Almota Farmers Elevator and Warehouse Company v. United States

• Decision Date: 16 January 1973
• Docket Number: No. 71-951,71-951
• Citation: 93 S.Ct. 791,35 L.Ed.2d 1,409 U.S. 470
• Parties: ALMOTA FARMERS ELEVATOR AND WAREHOUSE COMPANY, Petitioner, v. UNITED STATES
• Court: U.S. Supreme Court

409 U.S. 470

93 S.Ct. 791

35 L.Ed.2d 1

ALMOTA FARMERS ELEVATOR AND WAREHOUSE COMPANY, Petitioner,

v UNITED STATES.

No. 71-951.

Argued Oct. 18, 1972.

Decided Jan. 16, 1973.

Syllabus

Before and during the last of several successive leases, petitioner made substantial and permanent improvements that had a useful life in excess of the remaining lease term. With 7 1/2 years to run on the then-current lease term, the United States contracted to acquire the underlying fee and began condemnation proceedings for the leasehold. The Court of Appeals reversed the District Court's ruling that just compensation required that the improvements be valued in place over their useful life, without limitation to the remainder of the lease term. Held: In a condemnation proceeding, the concept of 'just compensation' is measured by what a willing buyer would have paid for the improvements, taking into account the possibility that the lease might be renewed as well as that it might not. Pp. 794—797.

450 F.2d 125, reversed and District Court judgment reinstated.

Lawrence Earl Hickman, Colfax, Wash., for the petitioner.

Kent Frizzell, Washington, D.C., for respondent.

Mr. Justice STEWART delivered the opinion of the Court.

Since 1919 the petitioner, Almota Farmers Elevator & Warehouse Co., has conducted grain elevator operations on land adjacent to the tracks of the Oregon- -Washington Railroad and Navigation Company in the State of Washington. It has occupied the land under a series of successive leases from the railroad. In 1967, the Government instituted this eminent domain proceeding to acquire the petitioner's property interest by condemnation. At that time there were extensive buildings and other improvements that had been erected on the land by the petitioner, and the thencurrent lease had 7 1/2 years to run.

In the District Court the Government contended that just compensation for the leasehold interest, including the structures, should be 'the fair market value of the legal rights possessed by the defendant by virtue of the lease as of the date of taking,' and that no consideration should be given to any additional value based on the expectation that the lease might be renewed. The petitioner urged that, rather than this technical 'legal rights theory,' just compensation should be measured by what a willing buyer would pay in an open market for the petitioner's leasehold.

As a practical matter, the controversy centered upon the valuation to be placed upon the structures and their appurtenances. The parties stipulated that the Government had no need for these improvements and that the petitioner had a right to remove them. But that stipulation afforded the petitioner only what scant salvage value the buildings might bring. The Government offered compensation for the loss of the use and occupancy of the buildings only over the remaining term of the lease. The petitioner contended that this limitation upon compensation for the use of the structures would fail to award what a willing buyer would have paid for the lease with the improvements, since such a buyer would expect to have the lease renewed and to continue to use the improvements in place. The value of the buildings, machinery, and equipment in place would be substantially greater than their salvage value at the end of the lease term, and a purchaser in an open market would pay for the anticipated use of the buildings and for the savings he would realize from not having to construct new improvements himself. In sum, the dispute concerned whether Almota would have to be satisfied with its right to remove the structures with their consequent salvage value or whether it was entitled to an award reflecting the value of the improvements in place beyond the lease term.

In a pretrial ruling, the District Court accepted the petitioner's theory and held that Almota was to be compensated for the full market value of its leasehold 'and building improvements thereon as of the date of taking . . ., the total value of said leasehold and improvements . . . to be what the interests of said company therein could have been then sold for upon the open market considering all elements and possibilities whatsoever found to then affect the market value of those interests including, but not exclusive of, the possibilities of renewal of the lease and of the landlord requiring the removal of the improvements in the event of there being no lease renewal.' The court accordingly ruled that the petitioner was entitled to the full fair market value of the use of the land and of the buildings in place as they stood at the time of the taking, without limitation of such use to the remainder of the term of the existing lease.

On appeal, the Court of Appeals for the Ninth Circuit reversed, 450 F.2d 125; it accepted the Government's theory that a tenant's expectancy in a lease renewal was not a compensable legal interest and could not be included in the valuation of structures that the tenant had built on the property. It rejected any award for the use of improvements beyond the lease term as 'compensation for expectations disappointed by the exercise of the sovereign power of eminent domain, expectations not based upon any legally protected right, but based only . . . upon 'a speculation on a chance." 450 F.2d, at 129. The court explicitly refused to follow an en banc decision of the Court of Appeals for the Second Circuit, relied upon by the District Court, which had held that for condemnation purposes improvements made by a lessee are to be assessed at their value in place over their useful life without regard to the term of the lease. United States v. Certain Property, Borough of Manhattan, etc., 388 F.2d 596, 601.

In view of this conflict in the circuits, we granted certiorari, 405 U.S. 1039, 92 S.Ct. 1312, 31 L.Ed.2d 579, to decide an important question of eminent domain law: 'Whether, upon condemnation of a leasehold, a lessee with no right of renewal is entitled to receive as compensation the market value of its improvements without regard to the remaining term of its lease, because of the expectancy that the lease would have been renewed.'¹ We find that the view of the Court of Appeals for the Second Circuit is in accord with established principles of just-compensation law under the Fifth Amendment, and therefore reverse the judgment before us and reinstate the judgment of the District Court.

The Fifth Amendment provides that private property shall not be taken for public use without 'just compensation.' 'And 'just compensation' means the full monetary equivalent of the property taken. The owner is to be put in the same position monetarily as he would have occupied if his property had not been taken.' United States v. Reynolds, 397 U.S. 14, 16, 90 S.Ct. 803, 805, 25 L.Ed.2d 12 (footnotes omitted). See also United States v. Miller, 317 U.S. 369, 373, 63 S.Ct. 276, 279, 87 L.Ed. 336. To determine such monetary equivalence, the Court early established the concept of 'market value': the owner is entitled to the fair market value of his property at the time of the taking. New York v. Sage, 239 U.S. 57, 61, 36 S.Ct. 25, 26, 60 L.Ed. 143. See also United States v. Reynolds, supra, 397 U.S., at 16, 90 S.Ct., at 805; United States v. Miller, supra, 317 U.S., at 374, 63 S.Ct., at 280. And this value is normally to be ascertained from 'what a willing buyer would pay in cash to a willing seller.' Ibid. See United States v. Virginia Electric & Power Co., 365 U.S. 624, 633, 81 S.Ct. 784, 790, 5 L.Ed.2d 838.

By failing to value the improvements in place over their useful life—taking into account the possibility that the lease might be renewed as well as the possibility that it might not—the Court of Appeals in this case failed to recognize what a willing buyer would have paid for the improvements. If there had been no condemnation, Almota would have continued to use the improvements during a renewed lease term, or if it sold the improvements to the fee owner or to a new lessee at the end of the lease term, it would have been compensated for the buyer's ability to use the improvements in place over their useful life. As Judge Friendly wrote for the Court of Appeals for the Second Circuit:

'Lessors do desire, after all, to keep their properties leased, and an existing tenant usually has the inside track to a renewal for all kinds of reasons—avoidance of costly alterations, saving of brokerage commissions, perhaps even ordinary decency on the part of landlords. Thus, even when the lease has expired, the condemnation will often force the tenant to remove or abandon the fixtures long before he would otherwise have had to, as well as deprive him of the opportunity to deal with the landlord or a new tenant the only two people for whom the fixtures would have a value unaffected by the heavy costs of disassembly and reassembly. The condemnor is not entitled to the benefit of assumptions, contrary to common experience, that the fixtures would be removed at the expiration of the stated term.' United States v. Certain Property, Borough of Manhattan, 388 F.2d, at 601 602 (footnote omitted).

It seems particularly likely in this case that Almota could have sold the leasehold at a price that would have reflected the continued ability of the buyer to use the improvements over their useful life. Almota had an unbroken succession of leases since 1919, and it was in the interest of the railroad, as fee owner, to continue leasing the property, with its grain elevator facilities, in order to promote grain shipments over its lines. In a free market, Almota would hardly have sold the leasehold to a purchaser who paid only for the use of the facilities over the remainder of the lease term, with Almota retaining the right thereafter to remove the facilities—in effect, the right of salvage. 'Because these fixtures diminish in value upon removal, a measure of damages less than their fair market value for use in place...