Does Tenant Have Right to Compensation If the Leased Property Is Condemned?

August 25, 2020

SITUATION

Commercial property is condemned. The tenant, a petroleum company, seeks a portion of the condemnation award compensating it for its remaining leasehold interest. The lease includes the following two provisions dealing with the tenant’s rights in the event the property is condemned during the lease term:

1. Condemnation: In the event of the taking or conveyance of the whole or any part of the Premises by reason of condemnation by any public or quasi-public body, Landlord and Tenant shall represent themselves independently in seeking damages before the condemning body. Each party shall be entitled to the amount awarded respectively to each.

2. Termination of Lease Due to Condemnation: In the event that Condemnation materially adversely affects the use of the Premises, Tenant may terminate the Lease by giving Landlord sixty (60) days’ written notice of its intention to terminate the Lease after receiving notice of the Condemnation from the condemning authority.

QUESTION

Is the tenant entitled to a portion of the condemnation award?

A. No, because the lease doesn’t expressly provide for such an entitlement.

B. Yes, because the entitlement is implied and doesn’t have to be spelled out in the lease.

C. No, because the lease waives whatever entitlements the tenant has in the award.

D. Yes, because the condemnation doesn’t automatically trigger the termination clause.

ANSWER

B. The tenant has a valid claim to the condemnation proceeds because the entitlement is implied under common law and not waived by the lease.

EXPLANATION

This scenario, which is based on an actual case, illustrates tenants’ basic rights when the property they lease is condemned and how what the lease says and doesn’t say impacts those rights. The starting point: Tenants are, in fact, entitled to just compensation for their leasehold interest when the government takes the property they lease. This right comes from common law—that is, case law made by the courts interpreting the Fifth Amendment and other federal and state laws.

But while the lease doesn’t create tenants’ entitlement to compensation, it can take it away. In other words, tenants can and often do agree to waive or contract out of their condemnation entitlement rights. Lucky for the tenant, the lease in this case included no provisions purporting to contract those rights away. So, B is the right answer.

WHY WRONG ANSWERS ARE WRONG

A is wrong because under the common law of not only Virginia where this case was decided but across the U.S., a tenant doesn’t need an express lease provision to be able to recover compensation for its leasehold interest in the event of condemnation.

C is wrong because the lease doesn’t waive the tenant’s condemnation rights. On the contrary, Clause 1 recognizes the tenant’s rights to seek and recover condemnation damages from the condemning authority; and while Clause 2 allows the tenant to terminate the lease in the event of termination, it doesn’t require it to do so.

D is wrong because while a clause automatically terminating the lease in the event of condemnation does operate to end a tenant’s leasehold rights thereby jeopardizing its case for compensation, the termination clause merely gave the tenant the option to terminate. And since the tenant didn’t exercise the option, it didn’t forfeit its remaining leasehold rights.

Comm'r of Hwys v. Thompson: 2020 Va. Cir. LEXIS 112

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