Utah Dep't of Transp. v. Kmart Corp. ( 2018 )

This opinion is subject to revision before final
publication in the Pacific Reporter
2018 UT 54
IN THE
SUPREME COURT OF THE STATE OF UTAH
UTAH DEPARTMENT OF TRANSPORTATION,
Appellant and Cross Appellee,
v.
KMART CORPORATION,
Appellee and Cross Appellant.
No. 20160653
Filed September 25, 2018
On Direct Appeal
Third District, Salt Lake
The Honorable Keith A. Kelly
No. 100907779
Attorneys:
Sean D. Reyes, Att’y Gen., James R. Soper, Barbara E. Ochoa,
Asst. Att’ys Gen., Erin T. Middleton, Asst. Solic. Gen., Salt Lake City,
for appellant
Perrin R. Love, Shannon Zollinger, Salt Lake City, for appellee
CHIEF JUSTICE DURRANT authored the opinion of the Court, in which
ASSOCIATE CHIEF JUSTICE LEE, JUSTICE PETERSEN, JUDGE MORTENSEN,
and JUDGE HAGAN joined.
Having recused themselves, JUSTICE HIMONAS and
JUSTICE PEARCE did not participate herein. COURT OF APPEALS
JUDGE DAVID N. MORTENSEN and COURT OF APPEALS
JUDGE DIANA HAGAN sat.
UDOT v. KMART
Opinion of the Court
CHIEF JUSTICE DURRANT, opinion of the Court:
Introduction
¶1 This eminent domain case is before us on appeal for the
second time. The first appeal (Utah Department of Transportation v.
FPA West Point, LLC1) addressed valuation methods in the context of
a condemnation award determination. In that case, we held that
courts must use the aggregate-of-interests approach—which
determines the value of properties with divided ownership interests
by assessing the value of each property interest separately—in
deciding the amount of a condemnation award. In this appeal we
must decide whether the district court erred by granting a
condemnation award to Kmart—a lessee—even though Kmart’s
lease contained a clause terminating its leasehold interest in the
event of a condemnation. We hold that it did. Because the
termination clause extinguished all of Kmart’s compensable
property interests, Kmart was not entitled to compensation.
Accordingly, we reverse the district court’s grant of a condemnation
award to Kmart.
Background
¶2 In 2010 the Utah Department of Transportation (UDOT)
condemned an access point from Bangerter Highway to the West
Point Shopping Center. At the time of the condemnation, the
shopping center was owned by FPA West Point, LLC. FPA leased
buildings in the shopping center to a number of businesses,
including K MART Corporation (Kmart). Both FPA and Kmart
entered the condemnation proceedings, asserting rights to just
compensation under Utah Code section 78B-6-508.
¶3 Despite FPA and Kmart’s opposition, UDOT was able—
pursuant to Utah Code section 78B-6-510 (Occupancy Statute)—to
close the access point by depositing $1.25 million with the district
court.2
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1 2012 UT 79, 304 P.3d 810.
2 The Occupancy Statute allows condemnors to proceed with a
condemnation where they demonstrate a need to speedily occupy
the property and post a deposit equal to the property’s appraised
value. UDOT met both of these requirements.
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Opinion of the Court
¶4 Shortly thereafter, FPA filed a motion requesting the district
court to separately determine the value of each party’s property
interest. The district court granted this motion and UDOT filed an
interlocutory appeal to this court, which we granted. In our decision
on appeal, we held that under Utah Code section 78B-6-511 (Just
Compensation Statute) courts are required to separately determine
the value of a condemnation award for each affected property
owner’s property.3 This valuation method is referred to as the
aggregate-of-interests approach.
¶5 Returning to the district court, UDOT brought a motion for
partial summary judgment against Kmart. UDOT argued that due to
a condemnation provision in Kmart’s lease with FPA, Kmart no
longer had any interest for which it should be compensated.
¶6 This condemnation provision contains two operative
clauses: (1) a termination clause and (2) a condemnation award
allocation clause (allocation clause). The termination clause states
that Kmart’s lease would terminate if a condemnation “materially
impaired” access to the leased property:
In the event all of Tenant’s buildings constructed by
Landlord shall be expropriated or the points of ingress
and egress to the public roadways . . . be materially
impaired by a public authority or quasi-public
authority, this lease shall terminate as of the date
Tenant shall be deprived thereof.
And the allocation clause states that Kmart is not entitled to share in
an award granted for a condemnation of FPA’s buildings, but it
preserves Kmart’s right to compensation for any buildings or
improvements made by Kmart:
Tenant shall not be entitled to share in any award
made by reason of expropriation of Landlord buildings
on demised premises, or any part thereof . . . ; however,
the Tenant’s right to receive compensation for damages
or to share in any award shall not be affected in any
manner hereby if said compensation, damages, or
award is made by reason of the expropriation of the
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3 Utah Dept. of Transp. v. FPA West Point LLC, 2012 UT 79, ¶¶ 10,
51, 304 P.3d 810.
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UDOT v. KMART
Opinion of the Court
land or building or improvements constructed or made
by Tenant.
UDOT argued that the termination provision extinguished Kmart’s
rights in the lease, so Kmart was not entitled to a condemnation
award.
¶7 The district court ultimately denied UDOT’s motion because
it concluded that a factual determination needed to be made as to
whether the “points of ingress and egress to the public roadways
[were] materially impaired.” Although the court did not address the
effect the termination clause would have on Kmart’s property
interest if the access were found to be materially impaired, it did
state that the first line of the lease’s allocation clause did not apply in
this case because of our adoption of the aggregate-of-interests
valuation approach in FPA.4
¶8 After a bench trial, the court determined that the
condemnation “materially impaired access and caused the Lease to
terminate.” Despite this finding, it awarded Kmart a condemnation
award in the amount of $1.4 million.5 UDOT appeals this decision.
¶9 Additionally, the district court awarded pre-judgment
interest on the $1.25 million deposit UDOT had made in 2010. UDOT
appeals this decision. We have jurisdiction pursuant to Utah Code
section 78A-3-102(3)(j).
Standard of Review
¶10 UDOT raises two issues on appeal: first, whether the district
court erred by awarding Kmart $1.4 million for Kmart’s leasehold
interest; and second, whether the district court erred by ordering
UDOT to pay interest on amounts previously deposited with the
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4 The district court also stated that many of the cases UDOT had
cited in its motion were distinguishable because the courts in those
cases had not used the aggregate-of-interests approach. And the
court held that a condemnation provision within the declaration of
covenants governing FPA’s property, which states that “all Owners
may file collateral claims with the condemning authority over and
above the value of the land and improvements located within the
Common Area . . . ,” also preserved Kmart’s right to a condemnation
award.
5 In making this award, the court did not revisit the legal
questions UDOT raised in its summary judgment motion.
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Opinion of the Court
court pursuant to the Occupancy Statute. We review a district court’s
interpretations of contracts,6 statutes,7 and prior case law8 for
correctness.
Analysis
¶11 UDOT argues that the district court erred in awarding a
condemnation award to Kmart because the termination clause in
Kmart’s lease extinguished any compensable property right Kmart
previously had in the condemned property. Kmart argues, on the
other hand, that our holding in Utah Department of Transportation v.
FPA West Point, LLC9 rendered termination clauses inoperative in
Utah. In the alternative, Kmart argues that even if termination
clauses are legally effective, its right to just compensation was
preserved by the plain language of its lease agreement. We agree
with UDOT and hold that the termination clause within Kmart’s
lease agreement extinguished Kmart’s right to a condemnation
award.
¶12 Additionally, UDOT argues that the court erred in ordering
UDOT to pay interest on amounts it had previously deposited with
the court pursuant to Utah’s Occupancy Statute.10 Because our
holding regarding Kmart’s right to a condemnation award moots
this issue, we decline to address it.
I. Termination Clauses
¶13 Generally, a lessee is entitled to a condemnation award if
the value of its leasehold is diminished or terminated by a
governmental exercise of the eminent domain power.11 But a lessee’s
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6 Bodell Const. Co. v. Robbins, 2009 UT 52, ¶ 16, 215 P.3d 933.
7Utah Dep’t of Transp. v. FPA West Point, LLC, 2012 UT 79, ¶ 9, 304
P.3d 810.
8 Id.
9 2012 UT 79, 304 P.3d 810.
10 UTAH CODE § 78B-6-510.
11 Colman v. Utah State Land Bd., 795 P.2d 622, 626 (Utah 1990) (“A
lessee holding under a valid lease also has a property interest
protected by the takings clause . . . .”); see also 2 NICHOLS ON EMINENT
DOMAIN § 12D.01[3][a], at 12D-23 (3rd ed. 1997) (“Leasehold interests
are compensable property.”).
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UDOT v. KMART
Opinion of the Court
right to a condemnation award may be altered,12 waived,13 or
terminated by the terms of its lease.14
¶14 A lease provision affecting the rights of parties to a lease
agreement in the event of a condemnation is commonly referred to
as a condemnation provision. Although a condemnation provision
may be structured in any way the parties like, it often contains a
clause that terminates the lease upon “the taking by eminent domain
of the whole or a part of the premises leased.”15 This type of clause
_____________________________________________________________
12 Pennsylvania Ave. Dev. Corp. v. One Parcel of Land in D.C., 670
F.2d 289, 292 (D.C. Cir. 1981) (“If there is a prior agreement between
the parties as to allocation of a condemnation award, that agreement,
of course, governs the disposition of the award.”).
13 Vandevere v. Lloyd, 644 F.3d 957, 969 (9th Cir. 2011) (”The lease
plainly exempts regulatory takings of the kind challenged here from
the requirement that Plaintiffs receive just compensation.”); Vanek v.
State, Bd. of Fisheries, 193 P.3d 283, 295 (Alaska 2008) (“Under Alaska
law, the right to compensation for a taking can validly be waived or
contracted away in the terms of a lease.”).
14 U.S. v. Petty Motor Co., 327 U.S. 372, 376 (1946) (“We are dealing
here with a clause for automatic termination of the lease on a taking
of property for public use by governmental authority. With this type
of clause, at least in absence of a contrary state rule, the tenant has no
right which persists beyond the taking and can be entitled to
nothing.”).
15 2 NICHOLS ON EMINENT DOMAIN § 12D.01[3][e], at 12D-33 (3rd
ed. 1997). A termination clause may provide that the lease terminates
automatically upon condemnation, Fibreglas Fabricators, Inc., v.
Kylberg, 799 P.2d 371, 375 (Colo. 1990) (“However, it is well
established that a lessee may forego his or her right to
compensation—and permit the landlord to receive all the
condemnation proceeds—where the lease agreement contains a
legally adequate ‘condemnation clause’ or ‘automatic termination
clause.’”), or at the option of one of the parties to the lease, J.R.
Skillern, Inc. v. leVision, 591 S.W.2d 598, 599 (Tex. Ct. Civ. App. 1979)
(holding that ”[t]he lease provides in the event of condemnation that
the lease ‘shall, at the option of the landlord, terminate’”), or either
party. Redevelopment Agency of Salt Lake City v. Daskalas, 785 P.2d
1112, 1114 (Utah Ct. App. 1989) (explaining that, pursuant to a
(Continued)
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Opinion of the Court
within a condemnation provision is often referred to as a termination
clause.16
¶15 UDOT asks us to adopt a termination clause rule followed
in most other jurisdictions.17 Under this rule, when a lease agreement
contains a termination clause, the lessee is not entitled to a
condemnation award in the event of a condemnation, because any
continuing interest in the leased property—the loss of which would
otherwise have entitled the lessee to a condemnation award—has
been extinguished under the lease agreement’s terms. In other
words, because the lessee’s property interest is wholly created by the
condemnation clause, “the leases were terminable at will by either
party”).
16 See, e.g., Cardi Am. Corp. v. All Am. House & Apartment Movers,
L.L.C., 210 P.3d 1256, 1258 (Ariz. Ct. App. 2009) (discussing the effect
of a “termination clause”).
17 Id. (“The decision in Starzinger reflects the prevailing view that
‘where a lease provides for its termination at the lessor’s option on
condemnation of the property, the lessee has no right to
compensation for the taking if the option is exercised.’”(citation
omitted)); see also Petty, 327 U.S. at 376; Nat’l R.R. Passenger Corp. v.
Faber Enter., Inc., 931 F.2d 438, 442 (7th Cir. 1991); U.S. v. Right to Use
and Occupy 3.38 Acres of Land, More . . ., 484 F.2d 1140 (4th Cir. 1973);
Bajwa v. Sunoco, Inc., 320 F. Supp. 2d 454 (E.D. Va. 2004); Heir, 218
F. Supp. 2d at 638 (U.S. District Court, New Jersey); Vanek, 193 P.3d
at 295 (Alaska); ; Capitol Monument Co. v. State Capitol Grounds Comm.
ex re. Murry, 251 S.W.2d 473 (Ark. 1952); Kylberg, 799 P.2d 371
(Colorado); City and Cty. of Honolulu v. Mkt. Place, Ltd., 517 P.2d 7
(Haw. 1973); State v. Heslar, 274 N.E.2d 261 (Ind. 1971); State v.
Starzinger, 179 N.W.2d 761 (Iowa 1970); State v. LeBlanc, 319 So. 2d
817 (La. Ct. App. 1975); Sparrow Chisholm Co. v. City of Boston, 97
N.E.2d 172 (Mass. 1951); Metro. Airports Com’n v. Noble, 763 N.W.2d
639 (Minn. 2009); Bi-State Dev. Agency of Missouri-Illinois Metro. Dist.
v. Nikodem, 859 S.W.2d 775 (Mo. Ct. App. 1993); Musser v. Bank of
Am., 964 P.2d 51, 53 (Nev. 1998); Carroll Weir Funeral Home, Inc. v.
Miller, In re Appropriation of Easement for Highway Purposes, 207
N.E.2d 747 (Ohio 1965); In re Dep't of Transp., of the Right of Way for
State Route 0202, Section 701, 871 A.2d 896 (Pa. Commw. Ct. 2005);
Motiva Enterprises, LLC v. McCrabb, 248 S.W.3d 211 (Tex. App. 2007);
Am. Creameries Co. v. Armour & Co., 271 P. 896 (Wash. 1928).
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UDOT v. KMART
Opinion of the Court
lease agreement,18 when the lease terminates, so does the lessee’s
interest in the leased property, including the lessee’s right to just
compensation.19 Because the termination clause rule conforms to our
eminent domain and contract jurisprudence, we adopt it.
A. The termination clause rule is consistent with general eminent
domain principles
¶16 The termination clause rule is consistent with general
eminent domain principles. Utah’s “constitutional guarantee of just
compensation is [only] triggered” if a party shows that they have
some “protectable property interest in the property.”20 For this
reason, compensation should be awarded only to claimants who
demonstrate that they had an existing property right in the
condemned property.21
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18 One Parcel of Land in D.C., 670 F.2d at 292 (“Where a lease in
condemnation is silent as to the tenant’s rights, the tenant has a right
to prove his damages in the condemnation proceeding inasmuch as a
term-of-years leasehold constitutes a possessory interest in the fee.”);
2 NICHOLS ON EMINENT DOMAIN § 12D.01[5][c], at 12D-28 (3rd ed.
1997) (“Compensation is due to the landlords for damage to their
reversionary interest, and to tenants for damage to their leasehold.”).
19 Petty, 327 U.S. at 376 (“With this type of clause . . . the tenant
has no right which persists beyond the taking and can be entitled to
nothing.”); see also Heir, 218 F. Supp. 2d at 638 (“[T]he right to
compensation extends only as far as a party’s contractual rights
permit.”); Norfolk S. Ry. Co. v. Am. Oil Co., 198 S.E.2d 607, 609 (Va.
1973) (“Of course, if the lease itself includes a provision in respect of
the rights of the parties in the event of condemnation of the leased
premises, such provision is valid and controlling.” (citation
omitted)); 2 NICHOLS ON EMINENT DOMAIN § 5.02[6][f], at 5-88 (3rd
ed. 1997) (“Under such a lease the tenant has no estate or interest in
the property remaining after the taking to sustain a claim for
compensation.”).
20Utah Dep’t of Transp. v. Admiral Beverage Corp., 2011 UT 62, ¶ 22,
275 P.3d 208 (internal quotation marks omitted); see also id. (“[T]he
prohibition on takings found in the Utah Constitution” does not
apply if the interest taken does not “qualif[y] as property.”).
21See Petty, 327 U.S. at 376 (stating that compensation should only
be awarded “for the value of the rights which are taken”); see also
(Continued)
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Opinion of the Court
¶17 We have frequently applied this principle in denying
requests for condemnation awards. For example, in Bingham v.
Roosevelt City Corp.,22 a group of landowners alleged that a nearby
city’s diversion of water from an aquifer below the landowners’
property amounted to a taking. But we denied their claim because
the landowners had not lawfully appropriated the water, so “the
[g]roup lacked a claim of entitlement to the continued presence of
water in its soil.”23
¶18 We also applied this principle in Bagford v. Ephraim City.24 In
that case, a garbage company sought damages from a city for
passing an ordinance requiring all city residents to pay for
city-operated garbage collection. But we denied its claim because the
company’s business “was based only on the expectation of being
able to continue doing business there, not on a legal right to do so.”25
As these cases illustrate, before we grant a condemnation award, the
claimant must show that it has an existing and protectable property
interest in the condemned property.26
United States v. Gen. Motors Corp., 323 U.S. 373, 378–79(1945) (“[T]he
Fifth Amendment concerns itself solely with the ‘property,’ i.e., with
the owner’s relation as such to the physical thing and not with other
collateral interests which may be incident to his ownership. In the
light of these principles it has been held that the compensation to be
paid is the value of the interest taken.”); R & R Welding Supply Co. v.
City of Des Moines, 129 N.W.2d 666, 670 (Iowa 1964) (“Compensation
cannot be allowed for something that does not exist.”).
22 2010 UT 37, 235 P.3d 730.
23 Id. ¶ 30.
24 904 P.2d 1095 (Utah 1995).
25 Id. at 1100.
26 See also Admiral Beverage, 2011 UT 62, ¶ 22 (“[A] takings claim
presents two distinct inquiries: First, the claimant must demonstrate
some protectable interest in property. If the claimant possesses a
protectable property interest, the claimant must then show that the
interest has been taken or damaged by government action. A
claimant who makes this showing is then entitled to just
compensation.” (citations omitted) (internal quotation marks
omitted)).
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UDOT v. KMART
Opinion of the Court
¶19 The termination clause rule accords with this principle by
disallowing condemnation awards to lessees who no longer have an
existing and protectable property interest in the condemned
property because their leaseholds were terminated under the terms
of the lease agreement.27 A leasehold interest is a temporary right to
occupy the real property of another. In the absence of a termination
clause, a condemnation of leased property would deprive the lessee
of its right to continue occupying the leased property for the
remainder of the lease term. This would constitute a loss of an
existing and protectable property right.28 So, for example, if a lessee
had five years remaining on its lease when the property it was
leasing is condemned, the condemnor would be obligated to
compensate the lessee for the value associated with the remaining
five years of the lease term.29
¶20 But the same cannot be said when the lessee has agreed to
include a termination clause in its lease agreement. When such is the
case, the lessee has a right to occupy the real property until the end
of the lease term or until the property is condemned. 30 Because the
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27 See Burkhart Advert., Inc. v. City of Fort Wayne, 918 N.E.2d 628,
634 (Ind. Ct. App. 2009) (“We conclude that the termination of a
lease according to the parties’ own provisions is not a taking of
property. Given the termination of the lease pursuant to [the]
proposed development of the property and our supreme court’s
[precedent], we conclude that [Appellant] had no interest in the
property compensable by the City.”).
28 See, e.g., Capitol Monument Co., 251 S.W.2d at 475 (“In the
absence of any contract provision to the contrary, a tenant for years
is ordinarily entitled to share in the compensation when the leased
property is taken by eminent domain during the terms of the
lease.”).
29 See, e.g., Twin-State Eng’g & Chem. Co. v. Iowa State Highway
Comm’n, 197 N.W.2d 575, 578–79 (Iowa 1972) (“The measure of
damages for a leasehold interest taken under eminent domain is
declared generally to be the fair market value of the leasehold or
unexpired term of the lease.” (internal quotation marks omitted)
(citing 27 Am. Jur. 2d, Eminent Domain, § 352)).
30 See, e.g., Capitol Monument Co., 251 S.W.2d at 475 (“But, when
the lease, under which the tenant holds, provides that the lease will
(Continued)
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Opinion of the Court
lessee’s leasehold interest is extinguished by the lease agreement’s
own terms, the lessee no longer has an ongoing protectable interest
in the property from the date of the condemnation. As a result, the
condemnor has not taken an existing and protectable property right
for which it must compensate the lessee.31 Accordingly, we hold that
granting a condemnation award to a former lessee under these
circumstances would be inconsistent with eminent domain law
principles.
B. The termination clause rule is consistent with general contract principles
¶21 The termination clause rule is also consistent with general
contract principles. It is a “basic principle of contract law that parties
are generally ‘free to contract according to their desires in whatever
terms they can agree upon.’”32 For this reason, “courts are loath to
interfere with parties’ ability to contract freely.”33
¶22 A termination clause is an agreed upon term between a
lessor and lessee that courts should uphold under general contract
principles. One purpose of a contract is “to apportion risk of future
events between the contracting parties.”34 A termination clause is
consistent with this purpose. By agreeing to the inclusion of a
termination clause, the lessee is freed from the risk of any continuing
obligations under a lease agreement,35 and the lessor is guaranteed a
be terminated by eminent domain proceedings, then the tenant is not
entitled to compensation for the taking of the property.”).
31 See Petty, 327 U.S. at 376 (“With this type of clause, at least in
the absence of a contrary state rule, the tenant has no right which
persists beyond the taking and can be entitled to nothing.”); 2
NICHOLS ON EMINENT DOMAIN § 5.02[6][f], at 5-88 (3rd ed. 1997)
(“Under such a lease the tenant has no estate or interest in the
property remaining after the taking to sustain a claim for
compensation.”).
32 Mind & Motion Utah Invs., LLC v. Celtic Bank Corp., 2016 UT 6,
¶ 35, 367 P.3d 994 (citation omitted).
33Utah Transit Auth. v. Greyhound Lines, Inc., 2015 UT 53, ¶ 31, 355
P.3d 947.
34Id.; see also id. (“[P]arties are free to allocate the risk of future
events between them however they wish.” (citation omitted)).
35See, e.g., Right to Use and Occupy 3.38 Acres of Land, 484 F.2d at
1144 (“Ordinarily, condemnation of a leasehold for part of the term
(Continued)
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UDOT v. KMART
Opinion of the Court
condemnation award for its reversionary interest in the leased
property.36 We see no reason to prevent this,37 and so we hold that
“[i]t is the agreement of the parties that controls whether the lessee
has a compensable property interest in the appropriated property.”38
Accordingly, when contract parties agree that a lease will terminate
upon condemnation, contract law principles require us to honor that
agreement.39
C. Our Decision in FPA Does Not Affect the Applicability of
Condemnation Provisions
¶23 Despite the many compelling reasons for adopting the
termination clause rule, Kmart argues that our holding in FPA
renders condemnation provisions inoperative in Utah. But Kmart’s
of an underlying lease does not invalidate the lease.”). In this case
Kmart was relieved of the obligation of continuing in a lease without
an adequate access point.
36 Noble, 763 N.W.2d at 644 (“When a lease contains a
condemnation clause, the automatic termination language is read to
deprive the lessee of any rights or entitlements beyond the taking
since the lessee has ‘contracted away any rights that it might
otherwise have had.’” (quoting Petty, 327 U.S. at 376); City and Cty. of
Honolulu, 517 P.2d at 15 (“This rule acknowledges that the allocation
of risks in such circumstances is a matter as to which the parties are
free to bargain.”).
37 Greyhound Lines, Inc., 2015 UT 53, ¶ 31 (explaining that the only
justification for declining to enforce a valid contract is if it is
unconscionable).
City of Cincinnati v. Spangenberg, 300 N.E.2d 457, 460 (Ohio Ct.
38
Ohio App. 1973); see also Heir, 218 F. Supp. 2d at 638 (“[T]he right to
compensation extends only as far as a party’s contractual rights
permit.”).
39 Greyhound Lines, Inc., 2015 UT 53, ¶ 31 (“We have recognized
that ‘[i]t is not [the court’s] prerogative to step in and renegotiate the
contract of the parties.’ ‘Instead, . . . we should recognize and honor
the right of persons to contract freely and to make real and genuine
mistakes when dealings are at arms’ length.’” (internal citations
omitted) (first and second alterations in original)).
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Opinion of the Court
argument fails because our holding in FPA is irrelevant to the
applicability of condemnation provisions.40
¶24 In FPA we held that when the court is determining the value
of a condemnation award, “the values of respective interests in a
parcel of condemned property must be individually assessed.” 41 This
valuation rule is referred to as the aggregate-of-interests approach.
Kmart argues that our adoption of the aggregate-of-interests
approach necessarily renders condemnation provisions inoperative
in Utah because “[c]ondemnation clauses [only] exist because most
jurisdictions apply [a different valuation method].” Condemnation
provisions are inoperative in aggregate-of-interest jurisdictions,
Kmart argues, because the “sole function of condemnation clauses is
to determine the landlord’s and tenant’s respective shares of
condemnation awards only after the government has made a
decision to change the allocation of resources by condemning
property.”42 But Kmart is incorrect on this point for two reasons:
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40 Kmart cites a statement in the district court’s summary
judgment ruling to suggest that the court held that condemnation
provisions do not apply in aggregate-of-interests jurisdictions. The
district court stated that the first sentence in the lease’s allocation
clause—which states that “tenant shall not be entitled to share in any
award made by reason of expropriation of Landlord buildings on the
demised premises”—did not apply in this case because our decision
in FPA meant that “there [was] no issue of the landlord and tenant
sharing an award.” To the extent the district court intended to rule
that our decision in FPA rendered condemnation provisions
inoperative in Utah, we hold that it was incorrect.
Additionally, Kmart cites a Florida court of appeals case
containing “a substantially identical condemnation clause” as is
found in this case, for the proposition that this condemnation clause
did not extinguish Kmart’s rights. K-mart Corp. v. State Department of
Transp., 636 So. 2d 131 (Fla. App. 1994). But that case deals only with
an allocation clause, not a termination clause. See id. at 132.
41 Utah Dep’t of Transp. v. FPA West Point, LLC, 2012 UT 79, ¶ 3,
304 P.3d 810.
42In support of this assertion, Kmart cites a law review article,
but no case law. See Victor P. Goldberg et. al., Bargaining in the
Shadow of Eminent Domain: Valuing and Apportioning Condemnation
Awards Between Landlord and Tenant, 34 UCLA L. REV. 1083, 1091.
Although the purpose of an allocation clause could be described this
(Continued)
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UDOT v. KMART
Opinion of the Court
(1) the valuation method a court uses to determine the amount of a
condemnation award does not affect the court’s determination of
which claimants are entitled to a condemnation award based on their
property interest—a determination that is often dictated by the terms
contained in a condemnation provision, and (2) the condemnation of
property does not change the allocation of property interests by
resetting the property’s division of ownership.
1. The valuation method used by a court does not affect the
applicability of a condemnation provision
¶25 The valuation method a court uses to calculate the value of a
condemnation award is irrelevant to the court’s determination of
which claimants are entitled to an award. We have previously
established that a court must answer two distinct inquiries before it
calculates the value of a condemnation award. First, the court must
determine whether the claimant possesses “some protectable interest
in [the] property.”43 Second, the court must determine whether “the
interest has been taken or damaged by government action.”44 Only
after those first two steps are complete should a court proceed to the
third step of calculating the amount of “just compensation” to award
the claimant.45 Importantly, neither of the first two steps is affected
by the approach the court employs in the third.
¶26 Although our holding in FPA marked a departure from
other jurisdictions on the question of valuation, it did not alter the
analysis a court should follow when answering the first two inquires
in an eminent domain determination.46 In fact, at several points in
way in some cases, Kmart takes this line of reasoning to an absurd
point. Kmart seems to be arguing that condemnation provisions are
necessary only because a condemnation in an undivided fee
jurisdiction—but not an aggregate-of-interests jurisdiction—
somehow resets the division of property ownership, so parties to a
lease must insert contractual provisions to determine the proper
allocation of a condemnation award in the event of a condemnation.
This is incorrect.
43 Admiral Beverage, 2011 UT 62, ¶ 22.
44 Id. (internal quotation marks omitted) (citation omitted).
45 Id. (internal quotation marks omitted) (citation omitted).
46See generally FPA, 2012 UT 79, ¶¶ 24–35 (recognizing that the
requirement to show a right to just compensation still exists).
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our decision in FPA we made it clear that courts must still determine
whether a claimant has a protectable property interest before it
commences an aggregate-of-interests valuation.47 Because the
purpose of a condemnation provision is to establish which parties
have protectable property interests in the event of a condemnation, a
condemnation provision remains relevant even where the court uses
an aggregate-of-interests approach to value the property later in the
condemnation award analysis. In other words, that Utah courts must
employ the aggregate-of-interests approach to value a condemnation
award during the third step of a condemnation award analysis has
no bearing on a court’s determination of which parties are entitled to
a condemnation award during the analysis’s first step. For this
reason, we hold that our adoption of the aggregate-of-interests
approach in FPA did not render condemnation provisions
inoperative in Utah.48
_____________________________________________________________
47 Id. ¶ 24 (“And we have recognized that ‘[a] lessee holding under
a valid lease also has a property interest protected by the takings
clause of the constitutional provisions.’” (alteration in original)
(emphasis added) (citation omitted)); Id. ¶ 25 (“Thus, ‘[o]nce a
landowner demonstrates that a protectable property interest has been taken
. . . the landowner is entitled to just compensation.’” (alteration in
original) (emphasis added) (citation omitted)).
48 That the method of valuation does not invalidate condemnation
provisions is supported by the fact that condemnation provisions are
still enforced in other aggregate-of-interests jurisdictions. For
example, in FPA we cited Iowa and Georgia as examples of states
that have authorized courts to use the aggregate-of-interests
approach, FPA, 2012 UT 79, ¶ 12, n.15 (citing cases from Iowa,
Georgia, and Nebraska), and both Iowa and Georgia recognize the
validity of condemnation provisions. See Starzinger, 179 N.W.2d at
765; R & R Welding Supply Co., 129 N.W.2d at 670 (“Compensation
cannot be allowed for something that does not exist.”) see also Lamar
Co., LLC v. State, 568 S.E.2d 752, 753 (Ga. Ct. App. 2002) (“It is
axiomatic that, to recover for the taking of a leasehold, the lessee
must, in fact, have such interest in the property. Accordingly, if the
lessee has waived its interest, it is not entitled to recover for
compensation as a condemnee.” (footnotes omitted)). So Kmart’s
argument that a state’s adoption of the aggregate-of-interests
approach necessarily precludes the application of condemnation
provisions is not supported by the case law in other jurisdictions.
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UDOT v. KMART
Opinion of the Court
2. A condemnation of property does not reset the property’s division
of ownership
¶27 Kmart’s argument also fails because it is based on an
incorrect understanding of the effect a condemnation has on
property with divided ownership. Kmart claims that a
condemnation of property changes the allocation of resources among
the holders of property interests in the property. And it suggests that
because of this, owners of divided property must insert
condemnation provisions to re-allocate those interests in the event of
a condemnation. But this argument fails because a condemnation
does not trigger a re-allocation of ownership interests in the
condemned property.
¶28 When property is condemned, the owners of the property
are entitled to just compensation for the property they owned at the
time the property is taken. Consequently, the exercise of the eminent
domain power is constitutional only “when a property owner is
made whole by placing him in the position he would have occupied
but for the taking.”49 To satisfy this constitutional requirement, a
court must determine what property rights a claimant possessed at
the time of the taking.50
¶29 Accordingly, a condemnation does not trigger a
re-allocation of property rights among owners of the condemned
property; it merely requires each property owner to give the
condemnor his or her property right in exchange for the fair market
value of that right. So in the absence of a condemnation provision, a
lessee would be entitled to the value of its leasehold interest in the
property and the lessor would be entitled to the value of its
reversionary interest.51 Consequently, the parties do not need a
condemnation provision to guarantee these rights.
_____________________________________________________________
49 Admiral Beverage, 2011 UT 62, ¶ 28.
50See id. (explaining that the constitutional requirements of “just
compensation” are only satisfied if the property owner is “put in as
good [a] position pecuniarily as he would have been if his property
had not been taken” (citation omitted)).
51 2 NICHOLS ON EMINENT DOMAIN § 12D.01[5][c], at 12D-28 (3rd
ed. 1997) (“Compensation is due to the landlords for damage to their
reversionary interest, and to tenants for damage to their leasehold.”).
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Opinion of the Court
¶30 This is true even in jurisdictions that do not use the
aggregate-of-interests approach. Under the undivided fee method—
the valuation method used in the majority of states—courts calculate
the value of each claimant’s property interest as a percentage of the
value of the property in its undivided form.52 But this is not the same
as reallocating property interests among the parties. Each party is
still entitled to the value of the property interest that was rightfully
theirs under the contract at the time of condemnation. So contrary to
what Kmart suggests, individuals with existing rights in a
condemned property do not need an allocation clause to preserve
their right to a condemnation award, even in undivided fee
jurisdictions.53 For this reason, it is clear that Kmart’s assertion—that
the only purpose of a condemnation provision is to re-allocate
property interests in undivided fee method jurisdictions after a
governmental exercise of the eminent domain power disrupts the
previous allocation—is wrong.
¶31 In fact, condemnation provisions cannot be pigeonholed to
just one purpose. Rather, condemnation provisions can have many
purposes, and often contain multiple operative clauses that go
beyond allocating parties’ rights to condemnation awards.54
_____________________________________________________________
52FPA, 2012 UT 79, ¶ 13; Cty. of Clark v. Sun State Props., Ltd., 72
P.3d 954, 958 (Nev. 2003) (“The undivided-fee rule provides that
condemned property is first valued as though it was unencumbered,
and in a subsequent hearing, the total award is apportioned among
the various interests.”).
53 See City of Dublin v. Friedman, 101 N.E.3d 1137, ¶ 50 (Ohio Ct.
App. 2017) (“Generally, a tenant does have ‘a property right in the
leasehold and, in the absence of an agreement to the contrary, is
entitled to compensation if it is appropriated by eminent domain.’”
(citation omitted)).
54 See Noble, 763 N.W.2d at 645 (“[W]e affirm the general rule that
a condemnation clause automatically terminates a lessee’s interest in
the property and bars a lessee’s claim to part of the condemnation
award. Further, we are bound by a rule of contract interpretation
that requires us to give effect to all of a contract’s terms. In order to
give effect to all of the terms in a lease, if the lease contains a clause
for apportioning the condemnation award, then the apportioning
agreement governs. If the lease contains no language on
apportioning the award, the entirety goes to the lessor.” (citation
(Continued)
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UDOT v. KMART
Opinion of the Court
¶32 The two most common clauses in condemnation provisions
are termination clauses and allocation clauses. A termination clause,
as its name suggests, terminates the lessee’s right to just
compensation on the date of condemnation, resulting in a reversion
of the property interest to the lessor.55 An allocation clause, on the
other hand, allows the lease parties to transfer their still-existing
rights to a compensation award among themselves.56 These two
types of clauses can be tailored to address a variety of future
circumstances.57
¶33 The condemnation provision in the lease in this case
provides a good example of how this is done. The condemnation
provision contains six paragraphs. The first paragraph contains a
termination clause that could be triggered by the condemnation of
omitted)); City and Cty. of Honolulu, 517 P.2d at 15 (“This rule
acknowledges that the allocation of risks in such circumstances is a
matter as to which the parties are free to bargain.”); Musser, 964 P.2d
at 53 (discussing termination clauses and allocation clauses);
Pepsi-Cola Metro. Bottling Co. v. Romley, 578 P.2d 994, 999 (Az. Ct.
App. 1978) (“With these admonitions in mind, it appears to us that
as a whole, this clause has two major objectives in mind: (1) to grant
to the lessee an option to terminate the lease in the event of
condemnation of all or more than 25% of the leased premises, and (2)
to define the rights of the parties in the event of condemnation of a
part of the leased premises when the lessee does not exercise its
option to terminate and remains in possession.”).
55Musser, 964 P.2d at 53 (“A termination clause in a lease without
accompanying language regarding how any compensation award is
to be allocated, is sufficient to bar a lessee’s claim to part of the
award.”).
56 Id., at 54 (“If there exists a prior agreement between a landlord
and tenant as to allocation of condemnation proceeds, that
agreement governs the disposition of those proceeds. The leases in
this case provide that in the event of a total condemnation, or if the
Lessees, in good faith, elect to terminate the leases in the event of a
partial condemnation, the Lessees are entitled to a portion of the
award.” (citation omitted)).
57 See In re Dep’t of Transp. of the Right of Way for State Route 0202,
Section 701, 871 A.2d at 900 (“Due to the conflict between the
interests of a landlord and its tenant, leases may include a
condemnation clause to address this potential conflict.”).
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Opinion of the Court
either “all of Tenant’s buildings” or “the points of ingress and
egress.” When this clause is triggered, Kmart’s leasehold interest, as
well as its right to just compensation, is extinguished and the right to
present possession of the leased property reverts back to FPA.
¶34 But because of the possibility of a partial condemnation that
does not trigger the termination clause—such as a partial
condemnation of Kmart’s building or an immaterial impairment of
points of ingress and egress—the parties also included an allocation
clause in the condemnation provision’s sixth paragraph. This clause
states that “Tenant shall not be entitled to share in any award made
by reason of expropriation of Landlord buildings.” Thus FPA
specifically reserved a right to any condemnation award granted for
any buildings to which it held title. So in the event of a partial
condemnation, the lease would continue in effect, but any portion of
a condemnation award for FPA’s building—to which Kmart would
otherwise have been constitutionally entitled under the terms of the
still-effective lease agreement—is allocated to FPA.
¶35 Additionally, because Kmart could have potentially been
entitled to the value of any fixtures or improvements it made to
FPA’s land or building, the parties included a clause in the sixth
paragraph’s last sentence, which clarifies that Kmart has not waived
its right to receive compensation for any unamortized fixtures or
improvements it installed or made to the leased premises.
¶36 As the lease agreement in this case illustrates, parties to a
lease agreement can draft a condemnation provision with multiple
operative clauses aimed at addressing a variety of future
circumstances. Although some of these clauses might not be
applicable in every future circumstance (i.e. the lessor’s allocation
clause may not be necessary where the lease terminates pursuant to
a termination clause, thereby reverting the right of present
possession back to the lessor), each clause has an independent
purpose and should therefore be enforced where applicable. Because
Kmart does not consider the possibility that condemnation clauses
could have purposes other than to shift existing property rights from
a tenant to a landlord, its contention that condemnation clauses are
unnecessary in aggregate-of-interest jurisdictions is incorrect.
Accordingly, Kmart’s claim that our decision to adopt the
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UDOT v. KMART
Opinion of the Court
aggregate-of-interests valuation approach in FPA renders
condemnation provisions inoperative in Utah fails.58
¶37 In sum, we adopt the termination clause rule because it is
consistent with longstanding eminent domain and contract
principles, and our holding in FPA does not foreclose its adoption.
Accordingly, we hold that where the terms of a lease agreement
terminate a lease upon condemnation, a lessee’s right to just
compensation is extinguished, unless otherwise reserved by
contract.59
_____________________________________________________________
58 At various points in its brief, Kmart also argues that the our
enforcement of the condemnation clause would “provide a windfall
to UDOT,”—it would shift the burden of the taking from “all
taxpayers” and place it solely on Kmart, and it would change the
proper condemnation analysis from the proper question of “what
has Kmart lost[?]” to “what will UDOT gain[?].” But these
arguments stem from a misunderstanding of the underlying
justifications for the termination clause rule. Each of these arguments
fails to address the fact that Kmart contracted away its property
interest in the lease—including a right to just compensation—when
it agreed to include the termination clause in its lease agreement
with FPA. Because Kmart’s loss of a right to a condemnation award
is dictated by the terms of Kmart’s own agreement, an adoption of
the termination clause rule would not, as Kmart suggests, provide a
windfall to UDOT. This is so because UDOT did not take Kmart’s
leasehold interest; the parties, through agreeing to include a
termination clause in the lease, did. And it would not improperly
shift a burden from the public to Kmart, because Kmart and FPA
already agreed to shift the burden from FPA to Kmart. And lastly, it
would not change the analysis from looking at what Kmart lost as a
result of the condemnation to what UDOT took. Instead, it merely
requires us to arrive at a conclusion Kmart does not like: Kmart did
not lose an existing property right.
59 See Noble, 763 N.W.2d at 645 (explaining that even in the
presence of a termination clause, the parties may agree to allocate the
lessor’s right to a condemnation award to the lessee through an
allocation clause in the condemnation provision).
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Opinion of the Court
II. We Hold that the Termination Provision in Kmart’s Lease
extinguished Kmart’s Right to Just Compensation
¶38 UDOT argues that the district court erred in awarding a
condemnation award to Kmart because Kmart’s lease with FPA
contained a condemnation clause and it did not otherwise reserve
Kmart’s right to just compensation in the event of a condemnation.
We agree.
¶39 Kmart’s lease agreement with FPA contained a termination
clause providing that Kmart’s leasehold interest would be
terminated in the event a condemnation “materially impaired” an
access point to the property:
In the event all of Tenant’s buildings constructed by
Landlord shall be expropriated or the points of ingress
and egress to the public roadways . . . be materially
impaired by a public authority or quasi-public
authority, this lease shall terminate as of the date
Tenant shall be deprived thereof.
Although, in its summary judgment order, the district court was
correct in concluding that whether the condemnation “materially
impaired” Kmart’s access presented a question of fact that needed to
be presented to the fact finder, at trial it erred in awarding a
condemnation award to Kmart after it had found that access had
been materially impaired. Because the court found that Kmart’s
access had been materially impaired, it should have held that the
termination clause in the lease was triggered, thereby extinguishing
Kmart’s right to a condemnation award.
¶40 On appeal, Kmart argues that the district court was correct
in granting it a condemnation award, even though the termination
clause was triggered, because nothing in the lease expressly waived
its right to share in this condemnation award. But this argument fails
for two reasons: (1) where a lease contains a termination clause, a
lessee’s right to just compensation is extinguished even in the
absence of an express waiver of that right, and (2) the plain language
of the allocation clause shows that Kmart reserved only a right to
compensation for the value of any fixtures or improvements it
constructed or made to the leased property, and Kmart has not
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UDOT v. KMART
Opinion of the Court
asserted that it was entitled to a compensation award under this
provision.60
¶41 First, Kmart is not entitled to a condemnation award despite
the fact that the agreement did not contain an express waiver of its
right to just compensation. When a termination clause terminates a
lessee’s leasehold interest, it extinguishes all of the lessee’s rights in
the leasehold.61 Accordingly, a termination clause extinguishes a
_____________________________________________________________
60 Kmart also argues that a condemnation clause contained in a
declaration of covenants governing FPA’s property preserved
Kmart’s rights in the property. But the condemnation clause in the
covenants applies only to “Owners” of the property. Kmart argues,
however, that this condemnation provision should apply to it, as a
lessee, because the “general tenor” of the covenants was to “preserve
rights” to just compensation in the event of a condemnation. In
support it cites section 5.01 of the covenants, which grants “Owners”
an easement over the property, and section 5.02, which states that
the easement established in section 5.01 “shall be for the benefit
of . . . the Owners [and] the lessees of the Owners.” But Kmart’s
argument fails, even if the condemnation provision in the covenants
applies to lessees, because once the termination clause in Kmart’s
lease agreement was triggered, Kmart ceased being a lessee. For this
reason, the rights guaranteed by the covenants do not apply to
Kmart.
61 See supra section I. It is possible, however, for parties to a lease
agreement to draft a termination clause in such a way that the
condemnation terminates the parties’ obligations to each other but
does not terminate the lease as a whole. See Maxey v. Redevelopment
Auth. of Racine, 288 N.W.2d 794, 806-07 (Wis. 1980) (holding that a
lease, which stated upon condemnation “such condemnation shall
terminate the further liabilities of both the lessors and lessees under
this lease,” did not explicitly terminate the lease, just the parties’
liabilities under the lease). If the termination clause is drafted in this
way, the lessee would maintain a right to just compensation unless it
also waived or assigned the right through an allocation clause. Id.
But such is not the case here. The plain language of the termination
clause contemplates the termination of the actual lease, not just the
parties’ obligations under it. Compare language of termination clause
in this case (“this lease shall terminate as of the date Tenant shall be
deprived thereof”) with language of termination clauses in other
cases where courts found that the lessee’s right to just compensation
(Continued)
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Opinion of the Court
lessee’s right to just compensation even where the lessee does not
affirmatively waive its right to a condemnation award elsewhere in
the lease agreement.62
¶42 Second, the plain language of the allocation clause in the
lease agreement preserves only Kmart’s right to an award granted
for a condemnation affecting improvements Kmart added or made
to the leased property. The lease’s allocation clause is found in the
sixth paragraph of the condemnation provision. It contains three
operative parts:
[(1)] Tenant shall not be entitled to share in any award
made by reason of expropriation of Landlord buildings
on demised premises, or any part thereof, by public or
quasi-public authority, [(2)] except as set forth in the
preceding paragraph relative to unamortized
expenditures by Tenant and then only if the award for
such unamortized expenditures shall be made by the
expropriating authority in addition to the award for the
land, buildings and other improvements (or portion
thereof) comprising the demised premises; however,
[(3)] the Tenant’s right to receive compensation for
damages or to share in any award shall not be affected
was terminated: Motiva Enters., LLC v. McCrabb, 248 S.W.3d 211, 213
(Tex. Ct. App. 2007) (“this lease shall terminate as of the date when
possession is required to be given in such condemnation”); Fibreglas
Fabricators, Inc., v. Kylberg, 799 P.2d 371, 373 (Colo. 1990) (“this Lease
Agreement shall terminate and the rent shall be apportioned as of
the date the governmental authority takes possession of the Leased
Premises pursuant to such Proceeding”); Metro. Airports Comm’n v.
Noble, 763 N.W.2d 639, 642 (Minn. 2009) (“If substantially all of the
leased premises shall be taken by any public authority under the
power of eminent domain then the term of this Lease shall cease as
of the day possession shall be taken by such public authority . . . .”).
62 See Musser v. Bank of Am., 964 P.2d 51, 53 (Nev. 1998) (“A
termination clause in a lease without accompanying language
regarding how any compensation award is to be allocated, is
sufficient to bar a lessee’s claim to part of the award.”);
Kylberg, 799 P.2d at 375 (“Similarly, the absence of a provision in the
condemnation clause specifying whether Fibreglas is entitled to
share in the condemnation proceeds does not render the clause
ambiguous.”).
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UDOT v. KMART
Opinion of the Court
in any manner hereby if said compensation, damages,
or award is made by reason of the expropriation of the
land or building or improvements constructed or made
by Tenant.
¶43 The first part of the allocation clause states that Kmart does
not have a right to a condemnation award for a condemnation of any
“Landlord buildings” or any part thereof. This part waives Kmart’s
right to share in any condemnation award given for a condemnation
of buildings Kmart is leasing.
¶44 Kmart argues that this part shows that the parties did not
intend the termination clause to extinguish Kmart’s property rights
because, if it did, “[t]here would be no reason to specify that Kmart
‘shall not be entitled to share in any award made by reason of
expropriation’ of Kmart’s building.” But this argument overlooks the
fact that the termination clause left open the possibility of a partial
condemnation that does not trigger the termination clause—such as
a partial condemnation of Kmart’s building—so it was necessary for
FPA to include a clause allocating Kmart’s rightful share of a
condemnation award to FPA in those circumstances. So in the event
of a partial condemnation the lease would continue in effect, but
under the terms of this first part, any portion of a condemnation
award to which Kmart would have otherwise been entitled is
allocated to FPA. Importantly, nothing in this part preserves a right
to the condemnation award granted in this case.
¶45 The second part of the allocation clause exempts Kmart
from the award allocation described in the first part when the award
is given for “unamortized expenditures.” This is a common
provision in an allocation clause that preserves a lessee’s right to an
award for the cost of immovable fixtures or improvements the lessee
installed on the leased property if those costs have not already been
recovered through tax deductions.63 The inclusion of this provision
_____________________________________________________________
63 See Universal Mktg., Inc. v. C.I.R., 94 T.C.M. 374 at *4
(T.C. 2007) (“Under section 162(a), a taxpayer may deduct ordinary
and necessary business expenses incurred or paid during the taxable
year. Generally, a taxpayer carrying materials and supplies on hand
is allowed to deduct expenditures for them only in the amount that
they are actually consumed and used in operation during the taxable
year. However, the cost of acquiring property having a useful life
beyond a taxable year is a nondeductible capital expenditure.”
(footnote omitted) (citation omitted)). Because the lessee is unable to
(Continued)
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Opinion of the Court
allows Kmart to recoup the cost of fixtures or improvements so long
as it has not already recouped that cost through amortization
deductions. But unamortized expenditures are not at issue, so this
part does not preserve Kmart’s right to any part of the condemnation
award in this case.
¶46 Finally, the third part clarifies that nothing in the lease
agreement affects Kmart’s right to receive a condemnation award
given for any improvements Kmart made or added to the leased
premises. It states that Kmart’s “right to receive
compensation . . . shall not be affected in any manner hereby if said
compensation . . . is made by reason of the expropriation of the land
or buildings or improvements constructed or made by Tenant.” So
this part preserves only Kmart’s right to receive a condemnation
award granted for the value of any improvements made by Kmart.
¶47 Kmart argues, however, that this part suggests that the
parties did not intend the termination clause to extinguish Kmart’s
right to compensation. It claims that if its rights were extinguished
by the termination clause, the third part would be rendered “null
and void” because Kmart would no longer have a right to just
compensation that could be preserved. But this argument fails
because (1) it once again overlooks the fact that the termination
clause left open the possibility of a partial condemnation that does
not trigger the termination clause, and (2) the terms of a lease may
function to preserve a lessee’s right to a condemnation award against
a lessor for improvements made to the leased premises, even where
the lessee’s leasehold has terminated.64 Accordingly, the third part of
immediately deduct the cost of the improvement or fixture as a
business expense that adds value to the property under the tax code,
it is forced to make periodic, amortized deductions as the
improvement depreciates over time. Id. So if a termination clause
terminates a lease upon condemnation before the improvement or
fixture had completely depreciated, the lessor would benefit from
the value of an improvement that was included wholly at the lessee’s
expense. A clause preserving a lessee’s right to the value of
improvements protects the lessee from this unfair result.
64 See Noble, 763 N.W.2d at 645-46 (recognizing that a “lease is a
form of a contract,” so it was possible for the parties to the lease to
have “allocated [a] portion of the award for the value of immovable
fixtures,” even though the lease contained a termination clause
extinguishing the lessee’s leasehold); Musser, 964 P.2d at 54
(Continued)
25
UDOT v. KMART
Opinion of the Court
the allocation clause is not rendered superfluous by the termination
clause, and so it does not suggest that the parties did not intend the
termination clause to terminate Kmart’s lease.
¶48 In sum, because the lease contains a valid termination clause
and does not contain an express reservation of Kmart’s right to a
condemnation award, Kmart no longer had a protectable property
interest in the leased property when the district court made its
condemnation award determination. Accordingly, we hold that the
district court erred when it granted a condemnation award to Kmart.
Conclusion
¶49 We hold that where a lease agreement contains a provision
terminating a lessee’s leasehold interest upon a condemnation, the
lessee no longer has a protectable property interest entitling it to a
condemnation award. Because Kmart’s lease agreement in this case
contained a termination clause, Kmart’s property rights were
extinguished under the lease. The district court, therefore, erred in
granting Kmart a condemnation award. Accordingly, we reverse the
district court’s condemnation award to Kmart.
(apportioning the value of an award attributable to improvements to
the lessee even though the lease contained a termination clause
extinguishing the lessee’s leasehold).
26