Daily Decisions: Apportionment of “Just Compensation” to a Commercial Tenant

I should admit at the outset that I don’t really like this case. The whole thing seems unfair. But I’m not sure how much of that perceived unfairnes is just the way it is, or whether perhaps the case should have been decided differently. I have no idea.

With that disclaimer, here is City of Puyallup v. Carl R. Hogan (Division 2, May 16, 2012). Carl Hogan owns a shopping center in Puyallup. But he used to own a little bit more. A “small portion” of his shopping center was condemned by the City in connection with a road construction project. As a taking, Hogan was entitled to “just compensation,” which a jury calculated at $5,150,000. That award was based, at least in part, on the City’s elimination of a road, which would reduce traffic and access to the center (and therefore reduce the number of shoppers).

Okay, so far so good. But then Borders (the shopping center’s “anchor tenant”) claimed that it was entitled to a portion of the award. The trial court agreed and awarded $948,000 to Borders after a “bench apportionment trial.” I admit that this is the first time I’ve ever heard of such a procedure.

Hogan and Borders each offered expert testimony at the hearing — with Hogan’s expert not surprisingly offering a low number and Borders’ expert offering a higher number. The trial court calculated Borders’ damages based on a blend of the parties’ experts: about $355,800. The Judge then doubled that amount based on various “unique variables” and equitable considerations. That brought the award to $711,600. Upon reflection, the trial court considered this amount just right, since Borders had 23 percent of the center’s square footage, and the award amount equaled the average of 23% of each parties claimed total damages. Basically, it seems like the trial court tried to split the difference.

After calculating the $711,600 in damages, the trial court added prejudgment interest, costs, and attorneys’ fees. It declined to award post-judgment interest. The final total award to Borders was $918,000. Both parties appealed based on various assignments of error, each of which is addressed below.

First, Hogan appealed the denial of his motion for summary judgment. He argued that the terms of the lease effected a waiver of Borders’ right to apportionment of the City’s condemnation award. The Court of Appeals disagreed.

“Unless a landlord and tenant agree otherwise, a tenant has the right to share in a condemnation award to the landlord.” While a tenant can waive that right, the lease here at issue did not waive Borders’ right to its share of the award. Rather, at most, Borders agreed to forfeit its share in limited circumstances not relevant here.

Hogan also appealed the trial court’s apportionment of the award. The Court of Appeals seemed very unwilling to get involved. It noted that the parties generally agreed on a valuation methodology, but that they offered “conflicting expert testimony on the impact the taking had on the fair market value of Borders’ leasehold.” The trial court was free to adopt one expert’s valuation over another. And that was that.

Hogan also argued that Borders had a duty to mitigate its potential losses from the condemnation. Borders had various renewal options in the lease for future years. Hogan’s point was, basically, that if Borders was going to be losing gobs of money every year because of the condemnation, it would opt out of the lease and go somewhere else. Or perhaps it would just break the lease and go somewhere else. In other words: Borders would mitigate rather than suffer the sorts of losses it claimed in the apportionment proceedings.

I can’t really make heads or tails of the Court’s discussion on this issue. It noted at the outset: “Whether the duty to mitigate applies to condemnation cases is an issue of first impression in Washington.” And there is nothing really on point from other states. But then, for some reason, the Court seemed to scold Hogan for not providing support for his postion that Borders had a duty to mitigate. Well, okay… but it’s an issue of first impression. The Court never really addresses the main question: in the absense of binding precedent, should the law impose a duty to mitigate on a tenant like Borders? We don’t get an answer for that.

Then, the Court concluded that regardless of whether mitigation was required, such a rule would not warrant reversal of the trial court’s decision because Hogan actually argued mitigation in the trial court and it was considered by the trial court. The trial judge heard Hogan’s argument that Borders should have broken the lease and relocated, but Hogan “provided no evidence to the trial court on what Borders’ damages would be if it broke its lease and relocated.”

That’s putting the cart a bit before the horse, right? If there were a duty to mitigate, isn’t it possible that Borders would have some burden to show that it took reasonable mitigation efforts? Or that the actions proposed by Hogan were unreasonable? I’m not sure, but the Court certainly never addressed what a duty to mitigate would mean for Borders or, specifically, whether it would mean that Borders had some obligation to present mitigation evidence at the apportionment proceeding. The Court’s observation that Hogan didn’t support his claim with evidence is meaningless without some background rule regarding what the mitigation evidentiary burden is and who bears it.

Next, Hogan challenged the trial court’s equitable doubling of the actual damages award. Again, the Court of Appeals stayed out of it. “Washington courts apply equitable principles in awarding just compensation for condemnation.” “Washington courts also have equitable discretion to apportion just compensation condemnation awards.” Accordingly, the doubling was basically discretionary and the Court of Appeals was unwilling to second guess the trial court.

Hogan also challenged the trial court’s award of prejudgment interest, which is usually reserved for claims based on fixed sums. Clearly, with all the equitable balancing and expert testimony regarding valuation, this was not a fixed sum. But according to the Court of Appeals, condemnation cases are different. “[I]n these situations ‘[i]nterest . . . is not an award of prejudgment interest on a liquidated sum . . . but is a measure of the rate of return on the property owner’s money had there been no delay in payment.’”

That just doesn’t seem fair to Hogan at all.

And, lastly, on post-judgment interest — the one thing that was resolved in Hogan’s favor in the trial court — the Court of Appeals reversed. There is a statute that would suspend the awarding of interest in an “eminent domain proceeding” if there is an appeal, but the Court concluded that the statute did not apply here because (a) the apportionment proceeding was not an “eminent domain proceeding” under the statute and (b) there was no appeal of the City’s award, just an appeal of the apportionment.

So that’s the end of the decision. But (surprise surprise) I’ve got a few thoughts. First of all, it seems totally crazy that first, the City and Hogan argue about valuation and money and how to calculate all that stuff. That argument produces a dollar amount. But then Borders gets to re-argue valuation, money, and calculation methods in the apportionment hearing? How is that fair? It seems like in the initial proceeding, the court could adopt a methodology that produces a “low” number, only to adopt a different methodology in the second proceeding that produces a higher number. Then Hogan’s pot of money is based on the “low” number but the payouts to the tenants are based on a “higher” number.

It just seems like Hogan’s ownership of the Borders property is worth something, and that something should be constant in determining both (1) the total compensation amount from the City and (2) Borders’ share of the amount. Perhaps there are procedural or judicial-oversight mechanisms to prevent unjust inconsistencies, but I didn’t see any of that in this case. The entire procedure seems like a bit of a mess, and perhaps something ripe for legislative overhaul.

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One thought on “Daily Decisions: Apportionment of “Just Compensation” to a Commercial Tenant

  1. Pingback: Monday Morning [Afternoon? Evening?] Mash-up: May 21, 2012 | Ziff Blog

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