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Government Property Acquisition Costs May Rise

A state appellate court has issued a ruling in an eminent domain case that could have expensive ramifications for government agencies.

The court ruled that a business owner isn't required to have a written lease in order to seek compensation for lost goodwill resulting from a government taking of property. The decision reverses a 1999 ruling that held a business shall not receive compensation for lost goodwill unless the business has an "enforceable property interest."

The decision means that the owners of a recycling business located on property taken by the Los Angeles Unified School District as a site for a new school may seek compensation for lost goodwill, even though the owners occupied the property under a month-to-month tenancy with no written lease.

There is no constitutional right to compensation for loss of goodwill essentially, economic losses caused by forced relocation resulting from a government taking. However, Code of Civil Procedure 1263.510 authorizes such compensation if certain conditions are met. Ten years ago, the Fourth District Court of Appeal established a bright line for goodwill claims. In San Diego Metropolitan Transit Development Bd. v. Handlery Hotel, Inc., (1999) 73 Cal.App.4th 517, 533, the court ruled that, "Where the business owner has no enforceable property interest, a claim for compensation for goodwill cannot stand." In other words, month-to-month tenants could not qualify for goodwill compensation because they are always subject to losing their location (see CP&DR Legal Digest, September 1999).

Los Angeles County Superior Court Judge Joanne O'Donnell relied on the Handlery decision in rejecting a claim from the owners Mid Town Recycling, Elisa and Juan Pulgarin. The couple's business operated on a site owned by A&D Investment Corporation that the school district acquired via eminent domain. The Pulgarins sought compensation for loss of business goodwill, but O'Donnell ruled that they did not qualify under the Handlery rule.

On appeal, a unanimous three-judge panel of the Second District Court of Appeal, Division Four, said that while it agreed with the outcome in Handlery because of the specific facts in that case, the Second District disagreed with the Handlery court's interpretation of 1263.510.

"The statute contains no requirement that the real property interest be taken from the business owner in order for the business owner to be entitled to compensation, just that the taking cause a loss to the owner of a business conducted on the property which was taken," Presiding Justice Norman Epstein wrote for the court.

"What is required is that the business owner prove that the loss is caused by the taking of the property. A business which is required to move because of the taking of the property on which it operates has suffered a loss from the taking," Epstein wrote. "This is true whether the tenancy is for a fixed term, or is a periodic tenancy as in this case."

The value of goodwill, the court continued, depends in part of the duration of the tenancy and "the quality and mutual satisfaction in the landlord and tenant relationship."

The ruling set legal analysts abuzz. Rick Rayl, an eminent domain and valuation specialist at Nossaman, wrote in a widely circulated "E-Alert" that while the Handlery rule was "somewhat arbitrary," it was also simple and predictable. "Whether one applauds or decries the Pulgarin opinion," Rayl concluded, "one thing is clear: This battle goes to the business owners and against the government."

In another publicly distributed analysis, attorneys at Kronick, Moskovitz, Tiedemann & Girard wrote that the ruling "highlights the potential costs a public entity may incur in a condemnation action and the potential damages available to a business owner." Compensation for lost goodwill "could significantly increase the acquisition costs."


The Case:
Los Angeles Unified School District v. Pulgarin, No. B206892, 2009 DJDAR 9179. Filed June 23, 2009.
The Lawyers:
For the school district: Cynthia C. Miller, Oliver, Sandifer & Murphy, (213) 621-2000.
For Pulgarin: Karen A. Larson, Century Law Group, (310) 642-6900.