July 7, 2009
Previously published on June 25, 2009
The late Hollywood movie mogul, Samuel Goldwyn, once observed that “[a]n oral contract isn’t worth the paper it’s written on.” The California Court of Appeal for the Second District apparently disagrees - - at least in eminent domain. On Tuesday, the Court of Appeal issued its opinion in Los Angeles Unified School District v. Pulgarin (June 23, 2009, B206892, ____ Cal.App.4th ____).
In Pulgarin, the Court of Appeal held that a month-to-month tenant is not barred from recovering lost business goodwill, as a matter of law, simply because the owner lacks a written lease on the property taken. California eminent domain law contains “no requirement that the real property interest be taken from the business owner in order for the business owner to be entitled to compensation.” (Ibid.)
Background: Can I Get That in Writing?
Mid Town Recycling (“Mid Town”) operated a small recycling business on some real property which the Los Angeles Unified School District (“LAUSD”) sought to condemn. Mid Town occupied the property under a month-to-month tenancy; it lacked a written lease. Nonetheless, after LAUSD’s condemnation, Mid Town would no longer be able to operate its business on the property.
Mid Town sought the value of its lost business goodwill in court. Before the compensation trial, LAUSD challenged Mid Town’s “entitlement” to any compensation. In other words, LAUSD sought a pretrial ruling from the court, under Code of Civil Procedure section 1260.040, that Mid Town possessed no legally enforceable interest in the property, since it lacked a written lease. LAUSD claimed Mid Town could not recover for lost business goodwill.
Mid Town, by contrast, asserted that a written lease is not necessary to recover lost business goodwill. The trial court agreed with LAUSD and dismissed Mid Town from the action.
Legal Background: Lost Business Goodwill Is Compensable in California.
California stands (nearly) alone among the states in allowing business owners to recover business goodwill lost through condemnation. (See generally 8A Nichols on Eminent Domain (3d ed. 2009) Loss of Business Goodwill, §§ 29.01-29.08, pp. 29-1 to 29-58; 7A Nichols on Eminent Domain (3d ed. 2009) Partial Takings, § G12.03[3][c], pp. G12-30 to G12-32. See also Cal. Code Civ. Proc., § 1263.510.)
Notably, the California business goodwill statute (section 1263.510) does not require that a business owner who seeks lost goodwill also prove that he or she owns the real estate on which the business happens to sit.
Written Lease Not Required to Recover Business Goodwill, as a Matter Of Law.
Mid Town argued on appeal that section 1263.510 does not require that a business owner own - - or even have a written lease on - - the property that is taken. The Court of Appeal agreed.
The Court of Appeal distinguished San Diego Metropolitan Transit Development Board v. Handlery Hotel, Inc. (1999) 73 Cal.App.4th 517:
- In Handlery Hotel, before the condemnation action, the fee owner refused to renew the lease that gave the business the right to operate on the property taken. Condemnation, therefore, did not terminate the owner’s right to operate its business on the property or cause any lost business goodwill; the fee owner’s decision not to renew the lease did.
- Handlery Hotel should not be read to hold that section 1263.510 requires that a business owner have a written lease on the property that is taken to recover lost business goodwill.The Court of Appeal stated: “What is required is that the business owner prove that the loss is caused by the taking of the property. . . . A business which is required to move because of the taking of the property on which it operates has suffered a loss from the taking . . . whether the tenancy is for a fixed term, or is a periodic tenancy.”
Parting Thoughts: Semper Letteris Mandate, Perhaps.
The Court shared some parting thoughts on how lack of a written lease could affect the value of lost goodwill. The value of lost business goodwill “is affected by the probable remaining term of the tenancy,” and “[e]vidence of the remaining length of a lease and the existence of an option to renew a lease are, of course, relevant for determining the amount of compensation” for lost goodwill.
Accordingly, the old Japanese proverb seems to ring true here: “One written word is worth a thousand pieces of gold.”
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