California Eminent Domain Report

One of the issues that arises with some frequency in eminent domain cases involves a debate over which parties may seek compensation for lost business goodwill.  In many cases, this is an easy discussion:  any business operating on the property at the time it is condemned generally has the right to seek compensation for lost goodwill. 

But sometimes, the situation becomes murky, and a decision this week by the Court of Appeals, Los Angeles Unified School Dist. v. Recovery Resource LLC, presents an interesting, twisted set of facts.  In Recovery Resource, LAUSD filed a condemnation action to acquire a property for a school site.  At the time it filed the action, Recovery Resource was conducting business on the property.  About six months after the filing, LAUSD took possession of the property.  Recovery Resource was still doing business on the property and was displaced when LAUSD took possession.  So far, this seems like a pretty easy case -- and a classic example of a party eligible to seek lost business goodwill. 

But the issue in this case was not whether the business was in fact operating on the property, but whether it was entitled to be operating on the property.  As it turned out, the tenant possessed only a month-to-month tenancy.  More importantly, the tenant had repeatedly been late or had failed to pay rent.  As a result, before LAUSD filed its condemnation action, the owner filed an unlawful detainer action to evict the tenant.  One might wonder why, then, the tenant remained on the property through the filing of the eminent domain action and the eventual order for prejudgment possession. 

The answer involves a fairly common situation in these economic times.  Before the owner could complete the eviction, Recovery Resource declared bankruptcy.  The owner concluded that the bankruptcy filing stayed the unlawful detainer action.  Thus, when LAUSD took possession of the property, Recovery Resource was still there. 

Despite the tenant's actual occupation of the property at the time of the taking, the Court rejected the goodwill claim.  The bottom line:  even though the owner had not successfully evicted the tenant prior to LAUSD's taking possession of the property, the owner's intent to evict was enough.  As the Court explained:

Hanelin decided not to continue Recovery Resource's tenancy before the taking occurred. Thus, it was not the condemnation that terminated Recovery Resource's right to possession of the property, but Hanelin's decision not to lease it to Recovery Resource. Recovery Resource therefore could not establish that LAUSD's actions caused its loss of goodwill.

The Court of Appeal affirmed the trial court's determination that the tenant could not seek loss of business goodwill against LAUSD.