Can Condemnation Force Rent Reduction?
Q: Several years ago, I began subleasing my space at a shopping center to a new tenant. Recently, that space was affected when the city condemned a portion of the property for a public works project. As a result, the space became unusable. The owner of the center was compensated by the city for the portion of the center that was taken. The subtenant is asking me to reduce its rent in proportion to the current amount of space that it still can’t use. But I didn’t receive any compensation proceeds from the city or the owner, so I don’t feel that that I should have to reduce the rent. Now the subtenant is considering suing me. Do subtenants ever prevail in cases like this?
A: Yes, and a Kansas appeals court’s rationale in a recent case on point demonstrates this. In that case, a trial court ruled in favor of a tenant who refused to lower the rent for its subtenant who lost part of its space in a condemnation situation. However, on appeal, the subtenant was successful.
Similar Condemnation Situation
In that case, a shopping center owner leased property to a tenant that then subleased its space to a subtenant. The tenant later assigned its lease with the owner and its lease with the subtenant to a new company (assignee).
When the city condemned several tracts of land to improve the road next to the center, including a significant portion of the property used by the subtenant, the owner received compensation for the taking. But neither the subtenant nor the assignee received any condemnation proceeds.
The subtenant asked a court to declare that based on the sublease, the assignee was required to reduce the rent due to the condemnation. The assignee asked a trial court for a judgment in its favor, arguing that because it hadn’t received any condemnation proceeds, the subtenant wasn’t entitled to a rent reduction. The subtenant asked the trial court for a judgment in its favor without a trial.
Assignee Wins First
The trial court agreed with the assignee’s interpretation of the sublease and found that the subtenant wasn’t entitled to a rent reduction because the assignee hadn’t received any condemnation proceeds. The subtenant appealed, arguing that the court’s interpretation of the sublease was incorrect and that the sublease entitled it to a rent reduction regardless of whether the assignee received any condemnation proceeds.
Appeals Court Simplifies Argument
The appeals court noted that the case wasn’t really about a condemnation; it boiled down to the interpretation of a contract—that is, the sublease. The crucial portion of the sublease that dealt with “condemnation” of less than the entire premises stated that:
If during the Term of this Sublease, (i) any part of the Building or (ii) any other portion of the Premises which, if taken, would, in Tenant’s sole but reasonable judgment, render the Premises not suitable for the Intended Use or such other use which Tenant is using the Premises for as of the date of such taking, is condemned for public use under right of eminent domain, Tenant may, at its option, terminate this Sublease. If Tenant shall not elect to terminate this Sublease, Landlord shall only to the extent of condemnation proceeds actually received, restore and rebuild the Premises to provide Tenant, as far as possible, all the improvements and building facilities existing before the taking, and the monthly rental thereafter to be paid shall be reduced by an amount that bears the same ratio to the rent herein provided for as the amount of damages awarded (in excess of allowance for building revision) bears to the total value prior to such taking.
The subtenant believed that the phrase “only to the extent of condemnation proceeds actually received” applied only to the promise to restore and rebuild the premises; the assignee argued that the language was a condition precedent that also applied to the rent reduction clause, meaning the assignee must receive condemnation proceeds before the subtenant is entitled to a rent reduction.
Reasoning in Favor of Subtenant
The appeals court examined the structure of the disputed clause and determined that if the sentence in question was read so it applied to the rent reduction clause, it would read: “Landlord shall only to the extent of condemnation proceeds actually received…the monthly rental thereafter to be paid shall be reduced. . . .”
“That sentence, read as the assignee proposes, is nonsensical and meaningless,” said the appeals court. Accordingly, it found the plain meaning of the language regarding condemnation proceeds pertained only to the restore and rebuild clause in which it appeared; therefore, the condemnation proceeds clause is not a condition precedent but merely a cap on the amount of money the landlord must spend to restore and rebuild the improvements and buildings—a duty not invoked by either party.
If the part of the premises that the subtenant is renting is permanently condemned, it seems reasonable that the rent would be permanently reduced by an amount equal to the loss in value of those premises, the appeals court concluded. The trial court had erred when it required the subtenant to pay full fair-market value rent for the entire premises even though the subtenant no longer received the value of the entire premises. The appeals court reversed the decision, finding that the subtenant’s interpretation was reasonable from an equity viewpoint [Bridgestone Retail Operations, LLC v. GFTLenexa, LLC, February 2016].