Eminent Domain Provisions in Commercial Leases

Certain steps should be taken in commercial leases eminent domain provisions regardless of whether they are negotiated from the perspective of the landlord or tenant. 

I am perhaps unique in Michigan in that I have handled hundreds of cases both in eminent domain and relating to commercial leases. That experience includes both drafting eminent domain provision language for landlords and tenants or representing both in condemnation cases. 

Eminent domain provisions are often lacking. This stems from three basic problems.

First, eminent domain provisions are different from bankruptcy or other types of language where a national approach in more effective. The eminent domain process varies vastly from state to state, making provisions drafted nationally less useful.

Additionally, unlike default remedies that can also vary from state to state, eminent domain arises less frequently. Therefore, less attention is paid.

Finally, most attorneys who draft lease provisions have a greater degree of knowledge about lease enforcement than eminent domain. 

The language that is going to end up in lease is based upon the leverage of the parties negotiating it. However, certain things should be done in all eminent domain provisions. It does a landlord little good to “win” the negotiation on the eminent domain provision from a legal perspective, where the landlord has little practical ability to pursue a certain type of claim assigned to it or if the landlord puts its tenant in the position of not being able to survive a taking. 

First, the eminent domain provision language allocating types of claims between the landlord and tenant should use the actual eminent domain terminology applicable in that state. This can change dramatically from state to state. For example, in Michigan, property owners are entitled to be paid their costs to avoid business interruption. In limited circumstances, they can obtain the going concern value of their business. Property owners can make claims for fixtures, with the definition of fixture used in eminent domain being much more expansive than what is typically recognized to be a fixture in a commercial lease. In Michigan, the eminent domain definition of a fixture does not require it to be affixed. It could include things like logoed uniforms. 

The allocation of just compensation claims should never be so ubiquitous that these types of claims are assigned from the tenant to the landlord. There are two reasons for this rule. First, such an assignment would have a little practical benefit to the landlord. The landlord would not know what business interruption expenses a tenant incurred to be able to make the claim. Even if a landlord tried to claim that nature because it was assigned under the lease, the landlord may have trouble presenting it convincingly without the tenant’s cooperation.

More importantly, the ability to make a business interruption claim may be what allows a tenant to survive a taking. In a partial taking, the landlord should want the tenant to be able to survive the taking and continuing paying rent.

As to real estate based claims, the allocation of them is typically an exercise in leverage in the negotiation. However, to the extent that a landlord is receiving the entirety of its rent and for either all or a portion of the balance of the term of a lease, the taking reduces what would otherwise have been the market value of the leased premises, a tenant should be allowed to make that claim. While a landlord may have other significant real estate damages, the reduction in the market value of particular leased premises, particularly temporarily, is a claim that a landlord would have great difficulty in presenting convincingly even if assigned to it by a lease to the extent the landlord is receiving the full rent contemplated by the lease. However, a tenant faced with closed access, loss of parking, or other impacts of a taking would have a convincing position. Furthermore, it is in the best interest of the landlord to have that tenant be able to receive just compensation that could allow it to survive the taking and avoid a potential future vacancy. 

While takings can be a fairly rare occurrence for a particular shopping center, their impacts can be tremendous. For that reason, preparing a lease that recognizes the specifics of a particular jurisdiction and ensures that tenants can make claims that could otherwise not be made by the landlord makes sense in all circumstances, regardless of the relative leverage of the parties. 

If you have any questions about commercial eminent domain provisions, please do not hesitate to contact me. Similarly, if you are experienced at taking as either a landlord or tenant, I am available to assist.