What’s In Your Condemnation Clause? Landlord and Tenant Issues That Often Arise When Leased Interests are Impacted By Eminent Domain Takings

This Article is written by Owners’ Counsel of America for general informational purposes only.  It is intended to assist landlords and tenants by providing them with some basic information about some of the issues the often arise when leased property is impacted or taken by the power of eminent domain. This Article is not to be viewed as providing legal advice or to be considered as a substitute for consulting with an experienced eminent domain, takings or property rights lawyer on the matters covered herein. The definition of all hyper-linked terms can be found in the Dictionary of Key Terms on the OCA Website.

Negotiating the Possibility of Eminent Domain in the Lease

In negotiating the terms of a lease, the possibility that the property may be subjected to an eminent domain proceeding is usually one of the last things that landlords and tenants are thinking about. But condemnation actions do happen, and parties to a lease who do not provide for that possibility (or do so in a manner that does not protect their interests) can find themselves at a distinct disadvantage, or worse yet, at risk of losing monetary proceeds which might otherwise compensate them for their losses.

What legal obligations and rights a landlord and tenant may have in situations where the subject property (or some portion thereof) will be physically taken by a governmental body is controlled first and foremost by the terms of the lease that they have agree to. That is why one of the first questions lawyers will ask when an eminent domain taking is on the horizon is whether the lease contains what is commonly called a Condemnation Clause, i.e. a written provision that describes the legal rights of the parties in case the property becomes the subject of a condemnation proceeding.

Condemnation Clauses

Condemnation Clauses vary and there is no form provision that will work in all situations. Unfortunately, many “standardized” leases contain generic clauses that use boilerplate language. Theses clauses are generally not tailored to address unique or specific circumstances or conditions that may exist between the landlord and tenant. As a result, either or both parties may be surprised to learn that the Condemnation Clause they agreed to does not offer them the degree of protection or legal rights that they may have assumed.

The structuring of a Condemnation Clause is driven by a number of key factors, including but not limited to: (1) the eminent domain laws and procedures within the state or jurisdiction at issue (2) the method by which just compensation and damages to the property are measured and determined within that state or jurisdiction (3) whether relocation benefits will be available to the tenant (4) the impact that a specific taking may have on a tenant’s leasehold interest, including improvements made to the property or trade fixtures attached to the property (5) whether the lease is longterm with the possibility of renewal or month-to-month (6) whether the lease terminates when the taking occurs or continues beyond the taking.

Because Condemnation Clauses play such an important role in determining the rights and obligations of the landlord and tenant in a future condemnation action, it is not unusual that the party responsible for its initial preparation will draft it in a way that benefits its own interests, while possibly harming the interests of the other party.  Thus it becomes incumbent upon both parties to a lease, together with their attorneys, to negotiate a condemnation provision that is fair and balanced under the circumstances they find themselves in.

What Happens When There Is No Condemnation Clause?

On occasion situations arise when there is no Condemnation Clause in the lease. When this occurs outcomes vary depending upon the applicable eminent domain laws and case authorities in the state or jurisdiction at issue. Some states have laws that in the event a lease fails to include a Condemnation Clause detailing the rights of the parties, it is presumed that the tenant will be entitled to make a claim against any condemnation proceeds that may result from a taking. Other states may follow different rules. As a result, this is an area that benefits greatly from consultation with an experienced eminent domain lawyer.

Handy Primer on Leases and Condemnation Clauses

For more information about leases and Condemnation Clauses please review the following excellent three part series from OCA’s Colorado member Jack Sperber, first published in 2018. While the information in the articles is tailored to Colorado eminent domain law, the general concepts espoused are relatable to the law in many other states. However, once again, consultation with an experienced eminent domain lawyer in your state is advised. 

Property Rights Primer, Part 1: What Are a Tenant’s Rights When the Government Condemns Leased Property?   This article addresses how a tenant’s rights are usually treated under common law condemnation principles.

Property Rights Primer, Part 2: Is the Condemnation Clause in Your Lease Going to Cost You?  This article discusses how the parties to a lease may modify these common law principles by adding a “Condemnation Clause” to their agreement. 

Property Rights Primer, Part 3: Issues to Consider When Negotiating a Condemnation Clause in a Lease. This article provides a checklist of considerations when negotiating such a Condemnation Clause.