Eminent Domain Report

When is a lease termination triggered by eminent domain versus by contract?  The case of Media v. City of San Diego, 2021 U.S. Dist. LEXIS 103728 addressed this question and concluded that the lease termination was only a product of the lease naturally terminating, not the governmental acquisition of the underlying property.  This opinion raises questions regarding the future of loss of goodwill and furniture, fixtures, and equipment (FF&E) for short-term tenants.

Background

A billboard owner had been leasing property to display the billboard for many years when it was converted to a month to month lease in 2005. A few years later, the Center City Development Corporation, on behalf of the Redevelopment Agency of the City of San Diego, sent the property owner a proposal to acquire the whole property for a future public project. The billboard owner also received an offer to purchase the billboard lease interest.  Both letters indicated that formal condemnation approval had not yet been obtained.

The billboard owner rejected the offer, while the property owner and the Agency proceeded to complete the sale of the property under threat of eminent domain.

Shortly thereafter, California abolished redevelopment agencies, which led to the reorganization of the property ownership and the creation of a successor agency. Ultimately, the City became the owner of the property, and the City eventually terminated the lease in 2019 and the billboard was finally removed.

Claims

The billboard owner brought suit in federal court for myriad claims, including inverse condemnation for the taking of the billboard and loss of goodwill damages.  The billboard owner argued that the lease termination connected to the 2010 sale of the underlying property and that eminent domain was threatened in that purchase.  The City argued that it never threatened or manifested an intention to exercise eminent domain and that the lease was terminated properly under its own terms.

Decision

The court determined that the billboard owner itself was never threatened with eminent domain and that the lease termination was merely a consequence of a month-to-month lease.  The Court pointed to the language in the letter that indicated that it was only “recommended” that the billboard be purchased, not that eminent domain had been approved.  Essentially, the court stated that what was missing from the inverse condemnation claim was “an unequivocal act or intent to condemn” from the City that would convert the termination of the lease into the equivalent of a taking.  Thus, the billboard owner was not entitled to any damages, including loss of goodwill, as there was never a “taking” of the billboard’s property interests.

Conclusion

The Media decision raises some interesting issues for business owners and public agencies.  Can agencies now acquire private property under threat of eminent domain, and wait for any lease to expire and then evict the tenant would facing any liability?  Would this eliminate goodwill claims for tenants on short-term or month-to-month leases?  Will tenants still be entitled to relocation benefits, regardless of this decision?  While the court here found that the lease was terminated in accordance with its terms and that it was not acquired by or under threat of eminent domain, here the original property agreement stated that the acquisition was under threat of eminent domain.  While only a district court decision, this opinion raises questions about how agencies may attempt to circumvent compensating short-term tenants for loss of business goodwill along with furniture, fixtures and equipment (FF&E).