The operator of a golf course on leased property was not entitled to compensation when a public agency condemned part of the property to accommodate a trolley line, the Fourth District Court of Appeals has ruled.

The unanimous three-judge panel said the San Diego Metropolitan Transit Development Board (MTDB) was correct when it compensated the owner of the real estate, not the lessee. The court also said the lessee was not entitled to payments for loss of goodwill because of the trolley project.

The Handlery Hotel owns a 217-unit hotel, swim and tennis club, and cinema on 15 acres in Mission Valley. For more than 40 years, Handlery leased a 200-acre parcel next door, on which it built and operated a 27-hole golf course. Handlery built a clubhouse and parking on its own land. Handlery paid $500 a month to lease the 200 acres from the owners, Chevron Corporation and the Levi/Cushman families.

When Chevron, the general partner, took a more active interest in developing the property, Chevron advised Handlery it expected to net $1.2 million to $2 million annually from the golf course. In late-1993 and early-1994, Handlery and Chevron failed to agree on a new 15-year lease. At the same time, the transit board revealed its plans for the 6.2-mile Mission Valley West Light Rail Transit Extension from Old Town to Jack Murphy Stadium (now Qualcomm Stadium).

Recognizing that Handlery's lease was about to expire, the transit board negotiated only with Chevron. (The transit board did use eminent domain to take five acres of Handlery's property, for which the transit board paid Handlery.) After its long-term lease expired, Handlery continued to operate the golf course under a short-term lease and a series of extensions. The final extension terminated when the transit board assumed ownership of a portion of the golf course property in September of 1996.

Handlery sued for payment for pre-condemnation damages because the transit board had negotiated with Chevron. Handlery also requested compensation for loss of business goodwill. But the trial court concluded the transit board's actions "constituted neither unreasonable pre-condemnation conduct nor inverse taking." Additionally, the trial court ruled that transit board did not cause Handlery to lose goodwill.

On appeal, Handlery argued that by entering into discussions with Chevron about redesigning the golf course away from the hotel to accommodate the trolley line, the transit board undertook unreasonable pre-condemnation conduct that amounted to inverse condemnation of personal property. Handlery further noted the transit board promised to compensate Chevron for a period when the course was closed. Handlery argued that the transit board's agreement to provide Chevron with an "in-kind" golf course lead to Chevron's termination of lease negotiations with Handlery, which deprived the hotel of conducting the golf course business on a long-term basis.

But the Fourth District, Division One, of the Court of Appeals said Handlery was not entitled to compensation because it neither owned the property nor had a long-term lease to use the real estate. "Handlery's hypothetical lease resting on speculative expectation of renewal is not compensable," Presiding Judge Daniel Kremer wrote. Handlery's lost lease was the result of a business decision between two private parties, Kremer continued.

"MTDB did not restrain Handlery," Kremer wrote. "MTDB was not included in the lease negotiations between Handlery and Chevron. … Handlery simply did not convince Chevron/PDR that it was in their best interests to continue their business relationship with Handlery as operator of their golf course."

The Code of Civil Procedure, §1263.510, permits compensation for loss of goodwill, which is typically read as payment for instances when a business is forced to give up benefits of its location, the court said. But, citing Redevelopment Agency v. International House of Pancakes (1992) 9 Cal.App.4th 1343, the court ruled that only owners of real property may claim compensation for loss of goodwill. "None of the tees, fairways or greens for the golf course were located on Handlery's property," Kremer noted.

The Case: San Diego Metropolitan Transit Development Board v. Handlery Hotel, No. D029645, 99 C.D.O.S. 5577, 1999 Daily Journal D.A.R. 7081, filed June 17, 1999, certified for publication July 12, 1999.

The Lawyers:
For SDMTDB: Bruce W. Beach, Best Best & Krieger, (619) 525-1300.
For Handlery: Susan Hinz, (530) 247-8030.