Back in 2001, Whataburger ate the State’s lunch in a condemnation case. It recovered for the land taken, lost profits, impairment of access, and costs to raze and rebuild the building to comply with roadway set back regulations, totaling over $1.5 million, for 8,421 square feet of land (that’s $178 a foot). Here’s the skinny on damages available in condemnations, and why commercial lease provisions on condemnation are so important thereto.
Years ago, Whataburger set up one of its signature shops at the corner of U.S. Highway 90A and Interstate 610 in Houston. The lot had 41,777 square feet, but when the State decided to widen Highway 90A, Whataburger was not exactly happy with the prospect of losing 8,421 square feet (just over 20%) of this lot. And of course the State didn’t want the back portion of the lot, it wanted Whataburger’s parking lot and both entrances to the burger joint. Even worse, the new property line caused a portion of the restaurant building to extend beyond the 25 foot setback line. Compliance required Whataburger to raze the entire building and rebuild it on the back portion of the lot.
Well, the State couldn’t swallow Whataburger’s outrageous demands for compensation, and Whataburger couldn’t stomach the State’s ridiculous insult of an offer, so, Whataburger did the only thing it could do in the face of condemnation: file a protest and have a hearing before a special commissioner’s court. And at this hearing Whataburger didn’t fare too bad, obtaining an award for $620,000.
Commissioner’s Court proceedings can be fairly informal. They are sometimes made up of 3 or so individuals with varying amounts of real estate expertise. The “chief” can and does swear all witnesses. The governmental entity condemning the land begins by presenting the overall project, and then discussing the particulars of the tract of land at issue. Often, the project engineer is the designated witness on this topic.
Next comes the government’s appraiser(s), who testify as to the “fair market value” of the land taken. In cases such as Whataburger, there are also financial types and CPAs perhaps, to testify as to how much money the business will lose because of the condemnation, and how much it will take to rebuild the building.
After that, the landowner whose land is being condemned, in this case Whataburger, gets to take its turn calling witnesses and presenting evidence, and its case usually focuses solely on all the many ways this horrible, intrusive, inconvenient project is going to harm them financially. Basically, if you get in this position, you wrap yourself in the Texas flag and our state’s glorious Constitution, and recite Article 1, Section 17, which says that no person’s property
“…shall be taken, damaged or destroyed for or applied to the public use without adequate compensation being made.”
And you have to stick to certain types of damages. It’s not enough to say “this roadway expansion is really inconvenient in this lifetime, so pay up.” Inconvenient enhancements are “simply an incident of city life and must be endured,” says Texas courts. Plus, increased access to property often makes it more valuable. So, property owners cannot recover for increased traffic, noise, dust, diversion of traffic, circuity of travel, reduced visibility by the public, etc.
But property owners are entitled to full compensation for any involuntary taking of property. This includes the obvious–real property–but it also includes all other tangible and intangible property connected to the real property, including any damage to the land not condemned (called the “remainder”).
Ah, but I digress. Back to the story. After the special commissioners hear all the evidence put on by the government and the landowner, they come to an agreement among themselves on the fair market value of the property taken, and award that money to the landowner. This can take a very short amount of time, sometimes measured in minutes. If either the landowner or the government is unwilling to accept their decision, they appeal the case to a “regular” Texas civil district court.
In Whataburger’s case, both Whataburger and the State were not satisfied with the award, so BOTH parties appealed the special commissioners’ award. The lawyers for one of the parties was later hailed as brilliant, while the lawyer for the other party got handed the keys to the doghouse, and it was the State on the losing end here. The district court held a trial to determine the value of the property taken, which it does as though nothing has happened before (in other words, the special commissioners court decision meant nothing, their decision wasn’t even considered, and the court started from scratch). And instead of a measly $620,000, the court awarded Whataburger $1,255,622.80, plus prejudgment interest, plus an additional $268,524 for “lost profits arising from the State’s impairment of access.” That’s an increase of about $904,146.80 and change.
Well, at this point the State figured they’d been whipped pretty good, and it decided to only appeal the $268,524 “lost profits” part of the award. To recover lost profits as a damage to the remainder, a party must prove one of the following three things:
1. a total but temporary restriction of access;
2. a partial but permanent restriction of access; or
3. a temporary limited restriction of access brought about by an illegal activity or one that is negligently performed or unduly delayed.
Whataburger chose Door No. 1, a total but temporary restriction of access. Whataburger was out of business for 9 months because it had to raze its building and rebuild it set back further from the road. Therefore, it said, the State temporarily restricted access to its business and caused 9 months worth of lost profits. The State had a rather ingenious twist on this: no physical barrier barred access to the property, and since the State never restricted physical access to the property, there was no damage to the remainder. How would you feel about that if you were Whataburger? Well, the Court of Appeals put the State in its place by merely stating the obvious:
A building that has been razed and no longer exists cannot be entered. Accordingly, while no physical barrier prevented ingress or egress upon the remaining land, we find Whataburger was effectively denied access to the Improvements thereon.
And a business is property, so an owner can be compensated for lost profits resulting from the government’s “denial of access” to the business, as damage to the remainder.
So remember, when you face condemnation, consult an experienced counselor who knows where to look in order to maximize the dollar value of your condemnation award. It may just be that the actual dirt being taken is only a portion of what you are entitled to collect.
For Lessees in commercial leases, make sure any commercial lease you sign includes the ability of you, as the lessee, to be involved in condemnation proceedings, and collect any portion of the condemnation award that you are entitled to. In the Whataburger example, if the land was owned by someone else, the landowner would not have collected the $268,524 in lost profits, because it would not have lost that money. And depending on the lease terms, neither would Whataburger as tenant. Things could even get worse–the lease could also have required Whataburger to continue paying rent during the 9 months when the building didn’t exist. Condemnation provisions in commercial leases are therefore one of the most important parts to consider and fully negotiate.
State of Texas v. Whataburger, Inc., Fourteenth Court of Appeals (Houston), Case No. 14-00-00203-CV, Decided September 6, 2001