Things to Know About Eminent Domain in Commercial Leases

The real estate sector is vast and it holds a lot of opportunities for all the stakeholders in this sector. There is no doubt in the fact that investing in the real estate sector is indeed lucrative with the huge rate of returns on investments.

However, like every other business, investing in the real estate sector is also fraught with many risks and it is imperative for all the people associated with the real estate industry to know about these risks so that they don’t end up making these errors.

Among the various stakeholders in the sector, the role of both investors and tenants are prominent. Tenants get associated with the real estate sector when they rent properties in the form of leases. There are various terms that are included in a commercial lease.

However, sadly there are certain terms that are completely missed by everyone. One of these terms is eminent domain which is a power vested in the government to take back any property for public use? Most of the time these clauses is missed and only reappear when the situation arises.

Here in this article, we will discuss in detail about eminent domain in commercial leases.

What is eminent domain?

Eminent domain refers to the procedure where the government targets certain commercial spaces for public use and due to which you would be forced to relocate to some other space and give up your claim on that property. Among the various types of properties, commercial real estate is particularly prone to this procedure.

However, the government gives out compensation packages once it has been officially announced that space would be utilized for a public purpose. There are certain rules and regulations that govern this compensatory payment.

The rules require just compensation to be paid to the individual from whom the government is taking the commercial real estate for utilizing it for a public purpose. Moreover, property owners often have to seek the assistance of an attorney during a situation involving eminent domain because of its complexity.

Zoning

Zoning refers to the procedure during which the government designates the use of specific plots of land. Generally, the local government selects a variety of different zones that can be used for industrial, residential, commercial or agricultural purposes.

Whenever these selections are made the type of buildings or structures that can be built on that land are in accordance with the law. However, if your commercial property is located in a zone that has been designated suitable by the government for building public utilities, then eminent domain comes into play.

Ways eminent domain affects tenants

Most of the time the complexities involving the eminent domain is between the landlord and the government. Nevertheless, if the property has been leased to a tenant, then there is an existence of a leasehold relationship. The leasehold real estate doesn’t transfer the right of possession to the tenant but is a right on condition.

This translates to the condition where the tenant has the right of possession of the property under the condition of their payment of rent and other associated fees. The tenant doesn’t own the property; however, they are still entitled to compensation along with the landlord.

As the rights of the tenant are dictated by the lease agreement, the amount of compensation payable to the tenant is set as per the lease agreement terms.

How the compensation is decided

Whenever the compensation is being decided, it starts with a calculation based on the unit rule or the undivided fee rule. This rule is dependent on the state and while deciding under this rule, the fair market value of the property is taken into consideration.

Notwithstanding, most of the time property rights are ignored and the complete focus is on the fair market value of the property. The fair market value of a property is dependent on certain conditions like the size of the property, accessibility, zoning, level of development and other factors.

The compensation amount is divided into proportionate shares and is known as apportionment. In the end, the compensation is divided between the landlord and the tenant.

Finally

The eminent domain procedure is a must-know for all the stakeholders in the real estate sector. Most of the time it is seen that the tenants are not aware of the eminent domain process and in turn miss out on the compensation money. This is why it is imperative for a tenant to thoroughly read the lease agreement before signing the paper.

We at Landwin LLC have been delivering comprehensive professional real estate investment services since 1987. All our professionals are highly dedicated and have enough experience, as well as committed to our clients.