California Eminent Domain Report

Property owners typically have a lot on their minds when they find out that the government is going to be taking their property.  For residential owners, they need to worry about where they are going to live with their families once the agency takes possession of their home.  For business owners, they have to figure out how to run a business while planning for a forced relocation -- a relocation that may be coming at a terrible time or on a terrifyingly fast schedule.

The owners must also worry about whether they are receiving the right amount of money -- i.e., the "just compensation" the agency must pay them for the taking.  This comes in the form of payment for the fair market value of the property, but it can also include amounts for furniture, fixtures, and equipment and/or payments for lost business goodwill.  And where the government only needs part of the property, the owner must also learn about "severance damages" and how they are calculated.

And then there's the final nasty surprise that some owners face, the one that is the point of this post.  Once the owner finally gets everything sorted out and reaches a deal with the condemning agency, they may find their lender standing in front of them with open hands, waiting for their part of the proceeds.  And if that weren't enough, the bank may also hand them a bill for the bank's attorneys' fees incurred in the eminent domain action.

I deal with these issues every day; they do not strike me as unduly complicated or frightening.   But I'm an eminent domain lawyer, and I've represented clients on all of these types of issues for more than 20 years.  When I try to think like a more typcial propety owner -- one who may not even really know what eminent domain is when the government first knocks on the door -- I think about situations where I have been the one out of my element.  (Sitting in a doctor's office while they try to explain what they really mean when they say "cardiac incident" quickly comes to mind.)

The first thing to know when faced with lender demands is not to panic, and not to immediately sign whatever the lender puts in front of you.  Loan documents are lengthy and complicated, and they typically contain language (that the lender will gladly point you to) that sure makes it seem like the lender really does get the condemnation proceeds, and that it can force you to pay whatever costs -- including attorneys' fees -- that the lender has incurred.

But there are some legal rules that may change things, and you will want to talk with an eminent domain attorney before agreeing to give the lender anything.  The most important of these rules is that despite what the loan documents may say, the law limits what the lender can receive, particularly when the government is only taking part of the property.  Specifically, the lender's rights depend on the taking creating an impairment of the lender's security.  Determining what constitutes an impairment is itself a murky issue, but one in which the property owner may fare much better than the loan documents suggest.

And when it comes to attorneys' fees, the lender may indeed have the right to force the owner to bear those costs, but again there are other issues in play.  There may be a way to structure a deal under which the condemning agency agrees to pay those lender fees.  And if that doesn't work, the lender still must typically prove that the fees incurred were reasonable.

The bottom line is that these lender issues seem to crop up at the worst possible times, when owners are already overwhelmed with the many other issues facing them, and it is all too easy to agree to what the lender says and turn over money that need not be relinquished.   The point of this post is to suggest that owners in that situation resist the urge to capitulate, at least until they have talked with an attorney who understands these issues and can provide proper guidance.