Include Two Protections in Eminent Domain Clause

Some tenants that turn out not to be able to afford the rent for their space are upfront with their owners and try to deal with the situation the best way they can. Unfortunately, you may someday be faced with a tenant that must move out of its space before the end of its lease, but tries to get out of its obligations by relying on a technicality in its lease that doesn’t actually apply to the tenant’s situation. Even if the tenant is completely wrong, you could end up wasting time and money in court finding that out.

That’s what happened recently to the owner of a Georgia retail complex that rented space to a restaurant tenant that suffered a financial setback, but tried to get out of its obligations by relying on an eminent domain provision in its lease after the fact. Luckily for the owner, when it was negotiating its lease with the tenant, it had plugged two common loopholes that could’ve spelled trouble for it. 

Case in Point

In the restaurant tenant’s case, it had defaulted on its lease when it stopped paying rent. It moved out of its space. But, under the terms of its lease, it was required to continue paying rent to the owner. It refused, arguing that the owner wasn’t entitled to collect rent once the tenant was no longer operating at the center. The owner asserted that it was entitled to continue to collect rent, because although the tenant had moved, the lease hadn’t actually been terminated.

After a series of court proceedings, the tenant began to claim that the lease had, in fact, been terminated—by the city’s eminent domain of a portion of the center that was intended to be part of a beautification project in the area. It supported its argument with a provision in its lease that provided:

If all or part of the Demised Premises shall be taken for any public or quasi-public use by virtue of the exercise of the power of eminent domain or by private purchase in lieu thereof, this Lease shall terminate as to the part so taken as of the date of the taking, and, in the case of a partial taking, Tenant shall have the right to terminate this Lease as to the balance of the Demised Premises by written notice to the other within thirty (30) days after such date; provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Demised Premises taken shall be of such extent and nature as materially to handicap, impede, or impair Tenant’s use of the balance of the Demised Premises for its normal business operations.

A Georgia district court noted that the provision, by its terms, gives an option to the tenant. That is, if “all or part” of the premises are taken by eminent domain or private purchase in lieu of an eminent domain action, then it could terminate the lease by written notice within 30 days after the exercise of eminent domain or the private sale.

In connection with the city’s project, the owner had conveyed 1,300 square feet of sidewalk and curb in front of the center to the state’s department of transportation. The tenant contended that the conveyance of the area for the expanded sidewalk included a portion of its premises, rendering the lease unenforceable. But the court disagreed.

It noted that the provision relied on by the tenant stated that a condition to the exercise of the option by the tenant to terminate the lease in the event of eminent domain shall be that the portion of the property taken shall be of “such extent and nature as materially to handicap, impede, or impair Tenant’s use of the balance of the Demised Premises for its normal business operations.”

But here, the taking of the sidewalk wouldn’t have interfered with the tenant’s operation of its restaurant—had it stayed in the space. The portion used for the project wasn’t “material” to the tenant’s operations. It had no evidence of any impact by the claimed taking, such as a reduction in its business or its seating capacity, or any other impact to its operations.

The right to termination also was optional in the event there was a taking of any or all of the premises, the court emphasized. It said that the requirement that the right be exercised by the tenant in writing—as opposed to being by operation of law, or automatic—makes practical and commercial sense. A taking by a government entity of a portion of the premises may well enhance the value or desirability, or both, of the premises causing the tenant not to want to exercise its option, the court noted. It also pointed out that the provision clearly provided that the notice of the intent to terminate must be in writing; but there was no evidence here that the tenant had ever sent such a notice to the owner.

The court concluded that the absence of any evidence of an impact on the premises or impact on the tenant’s business, and the failure to give written notice, required the court to conclude that the lease was not, and could not be, terminated pursuant to the eminent domain provision. Rather, the tenant had failed to object to the claimed partial taking of the property when it was still operating in its space, and it now raised it in a lawsuit to evade the responsibility to pay rent, the court stressed. The tenant doesn’t have a right to terminate the lease, and even if it did, it has waived it [3455 LLC v. ND Props., August 2014].

Require Written Notice of Intent to Terminate

You’re leaving a huge loophole in your lease if you give your tenant free reign to terminate its lease in an eminent domain situation. If your lease contains an eminent domain provision, it’s important to make the tenant actually exercise any option that you give it to terminate its lease in the event that there is a taking of the property by the government or you decide to convey part of the property for a government project, such as the beautification project in this case. And require the notice to be in writing and sent to you.

And it’s crucial to set a time limit within which the tenant must exercise its option after learning of the taking or conveyance of the property. In this case, the owner set it at 30 days, which is a fair number. And it was key in helping the owner win its case: The tenant didn’t bring its claim until much later than the 30-day period, specifically after it no longer even occupied the space. A broad time period or no time period at all can give a tenant the opportunity to fall back on a technicality to avoid paying rent.

Taking or Conveyance Must ‘Materially’ Affect Tenant

A second major loophole in eminent domain provisions is not specifying under what circumstances the taking of the property will justify termination of the lease. A tenant that’s unhappy with its space for another reason may see a minor taking, such as a portion of the property that it doesn’t truly need to run its business, as an opportunity to get out of its lease.

To plug that loophole, make it a condition to the exercise of the option by the tenant to terminate the lease in the event of eminent domain that the portion of the property taken shall be of “such extent and nature as materially to handicap, impede, or impair tenant’s use of the balance of the demised premises for its normal business operations.”

The owner’s use of that language in its provision here was key. After all, the point of an eminent domain provision is to allow the tenant to terminate its lease and move to a different location if a taking of the property interferes with its business. If the eminent domain or conveyance doesn’t impact the tenant, why should it be allowed to terminate its lease with you, leaving you on the hook to find a replacement?