When They Make You an Offer You Can’t Refuse...

[author: Garrett Hanken]

Property rights are part of the fabric of American law.

They have been protected by the U.S. Constitution since adoption of the Bill of Rights. But the protection of property rights is not absolute. The Fifth Amendment to the Constitution does not absolutely prohibit the taking of private property for public use – it only prohibits the taking of private property “without due process of law” or “without just compensation.” The bottom line is that the government (or even non-governmental entities acting in the public interest, like utility companies) can take any property for public use, as long as they follow lawful procedures and pay fair value for the property rights taken. What should a business do when it receives such an offer it can’t refuse?

Be Aware of the Process

The taking of private property for public use is referred to as condemnation or eminent domain. Important steps in the eminent domain process can occur quickly, sometimes even before a business is aware of the threat to its property. A business cannot respond appropriately to a threat of condemnation unless it has a general understanding of the process.

Generally, a condemnation arises out of a public project. An agency’s staff and consultants will study how best to implement a proposed project, where to site it, how to relate it to neighboring properties, how to finance it, how to mitigate its adverse environmental impacts, etc. That process may or may not involve public workshops or hearings. Once the general design for the project is decided on, the agency may give the property owner notice of its intent to perform environmental studies or appraisals of the private property involved. The agency will then typically make an offer to purchase the property rights, supported by a summary appraisal.

If the offer does not result in an agreement, the agency will typically hold a hearing on a “resolution of necessity,” an action that authorizes the commencement of a lawsuit to take the property. The physical taking of the business’s property can occur fairly quickly after the commencement of the condemnation litigation. The law allows public agencies to take possession of condemned property and build their projects long before a final judgment is entered in the condemnation litigation. The public agency could, therefore, have possession of the property within a few months after the time the business owner learns of the threatened taking, even though the condemnation litigation may take years to resolve.

Evaluate Your Goals

How a business responds to a threat of condemnation depends on the importance of the property to the business’s operations and the extent of the taking. If the business would be gravely impacted by the taking of its property, the business may seek to challenge the right to take. If the property is not critical, the best approach for the business may be to seek to maximize the compensation it receives for the taking. If the property being taken is just a small encroachment on or interference with the property, the most important response may be to try to limit the impact of the taking on the business’s operations.

Challenging the Right to Take

The grounds for challenging a public agency’s right to take private property are severely limited. Adoption of a resolution of necessity conclusively establishes (with limited exceptions) most of the factual prerequisites to condemnation of private property. While a challenge to the right to take sometimes enhances the property owner’s ability to settle the condemnation case on favorable terms, the cost of challenging the public agency’s right to take is sometimes not justified in light of the limited chances of success in resisting the taking.

If a challenge to the city’s right to take the property is either not pursued or is not successful, the city will be allowed to take the property and the owners of the property will be entitled to compensation for the loss of the property.

Maximizing Compensation for the Taking

The measure of the compensation to which the property owner is entitled may fall into several categories, including:

  • the fair market value of the property and its improvements;
  • the fair market value of furniture, fixtures and equipment located on the property;
  • if only part of the property is taken, severance damages to compensate for injury to the part of the property not taken;
  • relocation expenses for relocation of business operations on the property;
  • loss of good will suffered by the business conducted on the property.

Where multiple parties have interests in the property taken (for example landlord and tenant, owner and lender, etc.), those interest holders may have to compete with each other for the compensation to be paid by the public agency. Public agencies typically elect to have a condemned property valued as a whole. Where the public agency makes such an election, after the value of the whole property is determined, the parties claiming interests in the property must settle or litigate among themselves to apportion the condemnation award. Such apportionment is governed in part by statute and in part by agreements between the parties. Crucial in lease situations is the issue of “bonus value” of the lease – i.e., the excess of the fair rental value of the property over the rent provided in the lease.

Minimizing Impact on Operations

Many condemnations seek not to take the whole of a parcel of land but rather to take only a small part or easement, as, for example, for construction of a utility pipeline, road widening or a new rail project. In those instances, the business owner must focus on how the proposed work may adversely affect the business’s operations. Experienced counsel can often negotiate and enforce work rules that minimize the impact of the taking on the operations and income of the business.

While a business may not be able simply to refuse the government’s effort to buy its real property, if the owner understands the process, acts quickly to assess its position and formulate its goals in response to the condemnation, and proceeds with appropriate legal guidance, the business can greatly improve the outcome of its encounter with an offer it can’t refuse.