property owner may be entitled to recover all or part of his attorneys’ and appraisers’ fees, whether the fee is based on a contingency or hourly basis. Each case, of course, differs and must be evaluated on its own merits.