An Introduction To Eminent Domain
The government's right to use eminent domain is found in the United States Constitution and the California Constitution. These provisions have been there since the constitutions were created. There are two primary restrictions. First, the government must provide "just compensation." This means "fair market value." Such is the main area of dispute in eminent domain actions. Second, the property can only be taken for a "public use." This is a controversial area. Frequently, the government will take one person's business so that another person can conduct a business at the same location. Sometimes the businesses themselves are the same or similar.
Eminent Domain Defined
Eminent domain is a procedure whereby the government acquires all or a portion of property for a public use upon paying just compensation. The government may be the U.S. government, the State of California, the County of Orange, a city, a water district, a redevelopment agency, or any other government agency. There has been much publicity in Orange County lately about eminent domain because of Cal Trans widening the various freeways. Eminent domain is not limited to freeway widening projects. It may include projects as diverse as a new city hall, a shopping center, an office building, a bicycle path or a golf course.
Inverse condemnation is the opposite of eminent domain. Inverse condemnation occurs when the government engages in some activity which diminishes the usefulness and value of the property. The property or business owner requests the government to compensate for the loss of use and loss of value of the property or business. Inverse condemnation can arise in a variety of situations. The government constructs an airport next to the home, and airplanes fly over the home causing the home to shake and the occupants' nerves to rattle. The government realigns the streets in such a way that business patrons are not able to access the business as easily as before. The government makes repeated announcements year after year that it is planning to condemn the property or business and then fails to do so. The repeated announcements depress the value of the property or business. No one wants to buy the property or business because of these announcements.
Or the government changes the zoning of the property from single family residential to agricultural. The property owner may use the property to grow vegetables, but the property owner cannot construct a residence. This is called downzoning. There has been much litigation over downzoning. The usual problem with inverse condemnation is that the government does not consider that it damaged the property or business.
The government contends that it is simply regulating the use of the property or business. The property or business owner must convince the government and especially the judge or jury that the government's action with regard to the property or business is unreasonable.
The Disclosure Requirements
Current law requires that sellers and brokers disclose to prospective buyers any material facts that may affect the value of the property. The requirements for commercial and industrial property are not as strict as the requirements for residential property. Suppose the property owner knows that a government agency has expressed an intent to condemn the property. Is the property owner required to disclose to the prospective buyer the possibility of eminent domain? The answer is uncertain.
In connection with eminent domain, there is often a relocation of the occupants of the property. The occupants may be owners or tenants. The occupant is usually entitled to relocation benefits. Relocation benefits include moving costs, storage costs, replacement advertising costs, replacement housing costs, and physical improvements to the new location. In the case of a business, the business owner is entitled to be compensated for loss of goodwill, i.e., loss of customers because of the move. The government representative will probably offer the relocatee the low end of eligible relocation benefits. Sometimes, the government's representative will not even disclose to the relocatee that he or she is eligible for certain benefits.
Sometimes, the government does not want to acquire all of the property because it does not need it all. The government does not want to pay for what it does not need. This is referred to as a "partial take." When the government takes a portion of the property, this may have an impact on the remainder of the property. In other words, the remainder of the property may not be as valuable as it was prior to the "partial take." The damages associated with this situation are referred to as "severance damages." For example, if there is a bowling alley with a parking lot, with no other nearby parking and the government initiates a partial take of just the parking lot, the bowling alley is not as valuable as it was before the taking because the customers have no place to park their cars. The business will decline dramatically because of the lack of parking.
The Special Problems Created By Leases
Eminent domain is very important in connection with leases. Leases usually have provisions that relate to eminent domain. These are provisions that few read until there is an eminent domain lawsuit.
It is important to be aware of the lease provisions and be sure that your clients are protected. Most leases are drafted by lessor's attorneys. The leases provide that in the event of eminent domain, all of the proceeds from eminent domain go to the lessor and none of the proceeds go to the lessee. Such clauses are generally legal and enforceable.
In negotiating leases, the lessee's attorney may want to eliminate the eminent domain clause or provide that in the event of eminent domain, the award is distributed in accordance with eminent domain law. Alternatively, there are various ways of dividing the settlement or judgment so that lessee and the lessor share the eminent domain proceeds.
The Importance of Appraisers
The primary dispute in eminent domain is over-valuation. The government will usually contend that the property or business is worth less than the property or business owner believes it is worth. This results in a battle of the appraisal experts. Each party retains an appraiser who will testify in court as to the value of the property or business. Usually, the testimony of the appraisers is widely varied.
The government conducts a public hearing and adopts a resolution of necessity. The resolution authorizes the government to initiate the eminent domain action. The resolution requires a two-thirds vote. The resolution must contain certain specific findings relating to the public necessity of the project. The next step is the filing of the lawsuit.
The government files the lawsuit and serves it on the property or business owner. Frequently, the government obtains an order for immediate possession at the same time it files the lawsuit. By depositing the appraised value of the property as determined by the government and complying with certain other procedural formalities, the government is entitled to take possession of the property prior to trial. In the case of occupied property, this may occur within 90 days after the order for immediate possession is served on the property owner. In all other cases, thirty days notice is sufficient. In the case of an "emergency," possession may be had within three days. During the course of the litigation, the parties are required to exchange their respective appraisals and settlement offers. At trial, a judge or jury determines the value of the property or business.
Questions that frequently arise are: What are the amount of the attorney's fees? Who pays them? When are they payable? Attorney's fees generally are not recoverable in an eminent domain action. There are two major exceptions. If the government does not make the property or business owner a reasonable settlement offer, but the property or business owner does make the government a reasonable offer, the property or business owner is entitled to recover attorney's fees and expert witness fees.
What is reasonable is determined by the judge after the trial. There is no fixed formula. If the government offers the property owner $100,000 for the property and the property owner counteroffers the government $200,000 for the property, with the jury determining that the property is worth $200,000, the property owner would be awarded attorney's fees. In the same case, if the jury awarded the property owner $100,000, the property owner would not be awarded attorney's fees. What if the jury awarded $150,000? The result is uncertain.
Another major exception is the case of inverse condemnation. If the property or business owner prevails in an inverse condemnation case, the property or business owner recovers attorney's fees. Attorneys charge clients for fees based on an hourly fee, a contingent fee, or a combination of the two. In the usual contingent fee arrangement, the attorney receives a percentage of the recovery above the amount which the government initially offered the property owner or business owner. If the government offers the property owner $1,000,000 initially and the judge or jury determines that the value of the property is $1,500,000, the attorney's fee would be a percentage (usually 35 to 50) of the $500,000 recovery.
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