This chapter was first published by IICLE Press. · PDF file · 2015-09-13©COPYRIGHT 2012 BY IICLE ®. 12 — 1 The Effect of Eminent Domain on the Landlord-Tenant Relationship JOSEPH

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The Effect of Eminent Domain on the Landlord-Tenant Relationship JOSEPH B. VANFLEET VanFleet Law Offices Peoria The author would like to thank Emily H. Wilburn of VanFleet Law Offices for her

contributions to this chapter.

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COMMERCIAL LANDLORD-TENANT PRACTICE

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I. [12.1] Introduction A. [12.2] Scope of Chapter B. [12.3] The Right To Condemn C. [12.4] Effect of the Condemnation Clause in the Lease D. [12.5] Federal Law II. The Parties A. [12.6] Condemnor B. [12.7] Condemnee-Landlord C. [12.8] Condemnee-Tenant D. [12.9] Subtenant Issues III. The Condemnation Proceeding A. [12.10] Complete Taking B. [12.11] Partial Taking C. [12.12] Valuation of Leasehold — Two Methods 1. [12.13] Apportionment as Part of the Jury Trial 2. [12.14] Posttrial Apportionment Hearing D. Evidence — Valuation of Leasehold 1. [12.15] Burden of Proof 2. [12.16] Options and Verbal Leases 3. [12.17] Permanent Improvements 4. [12.18] Unit Rule for Improvements 5. [12.19] Bonus Value 6. [12.20] Valuation Witnesses 7. [12.21] Valuation Testimony in Separate Apportionment Proceeding 8. [12.22] Comparable Leasehold Valuation 9. [12.23] Consequential Losses 10. [12.24] The Mortgagee’s Interest IV. [12.25] The Eminent Domain Act and Its Effect on Landlords and Tenants V. [12.26] Conclusion

THE EFFECT OF EMINENT DOMAIN ON THE LANDLORD-TENANT RELATIONSHIP

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 12 — 3

VI. Appendix — Sample Forms A. Automatic Termination Clauses 1. [12.27] Condemnation Clause 2. [12.28] Compensation Clause B. Condemnation Clauses 1. [12.29] Total Condemnation 2. [12.30] Partial Condemnation 3. [12.31] Office Building Clause 4. [12.32] Shopping Center Clause C. [12.33] 60-Day Letter D. [12.34] Tenant’s Waiver of Lease E. [12.35] Cross-Complaint F. [12.36] Motion for Separate Verdict G. [12.37] Motion for Apportionment of Condemnation Award

§12.1 COMMERCIAL LANDLORD-TENANT PRACTICE


I. [12.1] INTRODUCTION The Eminent Domain Act, 735 ILCS 30/1-1-1, et seq., which took effect January 1, 2007, provides that the “amount of just compensation shall be distributed among all persons having an interest in the property according to the fair value of their legal or equitable interests.” 735 ILCS 30/10-5-90. Thus, there is only one award of just compensation to divide between a landlord and a tenant, which creates a conflict between the lessor and the lessee. The lessor and the lessee may initially bargain for an apportionment of a condemnation award or the lease may be silent on the issue. Absent a clear condemnation clause, entitlement to any award is subject to interpretation under Illinois law. A. [12.2] Scope of Chapter This chapter addresses the effect of a leasehold interest in a condemnation proceeding from the perspective of the landlord-tenant relationship. The Illinois laws of eminent domain are discussed, and §§12.27 – 12.37 below contain sample forms that should be helpful to a practitioner when a leasehold interest is at issue. This chapter is intended to be an aid and timesaver to the lawyer who must address the impact of a leasehold interest in a condemnation proceeding. B. [12.3] The Right To Condemn An analysis of the effect of a leasehold interest on an eminent domain proceeding must begin with the government’s statutory power to condemn. In short, any landlord-tenant relationship may be affected by the exercise of the power of eminent domain by a condemning authority. See ILL.CONST. art. I, §§1, 2, 15; U.S.CONST. amends. V, XIV. In Babbitt v. Youpee, 519 U.S. 234, 136 L.Ed.2d 696, 117 S.Ct. 727 (1997), in an eight-one decision, the Supreme Court strongly affirmed the sanctity of just compensation under the Fifth Amendment and the necessity for full just compensation for any taking of private property. The Court stated:

Amended §207 still trains on income generated from the land, not on the value of the parcel. The Court observed in Irving that “[e]ven if . . . the income generated by such parcels may be properly thought of as de minimis,” the value of the land may not fit that description. 117 S.Ct. at 733, quoting Hodel v. Irving, 481 U.S. 704, 95 L.Ed.2d 668, 107 S.Ct. 2076, 2082 (1987).

A tenant is entitled to receive full compensation for the amount of the leasehold estate that is taken for public use. See Bohne v. Bauer, 21 Ill.App.2d 133, 157 N.E.2d 545 (2d Dist. 1959). This conclusion can be drawn from the long-standing proposition that a lease contains a property interest under the law, as explained in 26 AM.JUR.2d Eminent Domain §161 (2004). It is settled, as a general proposition, that valid contracts “are property protected by the Fifth Amendment against taking by the federal government, and by the Fourteenth Amendment against taking by a state, unless just compensation is made to the owner.” 26 AM.JUR.2d Eminent Domain §160. A leasehold falls within the definition of “property” in a constitutional provision

THE EFFECT OF EMINENT DOMAIN ON THE LANDLORD-TENANT RELATIONSHIP §12.4


that no person’s property shall be taken without just compensation. 26 AM.JUR.2d Eminent Domain §161. The test by which to answer the question as to whether there is such an “estate” or “interest” has been said to be whether the right with respect to real property taken in condemnation is, or is not, so remote or incapable of valuation that it would be disregarded in awarding compensation. See also Conness v. Indiana, I. & I. R., 193 Ill. 464, 62 N.E. 221 (1901). Illinois has long accorded respect to the property rights held by tenants. See Chicago & N.W. Ry. v. Miller, 233 Ill. 508, 84 N.E. 683 (1908). See also Blue Cat Lounge, Inc. v. License Appeal Commission of City of Chicago, 281 Ill.App.3d 643, 667 N.E.2d 554, 217 Ill.Dec. 465 (1st Dist. 1996). Whether the taking is partial or complete, both the landlord and the tenant are entitled to a share of the compensation. Alfred D. Jahr, LAW OF EMINENT DOMAIN: VALUATION AND PROCEDURE §130, p. 189 (1953) states:

When leased property is acquired by eminent domain, the owner of the fee and the lessee have their respective interests in the total award. The lessee or tenant has a possessory right, and the owner or landlord the reversionary right.

Other commentators have also elaborated on this principle:

Leasehold interests also have value. In many cases, property condemned by governmental authority has an existing lease, giving rights of possession to other than the owner. Depending upon the rent to be paid under the lease, other duties and obligations imposed by the lease upon landlord and tenant, and the length of time the lease has to run, the lease can have considerable value, or little or no value. a) Methods of evaluation — market value, income value etc. used. Generally, the value of the leasehold interest is determined under the same procedures as determining the value of the freehold interest itself. The tenant, upon condemnation, is entitled to compensation for the value of the unexpired term of the lease, to wit, the difference between the fair annual rental of the premises for the unexpired term and the amount of rent actually reserved in the lease for that period. The tenant is not, however, entitled to compensation for the inconvenience of being forced to move. b) Special provisions for condemnation in most commercial leases. Many leases have condemnation clauses, specially providing for the respective rights of landlord and tenant in the event of total or partial condemnation of the property. ALI-ABA, The Law of Eminent Domain, EMINENT DOMAIN AND LAND VALUE LITIGATION, pp. 17 – 18 (Jan. 9, 1997).

C. [12.4] Effect of the Condemnation Clause in the Lease The courts generally enforce the terms of a lease to which the landlord and the tenant have agreed. Peoria Housing Authority v. Sanders, 54 Ill.2d 478, 298 N.E.2d 173, 175 (1973). Thus, the courts should hold that a condemnation clause is an enforceable term. See National Railroad Passenger Corp. v. Faber Enterprises, Inc., 931 F.2d 438 (7th Cir. 1991). See also Elizondo v. Perez, 42 Ill.App.3d 313, 356 N.E.2d 112, 113, 1 Ill.Dec. 112 (1st Dist. 1976) (“it would be



inequitable to nullify the plain wording of the lease and place the landlord at the mercy of a tenant who clearly flouts the provisions of his lease without legal excuse”); Village of Palatine v. Palatine Associates, LLC, 406 Ill.App.3d 973, 942 N.E.2d 10, 19, 347 Ill.Dec. 177 (1st Dist. 2010) (under lease, tenant was not entitled to any part of condemnation award because no part of award was specifically made to compensate for tenant’s trade fixtures). A lessor must be careful to disclose to the lessee any pending or future condemnation of which he or she has knowledge. The lessor’s failure to disclose a possible condemnation to a lessee when procuring a lease in which the lessee waives any rights to an award can be grounds for reformation of the lease. See City of Chicago v. American National Bank & Trust Co., 233 Ill.App.3d 1031, 599 N.E.2d 1126, 175 Ill.Dec. 112 (1st Dist. 1992). Thus, even if a possible condemnation is a matter of public record, the prudent attorney will include the disclosure in the lease provision when the lessee waives rights to an award. Numerous forms exist for possible condemnation clauses in a lease. General forms for leases can be found in 7B AM.JUR. Legal Forms 2d Rev. §97:38 (2006); 11B AM.JUR. Legal Forms 2d §161:695, et seq. (2006); Emanuel B. Halper, GROUND LEASES AND LAND ACQUISITION CONTRACTS (1988); and Emanuel B. Halper, SHOPPING CENTER AND STORE LEASES (1979). Generally speaking, an automatic termination clause terminates the rights of a tenant upon the institution of a condemnation proceeding. See §12.7 below. A condemnation clause, on the other hand, will explain the rights and obligations of both the landlord and the tenant in the event of a taking. Sample forms of automatic termination clauses and condemnation clauses are found in §§12.27 – 12.32 below.

PRACTICE POINTERS

Because a condemnation clause expressly sets forth the rights and obligations of the parties to the lease, in drafting these clauses, one should consider and address

1. the rights of the parties in the event of a total or partial taking; 2. which parties may participate in a formal condemnation proceeding; 3. which parties may participate in the compensation received; 4. the effect of condemnation on rents; 5. whether, in a partial condemnation, the tenant will continue its tenancy; 6. dispositions of improvements and trade fixtures; and 7. cancellation of the lease.



Landlords will generally try to include an automatic termination clause in a lease. On the other hand, from the tenant’s perspective, all leases should contain a condemnation clause to force the parties to negotiate and set forth their respective interests prior to a crisis developing. Among the factors influencing the critical need for a condemnation clause are the following:

1. the length of the lease; 2. the proximity to a developing area; 3. the traffic occurring near the property; and 4. the nature and use of the property and surrounding parcels. The courts will generally ensure that tenants are not deprived of their property rights. See American National Bank & Trust, supra. The unit rule requires that a leasehold be valued not separately, but as part of the whole. City of Chicago v. Anthony, 136 Ill.2d 169, 554 N.E.2d 1381, 144 Ill.Dec. 93 (1990). A leaseholder, like an owner, is clearly entitled to the value of the property interest that is being taken. United States v. General Motors Corp., 323 U.S. 373, 89 L.Ed. 311, 65 S.Ct. 357, 360 (1945). Determining which interests have been taken necessitates an inquiry into the relative rights of the lessor and the lessee at the time of the taking, as agreed on in the lease. National Railroad Passenger, supra. When the parties have agreed in advance on the formula to divide the condemnation proceeds for the taking of the leasehold, the resulting sum will likely be deemed fair compensation. Bradley Facilities, Inc. v. Burns, 209 Conn. 480, 551 A.2d 746 (1988); 2 Julius L. Sackman and Patrick J. Rohan, NICHOLS’ THE LAW OF EMINENT DOMAIN, p. 5-117 (1994). Illinois practitioners should be aware that an Illinois Supreme Court review of the constitutionality of the unit rule may eventually be a possibility. See Department of Transportation, State of Illinois v. Kelley, 352 Ill.App.3d 278, 815 N.E.2d 1214, 287 Ill.Dec. 411 (3d Dist. 2004). As noted above in this section, the unit rule requires that a leasehold be valued not separately, but as part of the whole. Anthony, supra. However, it is becoming more and more apparent that strict application of the unit rule may not adequately provide just compensation as mandated by the Fifth Amendment of the United States Constitution. Kelley, supra. See also Department of Transportation v. HP/Meachum Land Limited Partnership, 245 Ill.App.3d 252, 614 N.E.2d 485, 185 Ill.Dec. 351 (2d Dist. 1993) (finding different values could be placed on unit of land when there are clearly cognizable different highest and best uses for land); City of Springfield, Illinois v. West Koke Mill Development Corp., 312 Ill.App.3d 900, 728 N.E.2d 781, 785, 245 Ill.Dec. 699 (4th Dist. 2000) (“whole does not necessarily equal the sum of the parts”), quoting Department of Public Works & Buildings v. Lotta, 27 Ill.2d 455, 189 N.E.2d 238, 240 (1963). The term “just compensation” has been defined by Illinois courts as “the fair market value of the property at its highest and best use on the date the property is condemned.” City of Oakbrook Terrace v. Suburban Bank & Trust Co., 364 Ill.App.3d 506, 845 N.E.2d 1000, 1010 – 1011, 301 Ill.Dec. 135 (2d Dist. 2006). The court in Kelley acknowledged “that when different uses of the [taken] property are easily delineated, a separate valuation may be appropriate.” 815 N.E.2d at 1218. In Kelley, Presiding Justice Holdridge, specially concurring, argued that cases



such as Kelley and HP/Meachum Land represent an exception to the unit rule “that should be allowed to swallow up the rule.” 815 N.E.2d at 1219. Justice Holdridge also asked the Illinois Supreme Court to revisit this issue to determine whether the unit rule is of continuing validity. Id. D. [12.5] Federal Law In 1971, Congress enacted the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (URA), Pub.L. No. 91-646, 84 Stat. 1894. The purpose of the URA was to afford fair and equitable treatment for persons who were displaced as a result of federal and federally assisted real estate acquisition programs. It was not intended to create any new substantive rights or liabilities involving actual purchase transactions or eminent domain proceedings but rather to provide a limited statutory privilege for certain otherwise non-compensable injuries or hardships incident to acquisitions. 42 U.S.C. §4602. See also H.R.Rep. No. 1656, 91st Cong., 2d Sess. (1970). The moving and related expenses applicable to commercial leases are found at 42 U.S.C. §4622. The provisions of the URA were made indirectly applicable to the states for federally assisted programs by conditioning federal assistance on state compliance with the provisions of the URA. 42 U.S.C. §4630. The provisions of the URA do not apply to the Illinois Department of Transportation. People ex rel. Department of Transportation v. Walliser, 258 Ill.App.3d 782, 629 N.E.2d 1189, 196 Ill.Dec. 345 (3d Dist. 1994). Finally, it is important to note that federal courts rely on §§8.1 and 8.2 of RESTATEMENT (SECOND) OF PROPERTY: LANDLORD & TENANT (1977), which state as follows:

§8.1 Effect Of Taking By Eminent Domain On Lease (1) If there is a taking by eminent domain of all of the leased property for all of the lease term, the lease is terminated. (2) Except to the extent the parties to a lease validly agree otherwise, if there is a taking by eminent domain of less than all of the leased property or for less than all of the lease term, the lease: (a) is terminated if the taking significantly interferes with the use contemplated

by the parties; and (b) is not terminated if the taking does not significantly interfere with the use

contemplated by the parties, but the tenant is entitled to an abatement of the rent to the extent prescribed in §11.1.

§8.2 Amount Of The Condemnation Award Tenant Entitled To Receive (1) Except to the extent the parties to a lease validly agree otherwise, the tenant is entitled to any award that is made to him in the eminent domain proceedings.



(2) Except to the extent the parties to a lease validly agree otherwise, the tenant is entitled to share in a lump-sum award made in the eminent domain proceedings, which lump-sum award is for his and other interests in the property condemned, and the tenant’s share in the lump-sum award is: (a) if the lease is terminated by the taking, that proportion of the lump-sum

award which corresponds to the proportion of the total value of the several interests in the property condemned, valued separately, that represents the value of the unexpired period of the tenant’s lease, plus the value discounted to the date of the taking of the payments the tenant is required to make to the landlord even though the lease is terminated; or

(b) if the lease is not terminated by the taking, that proportion of the lump-sum

award which corresponds to the proportion of the total value of the several interests in the property condemned, valued separately, that represents the value of a lease of the part of the leased property taken for the unexpired period of the original lease at a rent equal to the difference between the rent reserved in the original lease and the rent payable by the tenant under the original lease after the taking.

See National Railroad Passenger Corp. v. Faber Enterprises, Inc., 931 F.2d 438, 443 – 444 (7th Cir. 1991). II. THE PARTIES A. [12.6] Condemnor The condemnor’s primary responsibility is to ensure that all interested parties are properly named and served in the eminent domain proceeding. See 735 ILCS 30/10-5-10(a). Interested parties include holders of leasehold interests. See Bohne v. Bauer, 21 Ill.App.2d 133, 157 N.E.2d 545 (2d Dist. 1959). A leasehold is a property interest that is subject to “just compensation,” which is the fair cash market value of the subject property at its highest and best use on the date of the filing of the petition to condemn. Department of Public Works & Buildings v. Association of Franciscan Fathers of State of Illinois, 69 Ill.2d 308, 371 N.E.2d 616, 13 Ill.Dec. 681 (1977). Prior to preparing a complaint for condemnation, the condemnor should first obtain a title search. Tenants and other parties with a possessory interest in the property will appear as interested parties if the interest has been recorded. Unfortunately, many leasehold interests are not recorded, so the condemnor’s attorney should investigate the existence of tenants with unrecorded leases. A thorough investigation should uncover all leasehold interests in the property. If all such interests are not named in the complaint, the condemning authority may not obtain clear title. In City of Joliet v. Mid-City National Bank of Chicago, No. 05 C 6746, 2012 WL 638735 at *6 (N.D.Ill. Feb. 22, 2012), the Northern District stated that the failure to name all tenants of a building as defendants would be a valid defense at the compensation hearing. The court noted that Federal Rule of Civil Procedure 71.1 only requires the plaintiff to name the known defendants at the time of the commencement of the case. Id. However, “the plaintiff must add as defendants all



those persons who have or claim an interest and whose names have become known or can be found by a reasonably diligent search of the records” before any hearing regarding compensation. [Emphasis added by court.] Id., quoting Fed.R.Civ.P. 71.1(c)(3). If the condemning authority is the State of Illinois and the matter has arisen after December 31, 1991, the state must provide a 60-day letter. 735 ILCS 30/10-5-15(a), 30/10-5-15(d). This letter must be provided to only the property owner and not a tenant. 735 ILCS 30/10-5-15(d). A sample form of a 60-day letter is found in §12.33 below. No matter who the condemning authority is, the condemnor usually will attempt to quickly resolve any leasehold interests by obtaining waivers signed by the tenants. A sample form of a tenant’s waiver of lease is found in §12.34 below. If a tenant agrees to sign such a waiver, the condemning authority cannot show the property owner the amount it has agreed to pay the tenant for its leasehold interest and thereby bind the nonconsenting landlord. Chicago, B. & Q. R. v. F. Reisch & Bros., 247 Ill. 350, 93 N.E. 383 (1910). Without a signed waiver, a condemnor can be transformed into an owner-landlord. People ex rel. Department of Transportation v. Walliser, 258 Ill.App.3d 782, 629 N.E.2d 1189, 196 Ill.Dec. 345 (3d Dist. 1994). Care must be taken in determining whether this is the goal of the condemnor. B. [12.7] Condemnee-Landlord Automatic termination clauses are clauses stating that the lease terminates upon notice or the filing of a condemnation case. These clauses are enforceable, and they serve to bar the tenant from participation in the condemnation award. Sample forms of automatic termination clauses are found in §§12.27 and 12.28 below. The rationale is that since the clause serves to terminate the lease upon a condemnation, no tenant interest remains to be protected. Select Lake City Theatre Operating Co. v. Central National Bank in Chicago, 277 F.2d 814 (7th Cir. 1960). See also City of Rochester v. Northwestern Bell Telephone Co., 431 N.W.2d 874 (Minn.App. 1988); United States v. Advertising Checking Bureau, Inc., 204 F.2d 770 (7th Cir. 1953); Village of Palatine v. Palatine Associates, LLC, 406 Ill.App.3d 973, 942 N.E.2d 10, 347 Ill.Dec. 177 (1st Dist. 2010). When preparing a termination clause, counsel should be aware that courts have held that a landlord who is guilty of bad faith and unconscionable conduct in dealing with the tenant may lose any resultant benefit of the condemnation award. Forest Preserve Dist. of Cook County v. Christopher, 321 Ill.App. 91, 52 N.E.2d 313 (1st Dist. 1943). Both the landlord and the tenant should be aware that title to the property will relate back to the date of filing of the petition to condemn. City of Chicago v. McCausland, 379 Ill. 602, 41 N.E.2d 745, 747 (1942). The landlord’s title is not extinguished, however, until the judgment is paid in full. Bohne v. Bauer, 21 Ill.App.2d 133, 157 N.E.2d 545, 546 (2d Dist. 1959). The tenant’s portion of the ultimate compensation paid is limited to the difference between the rent paid under the lease and the market rate the tenant will need to pay upon relocation. One commentator has stated:

If the actual rental rate of the tenant is equal to the market rate or greater than the market rate, then the tenant has no positive leasehold estate interest and is



entitled to no compensation for cancellation of the remainder of the lease term. In a whole taking, the tenant will be able to lease other space in the market at the same rate or a more favorable rate than the above-market rate that the tenant was previously paying; thus the tenant is not denied any rental benefit. In a tenancy at will or a month-to-month lease, there is no possible continuing leasehold benefit, and the tenant is entitled to no compensation for termination of the leasehold interest since it could have been terminated at any time by the landlord without the consent of the tenant. The most common point of contention between landlords and tenants in eminent domain proceedings germinates from a lease provision that states that on condemnation of the leased premises, the lease terminates. The tenant will argue that it was the intention of the parties that the termination of the lease would not have the effect of cutting off the tenant’s prospective claim for a beneficial leasehold interest, but that is exactly what the termination of the lease does. At best, such a provision results in litigation over whether the lease is vague. The landlord will argue that references in the lease to the tenant’s rights to condemnation compensation relate to the tenant’s rights to claim value in any leasehold improvements still owned by the tenant (which frequently are minimal since leases often provide that fixtures installed by the tenant, once installed, become the property of the landlord) or the tenant’s rights to relocation assistance. Similarly, a provision that permits either the landlord or the tenant to elect to terminate a lease upon a partial eminent domain acquisition has the legal effect of turning the lease into a tenancy at will. A lease that continues only at will or from month to month leaves no possible claim by the tenant for a beneficial leasehold interest. If the landlord is not bound to continue the lease, the tenant cannot claim a vested right in the beneficial lease rate. Options for renewal of lease terms can be valuable for leasehold interests. The measure of damages in the value of the use and occupancy of the leasehold estate in a whole taking is the leasehold benefit for the remainder of the tenant’s term plus the value of the right to renew if such rights exist, less the agreed rent the tenant would pay for the use and occupancy during the option period. James Noble Johnson, Ultimate Questions: Valuation Issues in Eminent Domain Takings, 1994 Inst. on Plan. Zoning & Eminent Domain §8.05[4][a].

C. [12.8] Condemnee-Tenant Generally, in a complete taking, the tenant is entitled to the reasonable value of the unexpired portion of the lease, less the rent that would have been due the landlord. Department of Public Works & Buildings v. Bohne, 415 Ill. 253, 113 N.E.2d 319 (1953). If the rent reserved in the lease equals or exceeds market value, the tenant is entitled to nothing. Commercial Delivery Service, Inc. v. Medema, 7 Ill.App.2d 419, 129 N.E.2d 579 (1st Dist. 1955). A tenant who has enjoyed the



full term of the lease is not entitled to compensation, but if the complete taking is prior to the lease’s expiration, the tenant is entitled to compensation. Schreiber v. Chicago & E. R., 115 Ill. 340, 3 N.E. 427 (1885). Tenants must understand, however, that the courts rarely apply liberal or expanded views to leasehold interests. For example, a temporary one-year prohibition of the tenant’s license to sell liquor did not cause a landlord to suffer a taking since a liquor license is a privilege and not a property right. Blue Cat Lounge, Inc. v. License Appeal Commission of City of Chicago, 281 Ill.App.3d 643, 667 N.E.2d 554, 217 Ill.Dec. 465 (1st Dist. 1996). Another court held that relocation expenses of the tenant did not benefit the landlord and thus did not qualify as restitution damages. Lempa v. Finkel, 278 Ill.App.3d 417, 663 N.E.2d 158, 215 Ill.Dec. 408 (2d Dist. 1996). See also Yellow Cab Co. v. City of Chicago, 919 F.Supp. 1133 (N.D.Ill. 1996) (municipality-capped lease rates). In United States v. Certain Lands in Jo Daviess County, Ill., 120 F.2d 561 (7th Cir. 1941), tenant-placed houses that had been on the property for 20 – 30 years were lost to the landlord based on lease provisions. The court held that under Illinois law they became part of the realty. No portion of the condemnation award went to the year-to-year tenants. See also Village of Palatine v. Palatine Associates, LLC, 406 Ill.App.3d 973, 942 N.E.2d 10, 19, 347 Ill.Dec. 177 (1st Dist. 2010). Compare Empire Building Corp. v. Orput & Associates, Inc., 32 Ill.App.3d 839, 336 N.E.2d 82 (2d Dist. 1975) (in month-to-month lease involving complete taking, court found presumption for tenant). In National Railroad Passenger Corp. v. Faber Enterprises, Inc., 931 F.2d 438 (7th Cir. 1991), Amtrak condemned a subleased restaurant as the first step in the renovation of Chicago’s Union Station. In denying the lessee compensation for the removable property, the immovable fixtures, and the personal property, the court cited both the common law and the agreed termination-on-condemnation clause in the lease. The court held that the tenant was not entitled to compensation for personal property that it abandoned on the premises. The taking extinguished the tenant’s right of first refusal. A lease provision that accorded substantial value to trade fixtures removable by the tenant was cited as the basis for the landlord to recover the entire condemnation award for the taking of the leasehold in United States v. 1.357 Acres of Land, 308 F.2d 200 (7th Cir. 1962). Similarly, personal property of a tenant remained for the benefit of a landlord, pursuant to the lease provisions in Commercial Delivery Service, supra. Accord Select Lake City Theatre Operating Co. v. Central National Bank in Chicago, 277 F.2d 814 (7th Cir. 1960). In City of Lake Forest v. First National Bank of Lake Forest, 52 Ill.App.3d 893, 368 N.E.2d 156, 10 Ill.Dec. 670 (2d Dist. 1977), following answers to interrogatories, the condemnor discovered that the tenant had voluntarily canceled the lease shortly after the condemnation complaint had been filed. In affirming the trial court’s dismissal of the tenant’s claim for leasehold damages, the appellate court stated:

Union Oil’s first assertion on this appeal is that it is entitled to compensation for the value of the leasehold taken when Lake Forest instituted the eminent domain proceedings. It contends that its right to compensation became vested on the date



the petition to condemn was filed and that any action it took after the petition was filed is irrelevant to its right to receive compensation. We must disagree. Union Oil’s lease contained a provision allowing it to cancel the lease in the event there was a taking by eminent domain. It seems only reasonable that this provision of the lease should be viewed as giving Union Oil a choice of either staying on and continuing to pay rent in order to preserve its right to share in the condemnation award, or of cancelling the lease and thereby extinguishing both its obligation to pay rent and its right to share in the condemnation award. It is absurd to maintain that Union Oil should be in the same position upon cancelling the lease as it would have been had it continued to honor it. It must be remembered that Union Oil was but a lessee, and a lessee’s right to compensation consists only of its right to share in the condemnation award of its landlord. Therefore, it seems only fair that when the landlord receives no rent because the lessee has cancelled the lease, then the landlord should not be obligated to share its condemnation award with its former tenant. 368 N.E.2d at 157.

Accord Schreiber, supra (lease expired prior to condemnation award). Similarly, it has been held that a lessor cannot be limited in leasehold damages in a partial taking until a gross award for just compensation has been entered. City of Rockford v. Robert Hallen, Inc., 51 Ill.App.3d 22, 366 N.E.2d 977, 9 Ill.Dec. 466 (2d Dist. 1977). Finally, in City of Chicago v. Shayne, 46 Ill.App.2d 33, 196 N.E.2d 521 (1st Dist. 1964), the landlord received the entire award when evidence showed that the tenant had failed to pay pre-condemnation rent and offered no evidence as to the value of the leasehold. In the case of a long-term lease, it has been held that when the right of a landlord to receive rent from the tenant is not affected, the entire amount of the condemnation award may be due the tenant. Department of Public Works & Buildings v. Metropolitan Life Insurance Co., 42 Ill.App.2d 378, 192 N.E.2d 607 (1st Dist. 1963). A landlord’s interest in the subject property of a long-term lease is the revenue from the rent, and any reversionary value is so speculative and minimal that it cannot be considered. Id. Although Metropolitan Life could be interpreted by tenants as setting forth a bright-line rule that landlords are not entitled to any portion of the condemnation award for property subject to a long-term lease, the lack of any definition as to what constitutes a long-term lease raises serious questions to such a conclusion. Moreover, the Metropolitan Life court did not attempt to change existing caselaw, thereby leaving open the opportunity to show a reversionary interest when the facts support it. The court in Metropolitan Life stated that “[b]ecause the lease is a long-term lease within definition of the Illinois courts and generally accepted real estate concepts, the attribution of any present value to [the landlord’s] reversionary interest . . . is so speculative that it must be wholly disregarded.” 192 N.E.2d at 612. However, rather than setting forth any “definition of the Illinois courts and generally accepted real estate concepts,” the court’s analysis determined that the lease in question was a long-term lease by determining that any provisionary value assigned to the landowner would be so minimal and speculative that it should be disregarded. Id. Therefore, Metropolitan Life should be read as setting forth the general concept that when a landlord cannot prove more than a minimal reversionary value beyond mere speculation, the landlord is not entitled to any portion of the condemnation award.



It should further be noted that the condemnation clause in Metropolitan Life received minimal attention, and nothing in the case contradicts the discussion in §12.4 above regarding the effect given to condemnation clauses in leases. The clause in Metropolitan Life stated that condemnation awards were to “be divided fairly and equitably between the fee simple estate and the leasehold estate” and did not set forth any specific division of condemnation awards. 192 N.E.2d at 610. Therefore, the court’s decision regarding the distribution of the condemnation award gave effect to the clause requiring a fair and equitable distribution of the award. Tenants should also be wary of a condemnor’s right to abandon eminent domain proceedings at any point before the condemnor has taken possession of the property pursuant to the order of taking. 735 ILCS 5/7-110 (735 ILCS 30/20-5-40, eff. Jan. 1, 2007). In Village of Bellwood v. American National Bank & Trust Company of Chicago, 2011 IL App (1st) 093115, 952 N.E.2d 148, 351 Ill.Dec. 775, construing 735 ILCS 5/7-110, the court arguably created a harsh result for the tenant. In Bellwood, the village sought to condemn property under the eminent domain statute. The village and the property owners eventually reached agreements, and an “Agreed Stipulation and Final Judgment Order” was filed that provided that the village would pay the compensation to the owners by a certain date and then be vested with fee-simple title to the property. 2011 IL App (1st) 093115 at ¶5. Handschy Industries, Inc. was a tenant of one of the properties and had no input in these negotiations. The day before the village was to pay the compensation to the owners and take possession of the properties, the village abandoned the eminent domain proceeding. The Illinois appellate court reversed the trial court’s order that the village could not abandon the proceeding, finding that the right to do so was statutory and none of the parties negotiated with the village to waive that right. In a specially concurring opinion, Justice Cunningham noted that the tenant suffered the most harm in this situation because it was forced to wind down and move its business, losing money in the process, and there is no remedy for this situation within the Eminent Domain Act. D. [12.9] Subtenant Issues A subtenant has a potentially compensable interest, incident to an eminent domain acquisition. Chef’s No. 4, Inc. v. City of Chicago, 117 Ill.App.3d 410, 453 N.E.2d 892, 73 Ill.Dec. 67 (1st Dist. 1983); National Railroad Passenger Corp. v. Faber Enterprises, Inc., 931 F.2d 438 (7th Cir. 1991). It is also established in Illinois that a subtenant has no right in the demised premises not previously held by his or her immediate landlord, which is the original tenant. Thus, the subtenant possesses only the rights of the tenant and is charged with notice of all conditions and obligations contained in the original lease. 24 I.L.P. Landlord and Tenant §106 (1980). III. THE CONDEMNATION PROCEEDING A. [12.10] Complete Taking In a complete taking, the entire leasehold interest is taken by the condemning authority. By operation of law, the leasehold estate is extinguished and all obligations between the tenant and landlord cease to exist. Corrigan v. City of Chicago, 144 Ill. 537, 33 N.E. 746 (1893). The Illinois Supreme Court in Corrigan held:



The measure of compensation for the estate of the tenant taken is the value of her leasehold estate, subject to the rent covenanted to be paid. If the value exceeds the rental she will be entitled to recover the excess. If it does not exceed the rent reserved, she will be entitled to nothing. 33 N.E. at 749.

Notwithstanding whether the taking is complete, the tenant remains obligated to pay rent until the date of the condemnation judgment. Bohne v. Bauer, 21 Ill.App.2d 133, 157 N.E.2d 545 (2d Dist. 1959). Vesting of title in the condemnor, however, is conditioned on payment and deposit of the award. Chicago Park Dist. v. Downey Coal Co., 1 Ill.2d 54, 115 N.E.2d 223 (1953); Bohne, supra, 157 N.E.2d at 546. Thus, the preliminary just compensation must be deposited in a quick-take action, which in turn permits entry of an order vesting title in the condemnor. See 735 ILCS 30/20-5-5, et seq. In a complete taking, the primary issue is the leasehold’s fair cash rental value as compared to the actual rent paid under the lease agreement. Thus, the tenant’s damages can be measured by the fair cash market value of the leasehold, less the rental actually being paid. Department of Public Works & Buildings v. Bohne, 415 Ill. 253, 113 N.E.2d 319 (1953); Corrigan, supra; Yellow Cab Co. v. Howard, 243 Ill.App. 263 (1st Dist. 1927); Commercial Delivery Service, Inc. v. Medema, 7 Ill.App.2d 419, 129 N.E.2d 579 (1st Dist. 1955). To be entitled to any compensation for the taking, the lessee must have an interest in the property at the time of the award. A lessee may not share in the award under the following circumstances: 1. The lease expires by its terms after the complaint to condemn but before the final award is determined and there is no option to renew. Schreiber v. Chicago & E. R., 115 Ill. 340, 3 N.E. 427 (1885). The lessee is not entitled to compensation because, at the time the complaint to condemn was filed, the lessee had a right to possession for a certain term, which was fully exercised. 2. The lessee exercises its rights under a condemnation clause to terminate the lease due to the condemnation after the complaint to condemn but before final compensation is paid. City of Lake Forest v. First National Bank of Lake Forest, 52 Ill.App.3d 893, 368 N.E.2d 156, 10 Ill.Dec. 670 (2d Dist. 1977). The Lake Forest court found that the cancellation relieved the lessee of the burdens and benefits of the lease and the cancellation was tantamount to a natural termination of a lease. 3. The lessee abandons the premises after failing to pay rent. City of Chicago v. American National Bank, 86 Ill.App.3d 960, 408 N.E.2d 379, 42 Ill.Dec. 1 (1st Dist. 1980). The American National lessee left the premises due to an alleged failure of a commercial lessor to repair the premises after the complaint to condemn but before the entry of a final-judgment order. This abandonment extinguished the lessee’s right to share in the award. B. [12.11] Partial Taking In a partial taking, the condemnation clause will set forth the rights and obligations of the tenant. Absent an express condemnation clause, the partial taking of a leasehold that does not



adversely affect the lease results in no compensation to the tenant, and the tenant continues to remain obligated under the terms of the lease. Stubbings v. Village of Evanston, 136 Ill. 37, 26 N.E. 577 (1891); Corrigan v. City of Chicago, 144 Ill. 537, 33 N.E. 746 (1893). Conversely, if the taking is of such magnitude that the tenant can no longer operate, then the result is essentially the same as a complete taking. Yellow Cab Co. v. Stafford-Smith Co., 320 Ill. 294, 150 N.E. 670 (1926). See Alan N. Polasky, The Condemnation of Leasehold Interests, 48 Va.L.Rev. 477 (1962); Julius L. Sackman, Compensation Upon the Partial Taking of a Leasehold Interest, Sw. Legal Foundation 3d Ann.Inst. on Eminent Domain 35 (1961). However, if a tenant loses the leasehold interest for only a temporary period of time, it has been held that the rent does not abate since the situation is similar to a partial take. Leonard v. Autocar Sales & Service Co., 392 Ill. 182, 64 N.E.2d 477 (1945). Similar to a complete taking, the prevailing test in a partial condemnation of a tenant’s leasehold is the fair rental value of the leasehold taken, less the rent actually paid. Department of Public Works & Buildings of State of Illinois v. Blackberry Union Cemetery, 32 Ill.App.3d 62, 335 N.E.2d 577 (2d Dist. 1975). One commentator has noted the following hypothesis:

For example, a lessee pays $500 a month rent and has two years to go on his lease. He has constructed buildings which revert to landlord at termination of lease, so he has the use and enjoyment of buildings and land for two more years. Because of this the fair market value of the leasehold at the time of taking is $700 a month. After the partial taking, it is $200 a month. The lessee is entitled to $700 × 24 ($16,800) less $200 × 24 ($4,800) or $12,000, discounted for cash. This is actually the same as saying the lessee is entitled to the difference between the fair cash market value of the leasehold before and after the taking, the applicable test according to other authorities. Frank S. Righeimer, Jr., EMINENT DOMAIN IN ILLINOIS §6.281, p. 214 (3d ed. 1986).

In the landmark Illinois case Corrigan, supra, the court stated that the true way to measure compensation for the tenant in a partial taking is to place a value on the leasehold at the time of the filing of the complaint to condemn and subsequently to deduct the value of the use of the premises not taken. See §12.10 above. The Eminent Domain Act will have little effect on the valuation process, affecting only cases in which trials begin, or title to the property is taken, more than two years after the filing of the complaint to condemn. 735 ILCS 30/10-5-60. In these cases, the court has discretion to declare the valuation date no sooner than the date of filing the complaint to condemn and no later than the date of commencement of the trial or the date on which title to the property is taken. Id. Finally, Illinois Pattern Jury Instructions — Civil No. 300.59 (2011) (I.P.I. — Civil) provides:

In deciding whether the tenant is entitled to a share of the compensation to be paid for the entire property, you must first determine the fair rental value of the tenant’s leasehold. If the fair rental value of the leasehold exceeds the rent agreed



upon in the lease, the tenant is entitled to the excess. But if the fair rental value of the leasehold does not exceed the rent, the tenant is not entitled to any share of the compensation.

C. [12.12] Valuation of Leasehold — Two Methods At trial, the condemnees can elect one of two methods for the apportionment of their leasehold damages. First, the landlord and the tenant can request the jury to apportion damages after the determination of the gross award. Commercial Delivery Service, Inc. v. Medema, 7 Ill.App.2d 419, 129 N.E.2d 579 (1st Dist. 1955). Alternatively, they can petition the court to hold a subsequent and separate proceeding following the trial. 735 ILCS 30/10-5-70. In a partial taking, the condemnees should file a cross-complaint. A sample form of a cross-complaint is found in §12.35 below. It is unnecessary to file a cross-complaint in a complete taking. If any dispute arises regarding which method is preferable, the parties should file a motion in limine to resolve the dispute outside the presence of the jury. 1. [12.13] Apportionment as Part of the Jury Trial Apportionment as part of the jury trial is provided by statute and has long been recognized by the Illinois courts. See 735 ILCS 30/10-5-90. See also Chicago, B. & Q. R. v. F. Reisch & Bros., 247 Ill. 350, 93 N.E. 383 (1910); Lambert v. Giffin, 257 Ill. 152, 100 N.E. 496, 499 (1912). This method of determining leasehold damages can be placed before the court by filing an appropriate motion. A sample form of a motion for a separate verdict is found in §12.36 below. 2. [12.14] Posttrial Apportionment Hearing The condemnor will be required to deposit the condemnation proceeds with the county treasurer prior to title being vested in the condemning authority. 735 ILCS 30/20-5-15(a). If it is clear under the lease that only the landlord should recover the condemnation proceeds, then a waiver and consent can be obtained from the tenants. A sample form of a tenant’s waiver of lease is found in §12.34 below. Otherwise, a motion can be filed by any one of the condemnees seeking posttrial apportionment of the proceeds. A sample form of a motion for apportionment of condemnation award is found in §12.37 below. A bifurcated proceeding has been held appropriate to apportion condemnation proceeds between the landlord and the tenant. Commercial Delivery Service, Inc. v. Medema, 7 Ill.App.2d 419, 129 N.E.2d 579 (1st Dist. 1955); Department of Transportation v. White, 264 Ill.App.3d 145, 636 N.E.2d 1204, 201 Ill.Dec. 772 (5th Dist. 1994). D. Evidence — Valuation of Leasehold 1. [12.15] Burden of Proof The burden of proof to value the leasehold estate lies with the condemning authority. Chicago, B. & Q. R. v. F. Reisch & Bros., 247 Ill. 350, 93 N.E. 383 (1910); Department of Public Works & Buildings v. Bohne, 415 Ill. 253, 113 N.E.2d 319 (1953).



2. [12.16] Options and Verbal Leases An option to renew is valued and, thus, capable of expanding the lease term. In fact, there is a presumption that the tenant will exercise its option to renew. Department of Public Works & Buildings v. Bohne, 415 Ill. 253, 113 N.E.2d 319 (1953). On the other hand, a tenant’s mere expectancy of continued lease renewals may not be a compensable property interest. See State of Arizona, ex rel., Miller v. Gannett Outdoor Company of Arizona, Inc., 164 Ariz. 578, 795 P.2d 221 (App. 1990). In Texaco Refining & Marketing, Inc. v. Crown Plaza Group, 845 S.W.2d 340 (Tex.App. 1992), the court held that as a matter of law the tenant had a right to share in a condemnation award and the tenant did not act in bad faith by tendering rent and exercising the option to renew the lease. In holding against a sign tenant, one court noted that the ground leases lacked renewal options and refused to recognize any value in the tenant’s claimed “inchoate interest to renew the lease.” State of New Hampshire v. 3M National Advertising Co., 139 N.H. 360, 653 A.2d 1092, 1094 (1995). A tenant’s unexercised purchase option may be a compensable property interest. State of New Jersey v. Jan-Mar, Inc., 236 N.J.Super. 28, 563 A.2d 1153 (1989). Similarly, the court in City of Chicago v. Anthony, 136 Ill.2d 169, 554 N.E.2d 1381, 144 Ill.Dec. 93 (1990), held that a proposal letter to lease a small portion of ground space for a sign, while not a formal lease, could be considered by a valuation witness in determining the highest and best use for the property; the amount of rent proposed in the letter was inadmissible to prove value. However, a verbal lease was held insufficient to support a condemnation award to a tenant. Conness v. Indiana, I. & I. R., 193 Ill. 464, 62 N.E. 221 (1901). 3. [12.17] Permanent Improvements Permanent improvements installed by a tenant must be considered in arriving at the fair cash rental value of a leasehold. Department of Public Works & Buildings v. Bohne, 415 Ill. 253, 113 N.E.2d 319 (1953). It must be clear, however, that the improvements belong to the tenant. In Commercial Delivery Service, Inc. v. Medema, 7 Ill.App.2d 419, 129 N.E.2d 579 (1st Dist. 1955), a loading dock was installed by the tenant. Nevertheless, pursuant to the lease, the dock belonged to the landlord and not the tenant. 4. [12.18] Unit Rule for Improvements The unit rule for improvements prohibits separate valuation of leasehold improvements. Rather, the test is whether the improvement enhances the leasehold’s value. In United States v. 1.357 Acres of Land, 308 F.2d 200 (7th Cir. 1962), the lease contained a condemnation clause, but the court still considered whether the tenant was entitled to compensation for its improvements to the leasehold. Moreover, in Empire Building Corp. v. Orput & Associates, Inc., 32 Ill.App.3d 839, 336 N.E.2d 82, 84 (2d Dist. 1975), the court held:

In disputes between the landlord and tenant there is a presumption that the tenant, by annexing fixtures, did so for his own benefit and not to enrich the freehold, and the law accordingly construes the tenant’s right to remove his annexations liberally, at least where removal may be effected without material injury to the freehold.



In Department of Transportation v. East Side Development, L.L.C., 384 Ill.App.3d 295, 892 N.E.2d 136, 322 Ill.Dec. 889 (3d Dist.), appeal denied, 229 Ill.2d 665 (2008), the Third District Illinois Appellate Court upheld the use of the unit rule for condemned properties with lawfully erected off-premises outdoor advertising signs or billboards. The defendant-billboard owner argued that 735 ILCS 30/10-5-5 provided for billboard owners to obtain a separate market value for their loss resulting from the condemnation. The court determined that the statutory language is clear and provides only that the owner has a compensable interest, not that the interest should be valued separately from the property as a whole. 892 N.E.2d at 140. 5. [12.19] Bonus Value The bonus value of the leasehold belongs to the tenant. In a complete taking, the landlord would receive the present value of the agreed reserved rent for the remainder of the lease term. If the tenant had negotiated a below-market rental amount, he or she would then be entitled to the difference or “bonus” amount. Department of Public Works & Buildings v. Metropolitan Life Insurance Co., 42 Ill.App.2d 378, 192 N.E.2d 607 (1st Dist. 1963). The phrase “bonus value” or “bargain value” is the difference between the rent reserved and the rental value of the premises. It also has been referred to as an “overplus” or “surplus.” Alfred D. Jahr, LAW OF EMINENT DOMAIN: VALUATION AND PROCEDURE §131, p. 198 (1953). In Department of Transportation v. East Side Development, L.L.C., 384 Ill.App.3d 295, 892 N.E.2d 136, 322 Ill.Dec. 889 (3d Dist.), appeal denied, 229 Ill.2d 665 (2008), the Third District Appellate Court stated in dicta that bonus value may not be the only way to determine just compensation for a leasehold. The defendant-billboard owner argued that bonus value did not take into consideration the value of the billboard and the property’s value for producing rental income. The court reiterated “that the measure of compensation for a leasehold interest is the value of the interest, subject to the rent covenanted to be paid.” 892 N.E.2d at 141. While the Illinois Supreme Court has specifically rejected the proposal that profits derived from the property are a basis for determining just compensation, the Third District Appellate Court stated that bonus value may not be the only appropriate method for valuing a leasehold interest but did not give any examples of other methods that would be considered appropriate. 892 N.E.2d at 141 – 142. The Illinois Supreme Court denied certification on appeal; therefore, East Side Development leaves open the question of what other methods of valuation may be appropriate for determining just compensation. A tenant must ensure that evidence of bonus value is put into the record. In a case involving the apportionment of condemnation proceeds between the landlord and the tenant, a Missouri appellate court reversed and held that no evidence regarding the bonus value of the leasehold was introduced at trial and, therefore, the landlord was entitled to 100 percent of the award. St. Louis County, Missouri v. Boatmen’s Trust Co., 857 S.W.2d 453 (Mo.App. 1993). Similarly, a Florida court refused to permit a tenant to recover its bonus value because it would amount to an impermissible double recovery. Bolduc v. Glendale Federal Bank, 631 So.2d 1127 (Fla.App. 1994).



6. [12.20] Valuation Witnesses Any person acquainted with the property can be a valuation witness in a leasehold case. Department of Public Works & Buildings v. Bohne, 415 Ill. 253, 113 N.E.2d 319, 325 (1953); People ex rel. McDonough v. Goldberg, 354 Ill. 423, 188 N.E. 428 (1933); Illinois Power & Light Corp. v. Talbott, 321 Ill. 538, 152 N.E. 486 (1926). But see Department of Public Works & Buildings of State of Illinois v. Blackberry Union Cemetery, 32 Ill.App.3d 62, 335 N.E.2d 577 (2d Dist. 1975). A lease executed in good faith before commencement of condemnation proceedings is admissible in evidence on the issue of the rental value of the property. Department of Public Works & Buildings v. Kirkendall, 415 Ill. 214, 112 N.E.2d 611 (1953).

PRACTICE POINTER

Based on Bohne, and the flexibility under Illinois law in valuing a leasehold, the following items should be noted regarding leasehold valuation testimony:

a. The valuation witness should read the lease. b. The witness must know the property, its use, and its value for the purposes to

which it is being applied. c. A witness may express an opinion of fair cash rental value even though not

engaged in the business of leasing property or of real estate in general. d. A witness who testifies to an opinion of fair cash rental value must be familiar

with the terms and conditions of the lease and must have background, experience, or knowledge on which to predicate such an opinion of value.

e. A witness who testifies to the fair cash market value of the real estate subject to a

lease must be familiar with the terms and provisions of the lease, the existence of options of renewal, provisions relating to improvements, and improvements made.

f. A witness who testifies to the fair cash market value of the real estate subject to a

lease can properly consider the leased portions and any unleased portions as distinct elements in arriving at the value of the entire property.

For trial purposes, attorneys should note that the Illinois Rules of Evidence became effective on January 1, 2011. In Wilson v. Clark, 84 Ill.2d 186, 417 N.E.2d 1322, 49 Ill.Dec. 308 (1981), the Illinois Supreme Court adopted Fed.R.Evid. 703 and 705 and their applications to the testimony of experts. In City of Chicago v. Anthony, 136 Ill.2d 169, 554 N.E.2d 1381, 144 Ill.Dec. 93 (1990), the Illinois Supreme Court held that these rules apply to real estate valuations. While no appellate cases related to eminent domain have mentioned the new evidence rules related to expert testimony or the requirements for real estate valuation, practitioners should be aware that Illinois’ Rules of Evidence related to expert testimony are identical to the federal rules.



Ill.R.Evid. 703 states: The facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence. Ill.R.Evid. 705 provides: The expert may testify in terms of opinion or inference and give reasons therefor without first testifying to the underlying facts or data, unless the court requires otherwise. The expert may in any event be required to disclose the underlying facts or data on cross-examination. 7. [12.21] Valuation Testimony in Separate Apportionment Proceeding If the parties elect to proceed with a separate posttrial apportionment proceeding, the valuation testimony in this proceeding is similar to the testimony in a jury trial. However, the only issue is the fair cash rental value of the leasehold, and the court will not consider the fair cash market value of the whole. City of Chicago v. American National Bank & Trust Co., 233 Ill.App.3d 1031, 599 N.E.2d 1126, 1129 – 1130, 175 Ill.Dec. 112 (1st Dist. 1992); Commercial Delivery Service, Inc. v. Medema, 7 Ill.App.2d 419, 129 N.E.2d 579 (1st Dist. 1955); Department of Public Works & Buildings v. Metropolitan Life Insurance Co., 42 Ill.App.2d 378, 192 N.E.2d 607 (1st Dist. 1963). 8. [12.22] Comparable Leasehold Valuation Comparable leasehold valuation evidence is not generally as easy to obtain as comparable sales evidence. As stated by one commentator,

[t]he holding by the courts that leasehold interests are to be valued . . . according to their “market value” probably poses a problem which is just as complicated as the original problem. How are those interests to be valued by “market value”? Certainly there are very few sales of leases exactly in point. It is not like valuing a piece of real property where you may find sales of comparable properties in the vicinity. Each leasehold is sui generis. Nevertheless, the courts have said that market value is the measure of compensation to the lessee. The market value must be determined by qualified experts in the sale of leases. [Note omitted.] Alfred D. Jahr, LAW OF EMINENT DOMAIN: VALUATION AND PROCEDURE §130, p. 194 (1953).

Often the best source of comparable leasehold estates will be commercial real estate brokers and leasing agents. The difficulty in obtaining convincing and admissible leasehold valuation testimony is demonstrated by several Illinois courts. See, e.g., City of Chicago v. Lord, 276 Ill. 544, 115 N.E. 8 (1916); Commercial Delivery Service, Inc. v. Medema, 7 Ill.App.2d 419, 129 N.E.2d 579 (1st Dist. 1955); Department of Public Works & Buildings v. Lambert, 411 Ill. 183,



103 N.E.2d 356 (1952); Department of Public Works & Buildings of State of Illinois v. Blackberry Union Cemetery, 32 Ill.App.3d 62, 335 N.E.2d 577 (2d Dist. 1975); Sanitary Dist. of Chicago v. Boening, 267 Ill. 118, 107 N.E. 810 (1915). 9. [12.23] Consequential Losses The landlord’s and the tenant’s consequential losses (i.e., loss of profits, relocation expenses, and damage to goodwill) are not recoverable. United States v. Petty Motor Co., 327 U.S. 372, 90 L.Ed. 729, 66 S.Ct. 596 (1946); National Railroad Passenger Corp. v. Faber Enterprises, Inc., 931 F.2d 438 (7th Cir. 1991); United States v. Meyer, 113 F.2d 387, 397 (7th Cir.) (income is generally too conjectural and inadmissible to prove value), cert. denied, 61 S.Ct. 174 (1940); Kurth v. Iowa Department of Transportation, 628 N.W.2d 1, 9 – 10 (Iowa 2001). 10. [12.24] The Mortgagee’s Interest In the nature of an equitable conversion, all interest in the property is transferred to the award of just compensation upon the vesting of the title in the condemnor, and the holder of a first mortgage on the property is entitled to priority of payment from the award to satisfy its lien. City of Chicago v. Salinger, 384 Ill. 515, 52 N.E.2d 184 (1943). This priority is superior to an attorney’s lien on behalf of the owner for fees and expert witness costs. Village of Clarendon Hills v. Mulder, 278 Ill.App.3d 727, 663 N.E.2d 435, 215 Ill.Dec. 424 (2d Dist. 1996). Thus, when the lessor and/or lessee petitions to withdraw funds, the lien of the mortgagee is paid first. If there is an excess of the award after satisfaction of the first mortgage interest but the excess is insufficient to satisfy a lessee’s award of damages, Illinois law is uncertain as to whether the entire balance goes to the lessee or an apportionment on some basis is to be made between the lessor and the lessee. Accordingly, a condemnation provision dealing with this eventuality might be considered advisable by the parties. IV. [12.25] THE EMINENT DOMAIN ACT AND ITS EFFECT ON

LANDLORDS AND TENANTS The Eminent Domain Act, which took effect January 1, 2007, applies only to complaints to condemn filed on or after the effective date of the Act. The Act replaces, and in some instances modifies, the former provisions of the Code of Civil Procedure, 735 ILCS 5/1-101, et seq., for eminent domain proceedings. (Note that, in two instances, old eminent domain statutes still apply: (a) the O’Hare Modernization Act, 620 ILCS 65/1, et seq. (see 620 ILCS 65/15) and (b) tax-increment allocation redevelopment plans adopted prior to April 15, 2006. 735 ILCS 30/5-5-5(a-5), 30/5-5-5(a-10).) Although the Eminent Domain Act is extensive in its provisions, its effect on the landlord-tenant relationship is minimal. What changes the Act does have on the landlord-tenant relationship will be most evident when the court is determining the value of the property taken. The Act provides that the value of taken property shall be determined and ascertained as of the date of filing the complaint to condemn, except that

(i) in the case of property not being acquired under Article 20 (quick-take), if the trial commences more than 2 years after the date of filing the complaint to



condemn, the court may, in the interest of justice and equity, declare a valuation date no sooner than the date of filing the complaint to condemn and no later than the date of commencement of the trial; and (ii) in the case of property that is being acquired under Article 20 (quick-take), if the trial commences more than 2 years after the date of filing the complaint to condemn, the court may, in the interest of justice and equity, declare a valuation date no sooner than the date of filing the complaint to condemn and no later than the date on which the condemning authority took title to the property. 735 ILCS 30/10-5-60.

This language appears to provide more protection to the landlord and the tenant when the trial to condemn takes place long after the filing of the complaint to condemn. Other major changes from the former provisions of the Code of Civil Procedure for eminent domain proceedings focus on the general exercise of eminent domain power (735 ILCS 30/5-5-5), relocation expenses (735 ILCS 30/10-5-62), and attorneys’ fees (735 ILCS 30/10-5-110). These changes, while affecting other aspects of eminent domain, will not have a substantial effect on the landlord-tenant relationship. V. [12.26] CONCLUSION The impact of a leasehold interest in a condemnation proceeding begins with the condemnation clause in the lease. Once the contractual rights between the landlord and the tenant are ascertained, the parties must look to the law of eminent domain to determine whether damages exist to the leasehold and how those damages should be measured. VI. APPENDIX — SAMPLE FORMS A. Automatic Termination Clauses 1. [12.27] Condemnation Clause FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. 2. [12.28] Compensation Clause FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS.



B. Condemnation Clauses 1. [12.29] Total Condemnation FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. 2. [12.30] Partial Condemnation FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. 3. [12.31] Office Building Clause FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. 4. [12.32] Shopping Center Clause FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. C. [12.33] 60-Day Letter FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. D. [12.34] Tenant’s Waiver of Lease FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. E. [12.35] Cross-Complaint FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. F. [12.36] Motion for Separate Verdict FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS. G. [12.37] Motion for Apportionment of Condemnation Award FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO SMARTBOOKS® OR SMARTBOOKSPLUS.

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This chapter was first published by IICLE Press. · PDF file · 2015-09-13©COPYRIGHT 2012 BY IICLE ®. 12 — 1 The Effect of Eminent Domain on the Landlord-Tenant Relationship JOSEPH