The Award Goes to…..not the Tenant: Lease Provision Bars Tenant’s Condemnation Award Claim

August 2019

In a recent case, Utah DOT v. Kmart Corp., 428 P.3d 1118 (2018), the Supreme Court of Utah held that a condemnation provision in a lease precluded the tenant, Kmart, from recovering any portion of a condemnation award.  The court reached its conclusion because the condemnation provision included a commonly used clause that stated that the lease would terminate upon a condemnation.  Consequently, due to such lease termination, the court concluded that the tenant no longer had any “protectable property interest in the property.”

In this case, the Utah Department of Transportation (UDOT) condemned an access point from a highway to the shopping center in which Kmart was a tenant.  This partial condemnation of the shopping center materially impaired access to the Kmart-leased premises.  The lease contained a six paragraph condemnation provision that the court described as containing two distinct sections: (1) a termination clause; and (2) a condemnation award allocation clause.  The termination clause included language providing that the lease would terminate if a condemnation would materially impair any access to the leased premises.  The parties agreed that the UDOT’s partial condemnation triggered this language, thereby terminating the lease.

The condemnation award allocation clause provided that Kmart would not be entitled to any portion of the award allocated to any of the landlord’s buildings, but that Kmart would be entitled to the portion allocated to its own building.  The dispute centered around whether Kmart was entitled to compensation given the fact that the lease was terminated: Kmart argued that the plain meaning of the condemnation provision contemplated that Kmart would be entitled to the portion of the award that is based on Kmart’s building, while the UDOT argued that because the lease was terminated, Kmart no longer had a “protectable property interest in the property” and therefore was not entitled to any compensation.  The UDOT added that the condemnation award allocation clause was only applicable in circumstances where there was a partial condemnation and the lease remained in effect.  The district court sided with Kmart and found that it was entitled to a $1,400,000 award.  The Utah Supreme Court reversed.

The Court first acknowledged that the general rule of condemnation allows a tenant to recover an award if the value of the lease is diminished or terminated by eminent domain but such right may be “altered, waived, or terminated” by the terms of the lease.  The Court then held, “UDOT asks us to adopt a termination clause rule followed in most other jurisdictions [footnote citing to cases in the 4th and 7th Circuits, Virginia, New Jersey, Alaska, Arkansas, Colorado, Hawaii, Iowa, Louisiana, Massachusetts, Missouri, Nevada, Ohio, Pennsylvania, Texas, and Washington].  Under this rule, when a lease agreement contains a termination clause, the lessee is not entitled to a condemnation award in the event of a condemnation, because any continuing interest in the leased property—the loss of which would otherwise have entitled the lessee to a condemnation award—has been extinguished under the lease agreement’s terms. . . . Because the termination clause rule conforms to our eminent domain and contract jurisdiction, we adopt it” (brackets added).

Perhaps a different outcome would have resulted had the case been decided in California.    The California Supreme Court, in City of Vista v. Fielder, 13 Cal. 4th 612 (1996), analyzed a similar fact pattern and reached the opposite conclusion.  In Fielder, a restaurant tenant sued to recover a condemnation award.  Initially, both the superior court and the Court of Appeal held in favor of the City of Vista and against the tenant after the City condemned a building known as the “Old Red Barn” in which the tenant operated a restaurant pursuant to a lease.  As in the UDOT case, the lease contained a provision that stated the lease would terminate upon condemnation.  The lower courts cited to the “majority rule” and held that once the lease terminated, the tenant’s rights to any condemnation award also ended.  The California Supreme Court reversed noting that both lower courts ignored California’s Eminent Domain Law (citing to the statutes found in California Civil Procedure Sections 1230 and 1265 et seq.)  The Court held, “Under the Eminent Domain Law, a provision of a lease that declares that the lease terminates if all the property subject thereto is acquired for public use does not deprive the lessee of any right he may have to compensation for the taking of his leasehold or other property” (emphasis in original).  The Court did note that “[t]hese rules may indeed be displaced by a provision of a lease to the contrary.”  In other words, a tenant in California may waive its rights to compensation pursuant to an express term of a lease.