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Utah Department of Transportation v. Kmart Corp.

Supreme Court of Utah

September 25, 2018

Utah Department of Transportation, Appellant and Cross Appellee,
v.
Kmart Corporation, Appellee and Cross Appellant.

          On Direct Appeal

          Third District, Salt Lake The Honorable Keith A. Kelly No. 100907779

          Sean D. Reyes, Att'y Gen., James R. Soper, Barbara E. Ochoa, Asst. Att'ys Gen., Erin T. Middleton, Asst. Solic. Gen., Salt Lake City, for appellant

          Perrin R. Love, Shannon Zollinger, Salt Lake City, for appellee.

          Chief Justice Durrant authored the opinion of the Court, in which Associate Chief Justice Lee, Justice Petersen, Judge Mortensen, and Judge Hagan joined.

          Having recused themselves, Justice Himonas and Justice Pearce did not participate herein. Court of Appeals Judge David N. Mortensen and Court of Appeals Judge Diana Hagan sat.

          OPINION

          Durrant Chief Justice.

         Introduction

         ¶1 This eminent domain case is before us on appeal for the second time. The first appeal (Utah Department of Transportation v. FPA West Point, LLC[1]) addressed valuation methods in the context of a condemnation award determination. In that case, we held that courts must use the aggregate-of-interests approach-which determines the value of properties with divided ownership interests by assessing the value of each property interest separately-in deciding the amount of a condemnation award. In this appeal we must decide whether the district court erred by granting a condemnation award to Kmart-a lessee-even though Kmart's lease contained a clause terminating its leasehold interest in the event of a condemnation. We hold that it did. Because the termination clause extinguished all of Kmart's compensable property interests, Kmart was not entitled to compensation. Accordingly, we reverse the district court's grant of a condemnation award to Kmart.

         Background

         ¶2 In 2010 the Utah Department of Transportation (UDOT) condemned an access point from Bangerter Highway to the West Point Shopping Center. At the time of the condemnation, the shopping center was owned by FPA West Point, LLC. FPA leased buildings in the shopping center to a number of businesses, including K MART Corporation (Kmart). Both FPA and Kmart entered the condemnation proceedings, asserting rights to just compensation under Utah Code section 78B-6-508.

         ¶3 Despite FPA and Kmart's opposition, UDOT was able- pursuant to Utah Code section 78B-6-510 (Occupancy Statute)-to close the access point by depositing $1.25 million with the district court.[2]

         ¶4 Shortly thereafter, FPA filed a motion requesting the district court to separately determine the value of each party's property interest. The district court granted this motion and UDOT filed an interlocutory appeal to this court, which we granted. In our decision on appeal, we held that under Utah Code section 78B-6-511 (Just Compensation Statute) courts are required to separately determine the value of a condemnation award for each affected property owner's property.[3] This valuation method is referred to as the aggregate-of-interests approach.

         ¶5 Returning to the district court, UDOT brought a motion for partial summary judgment against Kmart. UDOT argued that due to a condemnation provision in Kmart's lease with FPA, Kmart no longer had any interest for which it should be compensated.

         ¶6 This condemnation provision contains two operative clauses: (1) a termination clause and (2) a condemnation award allocation clause (allocation clause). The termination clause states that Kmart's lease would terminate if a condemnation "materially impaired" access to the leased property:

In the event all of Tenant's buildings constructed by Landlord shall be expropriated or the points of ingress and egress to the public roadways . . . be materially impaired by a public authority or quasi-public authority, this lease shall terminate as of the date Tenant shall be deprived thereof.

         And the allocation clause states that Kmart is not entitled to share in an award granted for a condemnation of FPA's buildings, but it preserves Kmart's right to compensation for any buildings or improvements made by Kmart:

Tenant shall not be entitled to share in any award made by reason of expropriation of Landlord buildings on demised premises, or any part thereof . . .; however, the Tenant's right to receive compensation for damages or to share in any award shall not be affected in any manner hereby if said compensation, damages, or award is made by reason of the expropriation of the land or building or improvements constructed or made by Tenant.

         UDOT argued that the termination provision extinguished Kmart's rights in the lease, so Kmart was not entitled to a condemnation award.

         ¶7 The district court ultimately denied UDOT's motion because it concluded that a factual determination needed to be made as to whether the "points of ingress and egress to the public roadways [were] materially impaired." Although the court did not address the effect the termination clause would have on Kmart's property interest if the access were found to be materially impaired, it did state that the first line of the lease's allocation clause did not apply in this case because of our adoption of the aggregate-of-interests valuation approach in FPA.[4]

         ¶8 After a bench trial, the court determined that the condemnation "materially impaired access and caused the Lease to terminate." Despite this finding, it awarded Kmart a condemnation award in the amount of $1.4 million.[5] UDOT appeals this decision.

         ¶9 Additionally, the district court awarded pre-judgment interest on the $1.25 million deposit UDOT had made in 2010. UDOT appeals this decision. We have jurisdiction pursuant to Utah Code section 78A-3-102(3)(j).

         Standard of Review

         ¶10 UDOT raises two issues on appeal: first, whether the district court erred by awarding Kmart $1.4 million for Kmart's leasehold interest; and second, whether the district court erred by ordering UDOT to pay interest on amounts previously deposited with the court pursuant to the Occupancy Statute. We review a district court's interpretations of contracts, [6] statutes, [7] and prior case law[8] for correctness.

         Analysis

         ¶11 UDOT argues that the district court erred in awarding a condemnation award to Kmart because the termination clause in Kmart's lease extinguished any compensable property right Kmart previously had in the condemned property. Kmart argues, on the other hand, that our holding in Utah Department of Transportation v. FPA West Point, LLC[9] rendered termination clauses inoperative in Utah. In the alternative, Kmart argues that even if termination clauses are legally effective, its right to just compensation was preserved by the plain language of its lease agreement. We agree with UDOT and hold that the termination clause within Kmart's lease agreement extinguished Kmart's right to a condemnation award.

         ¶12 Additionally, UDOT argues that the court erred in ordering UDOT to pay interest on amounts it had previously deposited with the court pursuant to Utah's Occupancy Statute.[10] Because our holding regarding Kmart's right to a condemnation award moots this issue, we decline to address it.

         I. Termination Clauses

         ¶13 Generally, a lessee is entitled to a condemnation award if the value of its leasehold is diminished or terminated by a governmental exercise of the eminent domain power.[11] But a lessee's right to a condemnation award may be altered, [12] waived, [13] or terminated by the terms of its lease.[14]

         ¶14 A lease provision affecting the rights of parties to a lease agreement in the event of a condemnation is commonly referred to as a condemnation provision. Although a condemnation provision may be structured in any way the parties like, it often contains a clause that terminates the lease upon "the taking by eminent domain of the whole or a part of the premises leased."[15] This type of clause within a condemnation provision is often referred to as a termination clause.[16]

         ¶15 UDOT asks us to adopt a termination clause rule followed in most other jurisdictions.[17] Under this rule, when a lease agreement contains a termination clause, the lessee is not entitled to a condemnation award in the event of a condemnation, because any continuing interest in the leased property-the loss of which would otherwise have entitled the lessee to a condemnation award-has been extinguished under the lease agreement's terms. In other words, because the lessee's property interest is wholly created by the lease agreement, [18] when the lease terminates, so does the lessee's interest in the leased property, including the lessee's right to just compensation.[19] Because the termination clause rule conforms to our eminent domain and contract jurisprudence, we adopt it.

         A. The termination clause rule is consistent with general eminent domain principles

         ¶16 The termination clause rule is consistent with general eminent domain principles. Utah's "constitutional guarantee of just compensation is [only] triggered" if a party shows that they have some "protectable property interest in the property."[20] For this reason, compensation should be awarded only to claimants who demonstrate that they had an existing property right in the condemned property.[21]

         ¶17 We have frequently applied this principle in denying requests for condemnation awards. For example, in Bingham v. Roosevelt City Corp., [22] a group of landowners alleged that a nearby city's diversion of water from an aquifer below the landowners' property amounted to a taking. But we denied their claim because the landowners had not lawfully appropriated the water, so "the [g]roup lacked a claim of entitlement to the continued presence of water in its soil."[23]

         ¶18 We also applied this principle in Bagford v. Ephraim City.[24] In that case, a garbage company sought damages from a city for passing an ordinance requiring all city residents to pay for city-operated garbage collection. But we denied its claim because the company's business "was based only on the expectation of being able to continue doing business there, not on a legal right to do so."[25]As these cases illustrate, before we grant a condemnation award, the claimant must show that it has an existing and protectable property interest in the condemned property.[26]

         ¶19 The termination clause rule accords with this principle by disallowing condemnation awards to lessees who no longer have an existing and protectable property interest in the condemned property because their leaseholds were terminated under the terms of the lease agreement.[27] A leasehold interest is a temporary right to occupy the real property of another. In the absence of a termination clause, a condemnation of leased property would deprive the lessee of its right to continue occupying the leased property for the remainder of the lease term. This would constitute a loss of an existing and protectable property right.[28] So, for example, if a lessee had five years remaining on its lease when the property it was leasing is condemned, the condemnor would be obligated to compensate the lessee for the value associated with the remaining five years of the lease term.[29]

         ¶20 But the same cannot be said when the lessee has agreed to include a termination clause in its lease agreement. When such is the case, the lessee has a right to occupy the real property until the end of the lease term or until the property is condemned.[30] Because the lessee's leasehold interest is extinguished by the lease agreement's own terms, the lessee no longer has an ongoing protectable interest in the property from the date of the condemnation. As a result, the condemnor has not taken an existing and protectable property right for which it must compensate the lessee.[31] Accordingly, we hold that granting a condemnation award to a former lessee under these circumstances would be inconsistent with eminent domain law principles.

         B. The termination clause rule is consistent with general contract principles

         ¶21 The termination clause rule is also consistent with general contract principles. It is a "basic principle of contract law that parties are generally 'free to contract according to their desires in whatever terms they can agree upon.'"[32] For this reason, "courts are loath to interfere with parties' ability to contract freely."[33]

         ¶22 A termination clause is an agreed upon term between a lessor and lessee that courts should uphold under general contract principles. One purpose of a contract is "to apportion risk of future events between the contracting parties."[34] A termination clause is consistent with this purpose. By agreeing to the inclusion of a termination clause, the lessee is freed from the risk of any continuing obligations under a lease agreement, [35] and the lessor is guaranteed a condemnation award for its reversionary interest in the leased property.[36] We see no reason to prevent this, [37] and so we hold that "[i]t is the agreement of the parties that controls whether the lessee has a compensable property interest in the appropriated property."[38]Accordingly, when contract parties agree that a lease will terminate upon condemnation, contract law principles require us to honor that agreement.[39]

         C. Our Decision in FPA Does Not Affect the Applicability of Condemnation Provisions

         ¶23 Despite the many compelling reasons for adopting the termination clause rule, Kmart argues that our holding in FPA renders condemnation provisions inoperative in Utah. But Kmart's argument fails because our holding in F ...


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