Think Twice About Eminent Domain Provision

If you are considering leasing space that could later be subject to a “condemnation” by the state, and therefore unusable, think twice before agreeing to a termination clause in the eminent domain provision in your lease that would cover this scenario. That’s because, if the lease is terminated due to a condemnation of your space, you wouldn’t be able to get a condemnation award since—without a lease—you would no longer have an interest in the property. 

A Utah tenant learned this the hard way. In that case, a large national retailer leased space in a shopping center that later had a major access point blocked by the state’s department of transportation as part of a “condemnation.” The landlord and tenant each asked the state for a “condemnation award.” The lease between the landlord and tenant contained an “eminent domain” provision.

This provision contained two operative clauses: (1) a termination clause; and (2) a condemnation award allocation clause. The termination clause stated that the tenant’s lease would terminate if a condemnation “materially impaired” access to the leased property. It specified that “in the event all of Tenant’s buildings constructed by Landlord shall be expropriated or the points of ingress and egress to the public roadways be materially impaired by a public authority or quasi-public authority, this lease shall terminate as of the date Tenant shall be deprived thereof.”

The allocation clause stated that the tenant was not entitled to share in an award granted for a condemnation of the landlord’s buildings, but it preserved the tenant’s right to compensation for any buildings or improvements made by the tenant. The clause specified that “Tenant shall not be entitled to share in any award made by reason of expropriation of Landlord buildings on demised premises, or any part thereof; however, the Tenant’s right to receive compensation for damages or to share in any award shall not be affected in any manner hereby if said compensation, damages, or award is made by reason of the expropriation of the land or building or improvements constructed or made by Tenant.” The tenant had not made any improvements to its space or the building.

The department of transportation argued that the termination provision extinguished the tenant’s rights in the lease, so it wasn’t entitled to a condemnation award. A district court ultimately denied the department of transportation’s motion because it concluded that a factual determination needed to be made as to whether the “points of ingress and egress to the public roadways were materially impaired. However, the court didn’t address the effect the termination clause would have on the tenant’s property interest if the access were found to be materially impaired. After a trial, the court determined that the condemnation “materially impaired access and caused the Lease to terminate.” It awarded the tenant $1.4 million. The department of transportation appealed this decision.

A Utah appeals court reversed the condemnation award to the tenant. The appeals court determined that the district court erred in granting a condemnation award to the tenant because of a holding in past cases that stated that where a lease agreement contained a provision terminating a tenant’s leasehold interest upon a condemnation, the tenant no longer had a “protectable property interest entitling it to a condemnation award.”

The appeals court here concluded that the tenant no longer had a protectable property interest in the leased property when the district court made its condemnation award determination because the lease agreement contained a valid termination clause providing that its leasehold interest would be terminated “in the event a condemnation materially impaired an access point to the property, and the termination clause did not contain an express reservation of the tenant’s right to a condemnation award.” The appeals court had decided that the condemnation had materially impaired the access point, so the clause applied [Utah DOT v. Kmart Corp., September 2018].