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Condemnation Provision Condemns Compensation
by Michael Blahy

In 2010, the West Point Shopping Center, owned by FPA West Point, LLC (FPA), had an access point condemned by the Utah Department of Transportation (UDOT). KMART Corporation (Kmart) was one of the tenants in the shopping center. Both FPA and Kmart opposed the condemnation, but UDOT was able to proceed by invoking an Occupancy Statute. The two companies were left to assert their rights to compensation by entering into condemnation proceedings.

Early on in the proceedings, the district court granted FPA’s motion to separately determine each party’s property interest. UDOT filed for, was granted and lost an appeal. Following the Just Compensation Statute, the case returned to district court requiring the use of the aggregate-of-interests valuation method.

At the district court, UDOT moved for partial summary judgement, saying that due to a condemnation provision in the lease between FPA and Kmart, Kmart’s interest terminated with the condemnation.

The district court denied the motion on the grounds that because the valuation method which they were required to follow made the first line of the condemnation clause no longer applicable. Kmart was awarded $1.4 million.

UDOT appealed the decision to the Utah Supreme Court.

The Condemnation Provision in the lease had two important clauses in this case:

  1. 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.

  2. 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.

UDOT argued “that the district court erred in awarding a condemnation award to Kmart because the termination clause in Kmart’s lease extinguished any compensable property right Kmart previously had in the condemned property“.

Kmart argued that the previous Utah Supreme Court decision in this case “rendered termination clauses inoperative in Utah“. They also argued “that even if termination clauses are legally effective, its right to just compensation was preserved by the plain language of its lease agreement”.

The Utah Supreme Court said “It is a “basic principle of contract law that parties are generally ‘free to contract according to their desires in whatever terms they can agree upon.’” For this reason, “courts are loath to interfere with parties’ ability to contract freely” “. “The two most common clauses in condemnation provisions are termination clauses and allocation clauses. … These two types of clauses can be tailored to address a variety of future circumstances“.

A leasehold interest is a temporary right to occupy the real property of another. In the absence of a termination clause, a condemnation of leased property would deprive the lessee of its right to continue occupying the leased property for the remainder of the lease term. This would constitute a loss of an existing and protectable property right. So, for example, if a lessee had five years remaining on its lease when the property it was leasing is condemned, the condemnor would be obligated to compensate the lessee for the value associated with the remaining five years of the lease term”. But, “when the lessee has agreed to include a termination clause … the lessee has a right to occupy the real property until the end of the lease term or until the property is condemned”.

UDOT asked the Utah Supreme Court “to adopt a termination clause rule followed in most other jurisdictions. … when a lease agreement contains a termination clause, the lessee is not entitled to a condemnation award in the event of a condemnation … because the lessee’s property interest is wholly created by the lease agreement, when the lease terminates, so does the lessee’s interest in the leased property, including the lessee’s right to just compensation”.

The Utah Supreme Court said “Utah’s “constitutional guarantee of just compensation is [only] triggered” if a party shows that they have some “protectable property interest in the property”” and “before we grant a condemnation award, the claimant must show that it has an existing and protectable property interest in the condemned property. (“Compensation cannot be allowed for something that does not exist”)”.

The Utah Supreme Court also observed “the plain language of the allocation clause shows that Kmart reserved only a right to compensation for the value of any fixtures or improvements it constructed or made to the leased property, and Kmart has not asserted that it was entitled to a compensation award under this provision“.

The Utah Supreme Court concluded “where a lease agreement contains a provision terminating a lessee’s leasehold interest upon a condemnation, the lessee no longer has a protectable property interest entitling it to a condemnation award. Because Kmart’s lease agreement in this case contained a termination clause, Kmart’s property rights were extinguished under the lease. The district court, therefore, erred in granting Kmart a condemnation award. Accordingly, we reverse the district court’s condemnation award to Kmart”.

(Utah Department of Transportation v. KMART Corporation, (Supreme Court Of The State Of Utah, Citation: 2018 UT 54))

Decided: September, 2018
Published: September, 2018

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