Is a Landlord Entitled to Recover Money Awarded to a Tenant for Goodwill in a Condemnation Action? 

In the case of Thee Aguila, Inc. v. Century Law Group, LLC (2019) 37 Cal.App.5th 22, landlord sued its former tenant after the tenant was awarded $6 million for loss of goodwill resulting from eminent domain proceeding.  The landlord took the position that its lease required the tenant pay it the money received in such proceeding pursuant to the following lease term, “Any payment made under threat of the exercise of the  power of eminent domain shall be the property of the landlord.”

The court disagreed with the landlord’s position by distinguishing between “compensation paid for the tenant’s loss of goodwill and their loss of the leasehold interest.”  The court stated, “The Legislature has determined that a business owner’s goodwill for business operated on property taken by eminent domain is compensable separate and apart from the party’s interest in the property taken.”  Here, the lease did not specifically provide that the landlord would be entitled to any compensation for the loss of goodwill of the tenant’s business and the court indicated it would not interpret the language of the lease cited above as including goodwill.

This case is important to those drafting leases on behalf of landlords and tenants.  Instead of simply stating, “All awards for the taking of any part of the Premises . . . shall be the property of the Landlord, whether made as compensation for the diminution of value of the leasehold, or for the taking of the fee as severance damages,” the drafter should specifically state (if representing the landlord) that not only is the landlord entitled to any compensation received for the taking of any part of the premises, but also specifically for any loss of goodwill of the tenant’s business.

Of course, the tenant will want the exact opposite because California Code of Civil Procedure section 1263.510 awards compensation for loss of goodwill to the tenant.  The court felt that nothing in the lease provision which was the subject of the Thee Aguila case as counter to this section of the Code of Civil Procedure.

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