Define “Special Damages” in Condemnation Clause
When negotiating your lease, there are many risks that you should take into account and provide provisions that will protect you in case those problems arise. Condemnation—the government’s seizing of private property for public use—is a risk that’s sometimes overlooked. Depending on the type of business they operate, some tenants prefer to rent space in older industrial-type buildings, rather than at newly developed or renovated shopping centers or office buildings. Specifically, businesses that use large or loud equipment, like a machine shop, may want to find an older building, especially if the rent is lower because the condition of the building isn’t the greatest. The downside? If the property is considered by the government to be deteriorated, then it can be condemned and sold with the power of “eminent domain,” even if the property owners don’t want to sell it.
You may think that you’re protecting yourself if you include a “condemnation clause” in your lease for space in an older building that isn’t that well maintained, or has some other flaw that leads to it being condemned at some point during your lease. A condemnation clause might state that if the building is condemned, the lease would terminate automatically and you’d be awarded special damages. But if you didn’t include a definition of “special damages” in the clause, it might not help you if you’re expecting to recoup the difference between your lease rent and the market value of the lease—in other words, the “leasehold advantage.”
In the past, courts have ruled that a tenant wasn’t entitled to recover its lost future leasehold advantage when it didn’t define “special damages” in the lease. Courts have stressed that a tenant’s interpretation of that phrase—that it would be permitted to recover its lost future leasehold advantage—must be substantiated by the lease or another authority to be enforceable. To avoid being disappointed after the demolition if your building is condemned, be very specific in your condemnation clause about what special damages means in your case.