Temporary Takings; Permanent Damage – What’s The Scoop?

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Has any reader ever actually seen a “temporary taking” by way of eminent domain? Though rare, such a “taking” can take place, usually to accommodate construction of an adjacent road improvement. Theoretically, the government might need to “occupy” actual leased space for a temporary activity (such as in war time), but that may be less common than alien invasions. [That might not be a good example given that the National Geographic Channel did a survey and found 80 million Americans are certain that UFOs exist (that’s 36%). Only 17% are sure they don’t exist. 10% have actually seen a UFO.]

Now, back to the subject at hand – what’s going on in these temporary takings clauses we negotiate?

Temporary takings come in two flavors. There are both “physical” takings, where the government “occupies” the property and “non-physical takings,” such as moratoriums, where the government deprives the user or property owner of other rights, but not occupancy. Where the government occupies a tenant’s space, such as happened in the “War Department” cases of World War II, the tenant’s inability to use its space is pretty clear. In the rare, but more common situation where a part of the land or a parking area is temporarily taken, the effect on the tenant is attenuated or non-existent. So, any temporary taking lease provision should be premised on the tenant actually being affected. How the negotiators come to define that is up to them. That’s not to say that Ruminations doesn’t hold an opinion on that, only that we’re not concerned with this particular issue today.

The actual interference rule may be the same for a temporary taking as it is for a permanent taking, but that’s where the two part company. There is a fundamental difference, and that’s where almost every lease negotiator falls down.

In the case of a permanent taking, the property owner gets full compensation for what is taken. Believe it or not, for a permanent taking, the property owner should be getting at least as much in “just compensation” as it would be getting had it voluntarily sold its property. Basically, the property owner exchanges its interest in the property for the “highest and best” price. It can take that money and buy another property that, at least theoretically, will generate the same rate of return as the “taken” property was generating. Not so when it comes to a temporary taking.

The compensation scheme for a temporary taking, while also governed by the “just compensation” requirement of Article Five of the U.S. Constitution, doesn’t put a property owner in the same position as it would be with a permanent taking. That’s because the basic measure of damages for a temporary taking is payment of what would be fair market rent for use of the property during the taking period. You could say: “so what’s the difference who pays the rent so long as I get rent?” That’s true – at least up until the government is finished using the property. At that point, the landlord now has the property back. But, if its tenant had been allowed to terminate the lease, the landlord has an empty space, no tenant, and no rent.

While we’re at it, in the case of a temporary taking, the government might not take the owner’s or landlord’s interest; it might take the tenant’s interest in the lease, temporarily, as if it were a sublease. Theoretically, the tenant might receive a “bonus” if the fair market rent were greater than what it pays under its lease. So, if a tenant were permitted to terminate its lease under that circumstance, the landlord wouldn’t see any enhanced revenue. And, if the taking triggered the tenant’s lease termination, the landlord still will find itself with an empty space at the end of the taking period.

To make the situation even worse, there are a series of cases (but there aren’t a lot of cases at all in this area) where compensation is denied altogether. Keep in mind the general eminent domain principle that there is no compensation unless the taking deprives an owner of all economic benefit of its property. Although this doesn’t come up very often in the case of a permanent physical taking, it does come up all the time when it comes to “regulatory taking” claims, most often when a highly restrictive zoning ordinance is adopted. By definition, a temporary taking doesn’t deprive an owner of “all” economic benefit because the owner gets its property back at the end of the taking period. Obviously, such a taking takes “all” economic benefit during the taking period, but some courts define “all” under the “from here to eternity” standard. This approach claims to use the “balancing of interests” approach from the Penn Central case (whatever that is – for those who know the case, you know it; for those who don’t, it truly doesn’t matter; either way, the owner gets short-changed).

OK, by use of an example, we’ll tell you what we mean by the “balancing of interests” approach. Suppose that the EPA wanted to put test wells in the parking lot and did so by way of a “temporary taking.” In such a situation, one court used a “balancing test,” public good versus private harm. Then it decided that “test wells” were good for the public and that the loss of the parking spaces was immaterial to the property owner. Thus, no “rent.”

So, what does all of this mean? Where are we heading? Let’s distill the issue to its core question: “who should take the risk of a temporary taking, landlord or tenant?” Unless a landlord wants to get rid of its tenant, where a tenant has the right to terminate the lease when the genuine “interference” of a temporary taking exceeds an agreed-upon time period, the landlord will be taking the entire risk. So, in the end, this is a business issue, not a legal issue. How the parties allocate any award really isn’t important. After all, the tenant won’t be paying rent during the taking period; the condemning authority will be paying. In actuality, once the taking period exceeds whatever was agreed-upon, the landlord will then have a “new” tenant, but one with the right to terminate its “lease” at any time.

This isn’t an entirely new dilemma. After all, a lot of leases address the same kind of issue when it comes to “interruption of utility services” by an outside party or loss of a key entrance way. At the end of the day, in those cases, once the tenant has borne some “pain” or deprivation, the problem becomes that of the landlord. So, when it comes to dealing with temporary takings, the outcome will be the same.

Is there a “take-away” from today’s blog posting? We think there is, and it has to do with the negotiation process. First, let’s understand that temporary takings are very rare, and those that do happen (road construction staging areas, etc.) rarely have a true effect on a tenant’s use of its leased space. So, let’s make sure that our temporary takings provisions don’t mimic the permanent takings lease provisions in that regard.

Second, let’s understand that after all of the back and forth between negotiators, tenants will have the right to terminate the lease if the space is not usable for “too long” a time. That’s probably a period measured by how long it would take a reasonable tenant to decide to relocate to elsewhere in the same neighborhood.

Third, let’s face the reality that landlords are going to take the risk and won’t often be fully compensated (just as if the utility lines go down for three weeks).

Lastly, though a lease should properly deal with them, let’s not fight about temporary takings provisions because temporary takings are far and few between – really. And, those that do take place rarely have a material effect on a tenant. Wars happen, and battlefields are created. But, we haven’t seen any leases that allocate the risk of war as between a landlord and tenant. We’re not advocating that no lease should deal with temporary takings; only that, once we understand what they are and how they work, we shouldn’t fight over how the relevant clauses are drawn. Get in and get out. No one will be happy. Do rough justice.

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Comments

  1. Nice article about temporary taking in real estate . Not many people are clear about these things and the laws related to temporary taking even by government.

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