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Condemnation And The Interplay Of
Standard Lease Clauses
By M. Robert Goldstein & Michael J. Goldstein
Editorial Comment: Condemnation is a highly specialized discipline
not only calling upon skills in the area of valuation, but
also requiring a knowledge of the interests that are affected
and how they are handled in the proceeding. Bob and Michael
Goldstein are recognized experts in this field, and what they
offer is of valuable aid in understanding the subject when
considering a lease provision on condemnation.
Under the common law, when property is condemned, a tenant,
absent an agreement otherwise curtailing his rights, may recover
int eh proceeding for two property rights: the value of his
leasehold estate and the value of his tangible physical property
called trade fixtures (Matter of City of New York (Allen Street),
256 NY 236; Matter of Delancy Street, 20 App.. Div. 700, 105
N.Y.S., 779; Great Atlantic & Pacific Tea Co. V State
of N.Y., 22 N.Y.2d 75). Included in the latter is the right
to recover for the cost of relocating fixtures to new premises
(Rose v. State of New York, 24 N.Y.2d 80). In the former,
he is the owner of an estate carved cut of the fee and, as
such, he is entitled to be paid for the present worth of the
remaining term of his lease. This is measured by the difference
between his obligations under the lease, rent and otherwise,
(Matter of City of NY (Bronx River Ave.), 278 App.. Div. 813,
104 NYS 2d 234) and the higher rental value of his space under
the lease, his rent advantage. Since his lease represents
an interest in the fee title granted to him by the fee owner,
any award made to him is carved out of the fee award. (Matter
of City of New York (Mott Haven Houses), 33 Misc. 2d 808,
227 NYS 2d 858, aff'd, 16 A.D., 2d 637, 227 N.Y.S. 2d 891,
aff'd, 13 NY 2d 959,244 NYS 2d 458; Great Atlantic & Pacific
Tea Co. V. State of NY , supra).
It is because of this that most leases contain a condemnation
clause, the purpose of which is to protect the fee owner from
sharing his fee award with the tenant, at least as to those
tenants who have not added value to the building and/or land.
In the latter case, the tenant, having added value by way
of additions or improvements to the land or buildings, the
benefit of which he would have enjoyed over the term of the
lease, if not cut short by condemnation, will ordinarily bargain
to recover for those additions to t h property in the condemnation
proceeding, albeit to be carved out of the award for the real
estate. A landlord and tenant may determine, by agreement,
how the condemnation award for the fee estate is to be divided
between them and the court must divide the award according
to the terms of the agreement. (Traendly v. State of NY ,51
A.D. 2d 489,382 NYS 2d 365; Castellano v. State of NY 70 AD
2d 1033, 418 NYS 2d 177). Thus, in one way or another, there
will be a condemnation clause in a lease, the effect of which
is generally addressed to the tenant's common law right to
value his leasehold estate. Should there be no such clause,
the tenant is free to value his rent advantage over the term
of his lease, including any option periods. (Great A &
P Tea Co. V. State of NY, supra; in re Port of NY Authority,
2 NY 2d 296, 159 NYS 2d 825).
This is to be distinguished from another common law right
a tenant has in a condemnation proceeding, the right to recover
for his trade fixtures. Different from the leasehold estate,
which is carved out of the owner's award, a trade fixture
award is separately determined from the value of the real
estate and is in addition to it. (Marraro v. State of NY,
12 NY 2d 285, 239 NYS 2d 105 (1963))> Thus, as any fixture
award does not impact on the landlord's award, the right of
the tenant to a trade fixture award is generally not the subject
of a negotiated lease clause nor addressed in the condemnation
clause. This does not mean that one of the lease clause may
not affect the right of the tenant to recover for trade fixtures
and that is the alterations and improvements clause. To understand
why this is, we have to discuss what these clauses are intended
to address and how the cases interpreting them treat them.
The Physical additions of a tenant fall into three categories.
The first are those which are distinctively part of the real
estate; those items installed by a tenant which, if removed
would substantially damage the structure, that is, they have,
in effect, become one with the real estate. The second are
those items which are distinctively personalty; that is, they
may be removed with such little difficulty and loss in value
as to have retained their personal character. Then there is
the middle category of property which is regarded in the law
as being neither distinctively realty nor distinctively personalty,
and these are trade fixtures. (U.S.A.> v. Certain property
located in the Borough of Manhattan, 344 F 2d 142 (1956))>
As was said in the last cited case. "The New York Courts,
bearing in mind the purpose of the law of Fixtures ‘to
protect those who, having an estate less than a fee in the
land, had made improvements on it which, if they could not
retain, would be lost to them' (In re Mayor etc. of City of
New York, 39 App.. Div. 589, 594, 57 N.Y. Supp. 657,660 (1899)),
have taken a generous view of what may be removed without
injury to the freehold and is excluded from the standard alterations
clause. (See Matter of City of New York, 192 NY 295, 302 (1908);
Century Holding Co. V. Pathe Exchange, Inc. 200 App.. Div.
62, 192 N.Y. Supp. 380 (1922))."
This, of course, opens up the subject of the impact of the
alterations and improvements cause on the tenant's right to
recover for trade fixtures and what part does it play in negotiating
a condemnation clause. In most form leases there is a provision
similar to clause 3 of the Real Estate Board of N.Y. form
lease which has, as an essential part of it, "all alterations...installations
and additions or improvements upon demised premises made by
either party shall become the property of the landlord,, and
shall remain upon, and be surrendered with said premises,
as a part thereof, at the end of the term or renewal term
as the case may be."Bearing in mind that the basis of
a tenant's claim for trade fixtures is that, as between him
and his landlord, the items installed by him remain in his
title, being chattels real, even though as between the tenant
and the condemnor they are deemed as part of the real estate,
giving him the right to compensation, what effect does language
stating that the installed items become the property the landlord
have upon his right to be paid for trade fixtures in the condemnation
proceeding? (McCrea v. Central National Bank of Troy, 18 N.Y.
125 (1859)).
To begin with, in the language cited, the fixtures do not
become landlord's property until the end of the term, giving
the tenant the right to dispose of them at any time up until
then. As condemantion is not deemed the end of the term, for
this purpose, such language does not affect the tenant's right
to recover for trade fixtures.
Unless there is realty evidence of a contrary intention,
courts, generally in interpreting these clauses, have treated
them as simply declaratory of the common law; that is, the
same tests are applied based upon the physical facts as described
in USA v. Certain Property in Borough of Manhattan, supra.
The clause is not deemed to apply to the middle category of
trade fixtures, but solely to those items which are distinctively
realty. It is interesting to note that in a non-condemnation
case, the Civil Court in Queens County held that the alterations
and improvements clause did not require landlord's concent
to installation of such items as air conditioning, since the
clause only related to substantial changes varying or changing
the form or nature of the building without destroying its
identity. (Camaj vs. Robscat Graphics In. N.Y.L.J. 5/21/86,
p. 16, col. 5 (Hentel, J.)). Thus, it was stated in In re
Howard Laundry Co., 203 Fed 445 (2nd Cir. 1913): "The
presumption is that trade fixtures belong to the tenant and
if it be the intention of the parties that they shall become
the property of the landlord at the expiration of the lease,
that purpose should be stated in language so clear and explicit
there can be no doubt as to its meaning. That intent cannot
be deduced from broad and gereral language which is usually
found in the printed forms, regarding improvements. When this
word is used, without any language defining or extending its
ordinary meaning, the courts with substantial uniformity have
held that it relates to improvements to the realty and not
to trade fixtures." (See also, In re Seward Park Slum
Clearance Project, 10 A.D. 2d 498 (1960);In re Mount Holly
Paper co., 110 F 2d 220, 225 (3rd Cir. 1940); c.t. Matter
of City of N.Y. (G & C Amusements), 55 N.Y.2d 242, 449
N.Y.S. 2d 671 (1982))> Although condemnation acts to terminate
the lease, this is not deemed, for the purposes of the clause,
such an end to the terms as forteits the tenant's installations
to the landlord. (Gristede Bros. Inc v. State of N.Y., 11
A.D. 2d 580 (3rd Dept., 1960); U.S. v Seagren, 50 F 2d 335).
Without citing them here, the case law is reciete with cases
where there was an endeavor to protect a tenant as to his
installations and to prevent a forfeiture to the landlord
whether there be an alterations and improvements clause or
not.But what happens if a tenant makes substantial improvements
or additions to the real estate of items which are distinctively
realty and not trade fixtures? As they are clearly not trade
fixtures and they have become additions to the real estate
assumedly increasing its value. (In re City of N.Y. (Water
Street), 19A.D.2d 44,241 N.Y.S. 2d 44) he must look to the
landlord for an agreement to permit him to share in the landlord's
award for what he has added to the real estate. Those additions
may be as significant as an entire building, which is the
case in the typical ground lease, to such things as new bearing
walls, basic floors, store fronts etc. Since they are not
trade fixtures (although hung ceilings, partitions walls,
floor overlays are considered as such) nor personalty, the
only way a tenant will be able to secure compensation for
those additions is by negotiating for same in the lease.
Thus we put the package together as to what should be negotiated
between landlord and tenant as to clauses affecting condemnation
proceedings. If the tenant's installations are solely trade
fixtures, no clauses should be necessary as the standard condemnation
clause does not affect it, relating solely to the value of
the unexpired term of the lease and the standard alterations
and improvements clause being deemed not to affect trade fixtures.
If they are turly additions to the real estate then, if there
is to be any compensation for the tenant, it will be carved
out of the landlord's award and it requires specific negotiations
to modify what are standard clauses.
One of the ways to be compensated is to modify the condemnation
clause to permit the tenant to prove the increased value of
his lease of the premises which would assumedly be affected
by the tenant's additions. The problem with that course of
action is first that rental value may be affected independentily
by causes other than tenant's additions and second, there
may be no correlation between the tenant's cost of improvements
and the increased value.
Another way is to amortize the tenant's additions over the
term of the lease, the landlord reimbursing the tenant for
the unamortized protion of the expenditure, in effect treating
it as prepaid rent, being careful to separate out those additions
which would be compensated fro as trade fixtures. This too
has similar probems. While the tenant will be limited to his
physical improvements, and will not be the beneficiary of
increases in value unrelated to his improvements there is
no assurance that the value of the real estate will reflect
ehe cost of his improvements. On choice we would choose the
latter, however, as the formula of choice, if we were the
landlord.
Even in the situation of a ground lease, where the tenant
has erected the building, there are no sure formulas. If the
tenant is given the right to value his estate without restriction
and the lease is long enough or values have increased enough,
even just to the land, the fee owner could be virtually wiped
out if there is no provision for relatively frequent periodic
rent adjustments reflecting the increasing value of the land.
(Airport Lodge of Rochester Inc v Brooks-Buell, Inc., 40 A.D.
2d 1077, 339 N.Y.S. 2d 220 (4th Dept. 1970)). If an attempt
is made to value the building and the land separately with
the building to the tenant and the land to the fee owner,
even there, as the land is the constant, with the building
a wasting asset subject to obsolescence, artificial stimuli
to value, such as zoning changes increasing the permitted
density of the use of the site, which do not reflect itself
in increased rent and thus total value, may result in a distoration
of relative values by increasing the value of the land and
resulting in the decrease in the value of the building. On
the other hand, even if the lease has only a few months to
go at the date of condemnation, the tenant would get the total
value of the building under such a provision. Here the method
of choice is giving the tenant the right to value his leasehold,
but accompanied by a provision for frequent periodic land
rent adjustments and with a provision for a floor as to the
fee owner based upon the capitalized value of the land rent
(which should be the floor in the natural course of events,
although ignored in practice by some courts).
It is important to remember that condemnation courts will
not correct the errors and oversights of lease draftsmen that
lead to harsh results and that condemnation can happen at
any time to any property.
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