The California Court of Appeals, 2nd District, recently ruled in Los Angeles Unified School District v. Pulgarin, that a written lease agreement is not necessary to grant a business owner compensation for goodwill for an eminent domain taking under California Code of Civil Procedure section 1263.510, if the business owner can show that he has suffered a loss as a direct consequence of the taking of the property.
In Los Angeles Unified School District v. Pulgarin, the trial court denied compensation for loss of goodwill to Mid Town Recycling (“Mid Town”) because it did not have a written lease agreement in place when the Los Angeles Unified School District (“LAUSD”) filed an action in eminent domain to acquire commercial property. Mid Town was one of several small businesses occupying the property under a month-to-month tenancy. It did not have a long-standing written lease at the time of the taking of the property.
The Court of Appeals, was then asked to decide whether a written long term lease agreement was necessary, under Code of Civil Procedure section 1263.510 for a business’s owner’s claim for compensable goodwill.
Although there is no constitutional right to compensation for goodwill, under section 1263.510, the owner of a business conducted on property taken by eminent domain may be compensated for loss of goodwill in eminent domain actions.
Property owners have a right to be compensated for loss of goodwill if they can show the following to be true:
- The loss was caused by the taking of the property,
- The loss cannot reasonably be prevented by a relocation of the business or by taking steps and adopting procedures that a reasonably prudent person would take and adopt in preserving the goodwill,
- Compensation for the loss will not be included in payments under Section 7262 of the Government Code, and
- Compensation for the loss will not be a duplicated in the compensation otherwise awarded to the owner.
There is no explicit mention of a requirement that the owner of the business that operates on the property prove that he is the owner of the property or produce a written lease. He must only prove that the loss he is seeking compensation for was directly caused by the taking of the property. In deciding LAUSD’s pretrial motion, the trial court relied on San Diego Metropolitan Transit Development Bd. V. Handlery Hotel, Inc. (1999) 73 Cal.App.4th 517, 533 (“Handlery”) to show that in the Handlerymatter the lack of a written lease was enough to eliminate the possibility of compensable goodwill. The trial court had determined that if a business owner has no enforceable property interest a claim for compensation for goodwill cannot stand.
However, the Court Appeals distinguished the Handlery decision by focusing on the fact that Handlery’s right to possession of the property it had occupied was not terminated by the condemnation proceedings, rather it was terminated by the fee owner’s decision not to continue to lease the property to Handlery. For this reason, Handlery could not establish that its loss of goodwill was caused by the taking of the property, as required under section 1263.510 (a)(1).
In contrast, Mid Town’s right to possession was terminated by the condemnation proceedings and therefore the taking of the property had caused it to suffer a loss of goodwill for the business it conducted on the property which was taken.
As a result of this decision, commercial lease tenants will now be able to make claims for loss of business goodwill in eminent domain proceedings provided they can establish that they would have remained in possession of the commercially leased property had eminent domain proceedings not commenced.