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Goodwill Compensation
by Michael Blahy

People love their donut and coffee while sitting in morning traffic on their way work. For over 30 years, Yum Yum Donut Shops, Inc. (Yum Yum), a chain of donut shops had the ideal location on Crenshaw Boulevard, half a mile from the Rosa Parks Freeway (Interstate 10) in Los Angeles.

The Los Angeles County Metropolitan Transportation Authority (MTA) had plans to build a rail line, the Crenshaw/LAX Transit Corridor Project.

In California, eminent domain law was governed by constitutional provisions which did not take into account goodwill built up by businesses forced to relocate. In 1975, the stinginess was corrected with the passing of Code of Civil Procedure section 1263.510. The courts view “section 1263.510 is a remedial statute that is ‘to be liberally construed, with a view to effect its objects and to promote justice.’ ” The statute requires, a condemnee to establish in a court trial entitlement to goodwill, including whether the loss of goodwill cannot be prevented by relocating or making other reasonable mitigation efforts. Once entitlement is established, a jury trial would decide the value of that loss.

After failed negotiations, the MTA sued Yum Yum to take their Store 58 by eminent domain, since the property was required for a commuter transit project. MTA had proposed at least ten potential relocation sites, which all were rejected by Yum Yum. Three of the sites, MTA claimed were unreasonably rejected. Yum Yum argued that it would have to invest $250,000 to $300,000 to relocate Store 58 and most of those expenses would not have been reimbursable under the Relocation Act. The court heard undisputed expert testimony establishing some loss of goodwill at all the proposed sites, but [t]he trial court concluded Yum Yum was not entitled to compensation for goodwill because Yum Yum unreasonably refused to relocate the shop to one of three sites MTA proposed.

Yum Yum appealed to the California Court of Appeals.

Yum Yum Store 58 possessed following favorable properties:

  • heavy morning traffic toward Interstate 10, great for morning business

  • two driveways for easy entry and leaving with right turns in and out

  • a signalized intersection just south of Store 58, slowed traffic for more visibility and made it easier to enter and exit the parking lot

  • Yum Yum had the largest and highest place on the pole sign

  • three building signs where prominently visible from the west, south and north

  • the one mile trade radius was densely populated with the ideal demographics of lower to middle income households

  • the freestanding building was an ideal size of 1,232 square feet
Aaron Amster, a business appraiser and an expert on goodwill testified on behalf of MTA. He said that the goodwill value of Store 58 was $620,000. He also suggested that the goodwill available if Yum Yum relocated to the best three sites proposed by MTA would be $138,000, $202,000 or $340,000. In his opinion, “some goodwill could have been preserved at all three of these potential relocation sites.” Amster, on cross-examination, admitted that “[t]here would have been a loss of goodwill’ if Yum Yum ‘had relocated [the shop] to one of these three locations. ”

Yum Yum argued it was entitled to compensation for the value of lost goodwill under section 1263.510 because Amster conceded Yum Yum would lose some goodwill even if it relocated the shop to one of the three potential relocation sites. Yum Yum further argued it was entitled to a jury trial under section 1263.510 to determine that value.

MTA argued that Yum Yum applied overly strict location selection criteria and unreasonably rejected the three potential relocation sites, thus precluding Yum Yum from seeking compensation for any lost goodwill under section 1263.510, subdivision (a)(2) .

The appeals court agreed with the MTA argument that “the language of section 1263.510 is unambiguous. The statute’s unambiguous plain language provides that a condemnee must show it cannot prevent a loss of goodwill by relocating or otherwise taking reasonable steps to prevent that loss to be entitled to a jury trial on the amount of that unavoidable loss”. They noted the better argument that “if the condemnee would lose goodwill—even if it relocated its business or otherwise reasonably mitigated the loss—the condemnee satisfies its threshold burden”. They emphasized, “[n]othing in section 1263.510’s language provides that the condemnee is entitled to no compensation at all for lost goodwill if the condemnee fails to mitigate a portion of that loss”.

Appeals court summarised:

  • the trial court’s ruling turned on its following reasoning: “Where the condemnee cannot establish the facts showing it took reasonable steps to preserve its goodwill, it will not be entitled to any compensation for alleged loss of goodwill,’ and ‘[u]ltimately, ‘ . . . if a business can retain some goodwill value at a new location by serving new customers, it must do so, even if it loses many of its old patrons.’ ” We respectfully observe those statements of law are inaccurate.

  • We are aware of no authority compelling a condemnee to relocate when the investment required to relocate would make it diseconomic to do so. Indeed, the authority is to the contrary.

  • MTA’s own uncontroverted evidence supported the existence of loss of some goodwill that could not have been reasonably mitigated.

  • The trial court based its finding, however, on an erroneous legal assumption that if Yum Yum failed to mitigate as to some of its loss of goodwill, it was not entitled to any compensation for goodwill. It was uncontroverted that Yum Yum would have lost quantifiable goodwill even if it had relocated to any of the three locations MTA proposed. We thus cannot conclude that the trial court’s erroneous interpretation of the law was harmless.
The appeals court concluded:

  • The judgment is reversed, and the matter remanded with instructions to:

    1. enter an order that Yum Yum established its entitlement to compensation for goodwill resulting from the taking of the shop

    2. hold a jury trial to determine the value of that loss

  • Yum Yum is awarded its costs on appeal.

(Los Angeles County Metropolitan Transportation Authority v. Yum Yum Donut Shops (California Courts of Appeal, Docket: B276280(Second Appellate District)))

Decided: February, 2019
Published: February, 2019

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