What Is Likely the Weakest Provision in Your Multi-State Lease?

Employing a single, ubiquitous eminent domain lease provision for multiple states is like displaying a single photograph of a wolf as the individual portrait for every finalist at the Westminster Dog Show. Every state must comply with the minimal just compensation and due process requirements grounded in the federal constitution. While state-by-state just compensation principles and eminent domain procedures often evolved from national precedent, the United States Supreme Court acknowledged that nothing in federal law “precludes any State from placing further restrictions on its exercise of the takings power” beyond those found in the Fifth Amendment. Kelo v New London, Conn, 545 US 469, 489 (2005). Many states have implemented restrictions on agency power, including by expanding property owners’ just compensation rights and granting additional statutory benefits. Additionally, state procedures vary tremendously. For example, in some states, property owners are defendants in eminent domain lawsuits that address both the propriety of the taking and just compensation. Other states require property owners to sue to challenge agencies’ determinations. A properly written eminent domain provision is tailored to recognize the substantive and procedural idiosyncrasies of the state in which the property is located.

At its most elemental, the lease should reflect the states’ notice requirements. In states requiring agencies to include tenants from the outset of the acquisition process, notice is less important. But if tenants must intervene to participate, the lease should require notice of the proposed taking and the triggering event should reflect that states’ procedures.

Most leases provide termination rights dependent upon the level of impact created by a taking. The deadline to exercise that right may reflect the point in the process at which the agency’s public use and necessity are validated. However, leases may need to establish termination deadlines with a consideration of just compensation admissibility issues. For example, if a state rigidly focuses on a particular date of value relative to admission of evidence, the fact that a termination right was exercised after that date may not be admitted, making obtaining just compensation attributable to that exercise more difficult. State laws that apply a confirmation of public use and necessity retroactively to an earlier date create complicated drafting problems.

Landlords with leverage frequently shift payment of just compensation to themselves.  This helps landlords as it relates to a common type of real estate-based just compensation that allows tenants to capture the benefit of under-market rental rates through the duration of the lease, unless reallocated. However, broad just compensation allocation to landlords can sometimes harm both the parties to the lease. For example, some states recognize non-real estate classes of just compensation relating to the impacts on a business. Allocating that type of just compensation from a tenant to a landlord can be counterproductive. A landlord likely cannot convincingly present a claim seeking compensation for the impact on the tenant’s business; agency attorneys can weaponize the lease provision to prevent the tenant from retaining the claim or to cast doubt on its viability; and the inability to present the claim may be the difference between the tenant surviving the project and continuing to pay rent or folding.

There are also wide variances in the determination of just compensation. The Fifth Amendment prohibits property from being taken for a public use without just compensation. However, some state constitutions afford significantly greater protection by preventing either the taking or damaging of private property. “Or damage” states frequently recognize broader categories of just compensation. For example, a property owner is more likely to recover when a taking results in partial access reductions, grade changes, or alterations in drainage in an “or damage” state.  Additionally, “or damage” states may allow for broader consideration of the impact of the construction outside a taken area. The types of claims available should be considered when preparing lease provisions that allocate just compensation between the landlord and tenant.

Finally, some states afford owners additional benefits that may include attorney fee or litigation expense reimbursement by the agency. Some states attorney fee reimbursement provisions encourage attorneys representing property owners to work on a contingency fee basis. The potential to obtain free or subsidized representation and expert consulting may impact eminent domain provision negotiations.

It is true that only a numerically trivial number of eminent domain provisions in leases will ever be triggered. In some instances, the triggering events may only create nominal impacts. However, when a taking results in the total taking of a property or a partial taking with significant impacts, an eminent domain provision reflecting the specific laws of that jurisdiction can be the difference between success and disaster.

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