Eminent Domain Report

Most of us have been inconvenienced by road construction or other public works.  Streets can be more congested, exits closed, and traffic re-routed, making it more difficult to get to the restaurants, yogurt shops, book stores and other businesses we usually frequent.  Not surprisingly, these businesses often see their revenue decline while construction continues.  Does the public agency owe these businesses anything for these losses?

The short answer for most of the country is, usually not.  Courts generally consider construction-related inconvenience part and parcel of living in a modern society.  And this view makes some sense.  If public agencies had to compensate every business for every loss caused by construction of every public project, costs would quickly climb, making it more difficult for anything to get built.  In most states, this would be the end of the story.

In California, the analysis is somewhat different, especially for businesses who sit on property needed for the project – even if only a tiny sliver of the property is being taken.  Such business owners can seek damages for loss of business goodwill in an eminent domain action.  (And for one agency’s creative solution for businesses not on acquired property check out this recent article by Rebecca Gibian.)

But there are certain requirements in California’s goodwill statute (Code of Civil Procedure section 1263.510) that can create challenges for business owners seeking to recover for loss of business goodwill.  Here are a few that business owners should keep in mind:

• The loss must be caused by the taking.  This sounds simple, but things get complicated quickly when other factors may be contributing to the loss in addition to the public project (e.g., general economic conditions, changes in customers’ habits/preferences, etc.).

• Lost profits are not lost goodwill.  California law does not allow recovery for lost profits per se.  While profits may factor into a goodwill analysis, they cannot form the sole basis for a recovery.

• The business must be real.  No, seriously, this can trip some people up.  The point is the appraiser must value the business that operates on the property.  Not some hypothetical, new and improved business that might develop in the future.  (Check out our post on this issue here.)

• A business owner can’t just sit back and do nothing while waiting for the agency to cut you a check.  The goodwill statute specifically states the owner must take reasonable steps to preserve goodwill.  This might be as simple as adding some signs or offering discounts.

Valuing businesses in eminent domain actions is tricky, and these are just a few of the issues to look out for.