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Recent Court Decisions Help Real Estate Pros Avoid Litigation

Legal Briefs
Recent Court Decisions Help Real Estate Pros Avoid Litigation
by Carol C. Honigberg, JD

At the end of the year, it is helpful to revisit legal issues concerning commercial real estate by reviewing new court decisions that further the debate on these topics. Both of the examples cited here continue themes discussed in earlier columns. (See “Developers Must Establish Public Purpose to Justify Eminent Domain,” CIRE, May/June 2002, and “Pay Attention to Specific Lease Terms to Avoid Litigation,” CIRE, July/August 2002.)

The first case highlights the uncertainty surrounding the use of eminent domain and provides another example of what courts are ruling as private rather than public purpose. The second case emphasizes the importance of drafting clear and concise real estate documents. Commercial real estate professionals should take note of these decisions and similar cases when confronted with such issues.

Eminent Domain Confusion Lack of predictability seems to be a recurring theme in eminent domain cases this year, as various courts have differed on what constitutes a private vs. a public use. A recent example that further muddies the water is Southwestern Illinois Development Authority v. National City Environmental LLC, decided by the Supreme Court of Illinois in April.

The Illinois state legislature created the Southwestern Illinois Development Authority to promote development in specified depressed areas and gave it the power to issue bonds and acquire property by condemnation. In 1996, SWIDA issued taxable sports facility revenue bonds and lent the proceeds to Gateway International Motorsports Corp. to develop a multipurpose automotive sports and training facility.

The racetrack was extremely successful, generating more than 400,000 attendees in a single season. In 1998, Gateway raised the track's seating capacity and wanted to acquire an adjacent 148-acre tract to create additional parking to accommodate the increased attendance. The owner of the tract, National City Environmental, operated a metal recycling center that shredded nearly 100,000 cars and appliances per day. It deposited nonrecyclable materials into a landfill, which the company planned on expanding into the 148 acres.

NCE refused to discuss a sale, so Gateway petitioned SWIDA to use its power of eminent domain to acquire the property.

During the quick-take condemnation hearing held by the circuit court, SWIDA argued that significant public safety hazards existed at race times due to traffic congestion on the adjacent highways and the location of available parking. It introduced research indicating that these problems would improve significantly by creating new parking areas on the 148 acres. Other testimony confirmed the racetrack's economic benefits and its role in eliminating blight in the area. The circuit court approved the condemnation, and NCE appealed.

The Supreme Court of Illinois reviewed these actions to determine if the taking achieved a legitimate public use or was an impermissible taking from one private party for another private party's benefit. In its decision, the court focused on Gateway's for-profit status and the fact that SWIDA earned a fee or, as the court put it, “acted as a default broker of land for Gateway's proposed parking plan,” which it considered to be beyond the scope of SWIDA's authority. In reversing the decision, the court concluded that the taking conferred a purely private benefit, stating “the initial, legitimate development of a public project does not justify condemnation for any and all related business expansions.”

This decision continues the unfortunate trend of differing court opinions surrounding the power of eminent domain. Developers and property owners should watch for further decisions regarding this issue, as no clear-cut conclusion has been determined.

Clear and Concise Wording Imprecise wording of lease documents often causes litigation between landlords and tenants. Durnelco Inc. v. Double James LLC, decided by the Tennessee Court of Appeals in June, illustrates this point.

In 1997, Durnelco leased a restaurant facility in Harrison , Tenn. , made extensive renovations to the property including the addition of tongue-and-groove flooring, non-bearing walls, decking, wall coverings, and other elements, and opened the Durty Parrot Pub. Three years later, it informed the current landlord, Double James, of its intention to terminate the lease and remove the improvements it had made to the premises and cover the interior with low-grade plywood. Durnelco claimed it was within its rights based on a lease clause, which it had written, stating that it could remove “any alteration and addition over and above any trade fixtures so long as the removal does not effect [sic] the structural element.”

Double James objected, indicating it had provided a functioning premises at the beginning of the lease and was entitled to receive the same back. The landlord also noted that it would cost approximately $100,000 to restore the premises to a condition comparable to that at lease inception.

Durnelco filed a complaint seeking permission to remove the improvements. While the issue was in dispute, Durnelco barred Double James from reentering the premises, even though it had ceased restaurant operations.

In writing the disputed clause, Durnelco probably thought it had given itself the right to remove anything that was not structural -- what real estate professionals likely would define as anything not affecting load-bearing walls or building systems. The tenant exercised this removal right, both at the beginning of the lease term, when it extensively remodeled the premises, and at the end, when it tried to take out what it had installed.

However, the court found the term structural element to have no clearly understood meaning. Having concluded that the term was ambiguous, the court construed the language against the tenant, which had drafted the language. The court ruled that Durnelco could not remove any of its improvements or alterations, stating that the tenant should have itemized in the lease those elements it intended to remove at the end of the term. The court also held the tenant liable to the landlord for holdover rent for the months it refused to leave the premises.

As noted, it is difficult to predict how courts will rule on issues concerning commercial real estate. As of yet, a clear and consistent definition of public use has not been determined, making the use of eminent domain tricky. Courts often are not particularly familiar with commercial real estate concepts; therefore, clear and precise language in lease documents is essential to avoid litigation.

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Carol C. Honigberg, JD, is a partner in the real estate group at Reed Smith LLP in Falls Church, Va. Contact her at (703) 641-4220 or chonigberg@reedsmith.com

The discussion of legal issues in this column is for informational purposes only. Results may vary depending on state laws and individual circumstances.

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