The Lack of a Written Lease Is Not Fatal to a Business Owner's Quest for Compensation for Loss of Goodwill in an Eminent Domain Proceeding

In Los Angeles Unified School District v. Pulgarin, (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., June 23, 2009), a California Court of Appeal issued an opinion clarifying when a public entity must compensate a business for loss of goodwill in an eminent domain action. A trial court had dismissed a business’s claim for compensation for loss of goodwill after a school district condemned the property on which the business operated. The trial court believed the business could not receive compensation for lost goodwill since it lacked a written lease. The Court of Appeal reversed the dismissal, and held that the lack of a written lease was not fatal to the business’s claim for compensation for loss of goodwill.

Facts
The Los Angeles Unified School District (“District”) filed an eminent domain action to acquire property owned by A&D Investment Corporation (“A&D”). Elisa and Juan Pulgarin owned a business called Mid Town Recycling (“Mid Town”), which occupied a portion of the A&D property. Mid Town did not have a written lease with A&D and instead operated under a month-to-month tenancy.

District asked the trial court to determine prior to trial that, because Mid Town did not have a written lease for the property, Mid Town “had no legally enforceable interest in the property and thus was not entitled to compensation for loss of business goodwill.” The trial court granted District’s motion, and Mid Town was not able to proceed on its loss of goodwill claim.

Decision
The Court of Appeal reversed the decision of the trial court. The California Constitution does not require compensation for loss of business goodwill. However, the Legislature enacted Code of Civil Procedure section 1263.510 which provides for such compensation when a business operates on property taken by eminent domain. The purpose of the statute is to provide compensation for losses a business incurs when it is forced to move and give up the benefits of its former location.

Section 1263.510 provides that the owner of a business conducted on property taken or diminished by eminent domain must be compensated for the loss of goodwill if the owner proves: (1) the loss was caused by the taking of the property; (2) the loss cannot be prevented by relocation of the business or by taking reasonable measures to preserve the goodwill; (3) the loss will not be compensated by other payments made under the Government Code; and (4) the compensation for goodwill will not be duplicated in other compensation awarded to the property owner.

After reviewing the statutory language, case law and legislative history, the court found no requirement “that a business owner’s entitlement to goodwill must be based on a written lease on the property that is taken.” What is required to receive compensation for loss of goodwill “is that the business owner prove that the loss is caused by the taking of the property.” A business that “is required to move because of the taking of the property on which it operates has suffered a loss from the taking.” This loss can occur “whether the tenancy is for a fixed term, or for a periodic tenancy” as in the case of Mid Town’s tenancy. The court noted, however, that the value of business goodwill is impacted by the probable remaining term of the lease or tenancy, any option to renew the lease, the pre-condemnation duration of the tenancy and the quality and mutual satisfaction in the landlord tenant relationship. Based upon the court’s ruling, the matter was returned to the trial court for further proceedings including establishing the amount of any goodwill compensation.

What This Decision Means To You
This decision highlights the potential costs a public entity may incur in a condemnation action and the potential damages available to a business owner. A public entity’s costs are not limited to simply compensating the property owner, but it must also consider whether the condemnation will cause a business operated on the property to suffer a loss of goodwill. Such a loss could significantly increase the acquisition costs. Additionally, a business owner must consider whether the condemnation will cause it to suffer a loss of goodwill. The business can seek recovery in the eminent domain action, or it can file an inverse condemnation action against the entity. The lack of a written lease does not prevent recovery for loss of business goodwill.