Legal Briefs

Condemnation Concerns

Retail lease agreements should include change of access language.

For retail tenants, location is perhaps the most important factor for success. However, even the best location quickly can turn bad in the wake of condemnation or modification of access to the property. Despite the upfront investment made in securing a good location, tenants often overlook the importance of including condemnation and change of access clauses in their lease agreements to adequately protect their interests. Commercial real estate professionals who represent tenants should be aware of these factors and take steps to draft condemnation and change of access clauses into their clients’ leases.

Condemnation Clauses

When drafting leases, commercial real estate professionals should be mindful that leasehold interests are compensable interests in property. Generally, if a condemnation provision is absent in a lease, it is established that tenants are entitled to proportionately share in the condemnation award for the value of its leasehold interest. However, care still must be taken to describe a tenant’s ability to participate in a condemnation proceeding and distinguish between the taking of a leasehold interest, which is compensable, and the purported taking of other interests in real estate, such as lost goodwill, which may not be compensable.

While lease provisions do not determine what items are compensable, the lease terms can control most disputes between landlords and tenants. If a lease contains a condemnation clause spelling out the basis for dividing a condemnation award, such a clause will govern. Precision in drafting the lease and recognition of local laws can help to preserve a tenant’s interests and avoid disputes.

The key to drafting effective condemnation clauses is providing for appropriate remedies. In this regard, condemnation clauses may provide for leasehold termination, restoration obligations, apportionment, bonus value, and rent abatement. Clauses also may address relocation rights.

Another issue to consider when drafting leases is the distinction between total takings and partial takings. To do this, tenants should seek assurance that the condemnation clause provides sufficient discretion in the event of a condemnation. Tenants are most vulnerable in a partial taking situation where only a portion of property is taken. While the taking may appear small, it could have a huge impact on the tenant’s livelihood.

For instance, a partial taking of only a few hundred square feet may reduce drive aisles, cause internal circulation problems, and make the site no longer workable for drive-throughs or deliveries. A partial taking also can affect parking, limit a site’s ability to be further developed, and render a site non-conforming under existing zoning regulations.

Commercial real estate professionals should address situations where partial takings may have a significant impact on a site’s workability. In this regard, tenants should seek as much discretion as possible to determine if a partial taking will materially impact the property and choose the desired remedy such as termination, restoration, or abatement.

Access Issues

Equally important to the success of retail operations is the availability of safe and convenient access to a property. However, many leases pay little or no attention to access and the potential effects access changes can have on properties. In some cases, tenants may be in for a rude awakening should a modification of access occur.

While the regulation of access under police power is not considered a taking, because of eminent domain, the owner of land abutting to a street or highway has the right of access to and from the adjacent street. However, pursuant to its police power, the government may regulate access to and from the road for the public’s safety and welfare without having to pay compensation.

Therefore, the right of access is better regarded as the right to reasonable but not unlimited access to existing and adjacent public roads. In the case of Wolf v. Department of Highways, the court found that a property owner is not entitled to access its land at every point between it and the highway, but only to free and convenient access to its property and the improvements on it. Because of this, in similar cases since Wolf, it often is stated that a property owner has no vested right in the continued flow of traffic past its property.

In addition, the rights of an abutting owner may be subordinated to the rights of the public in regard to the proper usage of highways and the right of governmental agencies to enforce proper police regulations. Under proper exercise of its police power in the regulation of traffic, a state entity or transportation authority may, among other acts, reduce the number of existing access points, install guardrails or curbing, impose vehicle weight limitations, or replace access on a highway with access on a local roadway. The inconvenience, reduction in profits, or depreciation in property value that occurs as a result of a legitimate exercise of the state’s police power is considered loss or damage without injury.

Since access is a key component of property value, impairment often has significant real-world effects on the value of a commercial site. For instance, a change in access may reverse traffic flows through drive aisles, prevent delivery vehicles from safely entering or exiting the site, or force traffic to flow by a competitor’s business before reaching an entry point to the tenant’s property.

Tenants are wise to include lease clauses that address the potential for administrative changes in access and keep in mind that the regulation of access can be accomplished outside of the condemnation arena, and therefore not provide any compensation. Leases also should address related issues such as requiring notice to tenants, participating in access proceedings if legally permissible, and providing discretionary remedies should a change in access have a material impact on the business’s operation.

George J. Kroculick, JD, and Michael J. McCalley, JD

George J. Kroculick, JD, is a partner with Duane Morris LLP in Philadelphia. Contact him at (215) 979-1386 or [email protected] Michael J. McCalley, JD, is an associate with Duane Morris LLP in Philadelphia. Contact him at (215) 979-1383 or [email protected]

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