California Eminent Domain Report

In California, a business operating on real property being acquired, in whole or in part, for a public project may make a claim for loss of goodwill and be entitled to compensation if the business operator establishes the foundational elements: (1) the taking caused the loss, (2) the loss could not be prevented by relocation or other reasonable mitigation measures, (3) the loss is not includable as a reimbursable relocation expense, and (4 ) the loss does not duplicate other compensation being paid.  (Code Civ. Proc. §1263.510(a).)  As part of its affirmative duty to mitigate damages, a business often relocates its operations to a new site to preserve its goodwill.  Appraisers retained by the business and agency typically compare the business’ goodwill in the “before condition” (at the subject property) and in the “after condition” (at the replacement property) to determine the amount of loss, if there is any loss.

This comparison can be difficult when appraisals must be exchanged at a time when the business has little to no operating results at the replacement property because it has not yet moved or is still in a start-up period.  When the replacement property selected by the business has many of the same characteristics as the subject property and the project impacts are well understood from detailed construction plans, the parties usually choose to resolve the goodwill claim along with the real property claims in the existing litigation.  The appraisers are able to use historical data to determine goodwill in the before condition and compare it to the goodwill in the after condition, which they usually determine by making adjustments for the impacted condition.  The appraisers’ adjustments take into consideration the project plans, the owner’s testimony, other expert opinions, paired sales if available, and their own expertise. Subjectivity obviously creeps in with so many unknowns at play. However, if the adjustments are substantiated and the appraisal testimony credible, goodwill claims often settle, and sometimes go to trial, without the need of actual performance at the replacement property to compare with their performance (unimpacted) before the relocation.

However, at times, there are extreme differences between the agency and the owner as to the amount of goodwill loss.  The disparity is usually the result of a difference of opinion of the goodwill value in the after condition because the appraisers use reported, historical data to reach their conclusion of the value of the goodwill in the before condition but have considerable free reign in analyzing the effect of uncertain impacts on value in the after condition.  The unknowns often include potential closures or interruptions of business due to project construction, a change in a business’ functionality or efficiency if the replacement property is a different size or has different amenities, the loss of customers due to greater travel or lack of transportation, a start-up period that is much longer than expected, and numerous other reasons.   

In these situations where there is a great disparity between the appraisers’ opinions of goodwill loss, the parties may choose to settle all other claims in the existing eminent domain action and reserve only the goodwill claim for determination at a later date, ideally to a date after project construction is complete so that the actual project impacts are known.  To reserve the claim, the parties should enter a written agreement with specifics as to how the resolution of the goodwill loss will be determined on a future date.  Items typically included in such an agreement include:

• The mechanism by which the claim will be ultimately resolved, such as the filing of a new lawsuit by either the owner or agency, arbitration, mediation, or review by an independent appraiser.
• When and how the process will start, proceed, and conclude, including confirmation that the existing resolution of necessity to condemn the real property on which the business operated is valid and cannot be challenged in connection with the postponed valuation of the reserved goodwill claim.
• Any potential statute of limitations issues.
• Whether entry into the agreement bars an inverse condemnation action, which will generally deter new counsel from getting involved and unravelling the status quo.
• Claims that have already been resolved and/or waived, with one of the more significant being whether the business owner is waiving all claims for attorneys’ fees and expert fees.
• Whether the parties agree that a Final Order of Condemnation can be entered before resolution of the reserved claim.
• A status on reimbursement of eligible relocation expenses in order to avoid duplication of payment or other adjustments that may be necessary depending on the amount and category of items already reimbursed.

In the rare circumstances where there is a significant difference of opinion of loss and there are a number of uncertain project impacts, reserving the claim for determining goodwill loss at a later date makes good legal -  and business - sense.  The postponement should provide data for better analysis of the damages, if any, resulting from those impacts.  The improved ability to analyze the goodwill loss outweighs the extended time and piecemeal manner required to reserve the claim.  Thus, if you are heading into late-night negotiations and not making any headway because the owner wholeheartedly believes “all is lost” while the agency also wholeheartedly believes the business’ profits will soar at the new site, it is probably time to start discussing the possibility of reserving the goodwill claim for resolution at a later time.