City and County of Honolulu v. Market Place, Ltd.

• Decision Date: 14 December 1973
• Docket Number: No. 5378,5378
• Citation: 517 P.2d 7,55 Haw. 226
• Parties: CITY AND COUNTY OF HONOLULU, a municipal corporation, Plaintiff-Appellant, Cross Appellee, v. MARKET PLACE, LIMITED, a Hawaii corporation, Defendant-Appellee, Cross- Appellant, Bank of Hawaii, Jiroichi Otani, Defendants, and DHS Corporation, a Hawaii Corporation, Defendant-Appellee.
• Court: Hawaii Supreme Court

Page 7

517 P.2d 7

55 Haw. 226

CITY AND COUNTY OF HONOLULU, a municipal corporation, Plaintiff-Appellant, Cross Appellee, v. MARKET PLACE, LIMITED, a Hawaii corporation, Defendant-Appellee, Cross- Appellant, Bank of Hawaii, Jiroichi Otani, Defendants,

and

DHS Corporation, a Hawaii Corporation, Defendant-Appellee.

No. 5378.

Supreme Court of Hawai'i.

Dec. 14, 1973.

Rehearing Denied Dec. 26, 1973.

Syllabus by the Court

1. Money expended in the development of property to a use more valuable than that to which it was actually put at the time of taking is not per se recoverable, but rather is merely admissible as evidence to show enhancement of the property's fair market value.

2. A lessee of condemned property who has expended money in the development thereof has not suffered damages within the meaning of article I, section 18 of the Hawaii Constitution entitling him to indemnification of his expenditures, and any compensation to which he is entitled must come from an allocation of the fair market value of the property to his leasehold hold interest, if any, at the time of the taking.

3. As a general rule the proper method of determining just compensation for property subject to several, independently held interests is to value it as an unencumbered freehold estate, with allocation of fair market value thus determined to be made thereafter among the various interests.

4. Where a landlord and tenant have contractually agreed as to the disposition of compensation in the event of condemnation, such an agreement is binding, and on the happening of such event becomes controlling.

5. Interest at the rate of 5% per annum is the proper or reasonable rate to be uniformly applied in computing blight of summons damages.

6. A condemnor's unconditional initial deposit with the clerk of court of estimated just compensation entitles the condemnor to immediate possession of the condemned property and also stops the running of interest as blight of summons damages on the deposited sum.

7. A condemnor's additional deposit of estimated just compensation, made subsequent sequent to the initial deposit of estimated just compensation upon which an order of possession was based, must be unconditionally for the use of the persons entitled thereto in order to escape interest charges as blight of summons damages.

8. Fair market value is not limited to the value for the use to which the land is actually put, but may include potential use value.

9. A condemnee should be allowed to make a reasonable argument for a probable use, and if such an argument is made, competent evidence tending to show the value of that use should be admitted.

10. The value of a reasonably probable use may be shown by expert testimony utilizing legitimate income stream analysis, but a trial court may properly reject as prejudicial evidence of a condemnee's estimates of income or raw data on hoped-for profits.

11. A condemnor may not introduce evidence of the taking itself or of steps preparatory thereto to show depreciation of the fair market value of the taken property.

12. A condemnee is entitled to introduce evidence that there was a reasonable probability of re-zoning to a higher use at the time of the taking.

13. A trial court's determination that a witness lacks the qualifications of an expert on value will not be reversed unless shown to be an abuse of discretion. Robert K. Richardson, Deputy Corp. Counsel, City & County of Honolulu, Honolulu (Richard K. Sharpless, Corp. Counsel, City & County of Honolulu, Honolulu, of counsel), for plaintiff-appellant, cross appellee.

Ted T. Tsukiyama, Honolulu, for defendant-appellee, cross appellant.

John H. Robinson, Honolulu, for defendant-appellee.

Before MARUMOTO, Acting C. J., ABE, LEVINSON, and KOBAYASHI, JJ., and Circuit Judge HAWKINS in place of RICHARDSON, C. J., disqualified.

LEVINSON, Justice.

This is an eminent domain proceeding arising out of a taking by the City and County of Honolulu of a parcel of oceanfront land at the foot of Diamond Head, for the purpose of extending Kapiolani Park. The land comprises 55,894 square feet in area and is improved by an expensive, two-story residential home. On the date of summons, August 25, 1969, it was owned by the defendant-appellee, cross-appellant Market Place, Limited, hereinafter referred to as MPL, which had leased it to the defendant-appellee DHS Corporation, hereinafter referred to as DHS, under a 'Developer's Lease' dated August 1, 1968.

By the terms of that instrument, DHS undertook to develop the subject property into an 11-unit, luxury low-rise condominium project. The lease was for a 75-year term, and specified a nominal rental until the initiation of construction, an annual rental of $15,300.00 during construction, and an annual rental of $100,600.00 for the 15-year period following the date of first occupancy. There was also a premium of $126,000.00 payable by DHS to MPL upon completion of the project. The lease was terminable upon, among other things, the failure of DHS to sell eight of 11 units by March 1, 1969 or to obtain a building permit for the project. It also contained a 'condemnation clause,' in which the parties agreed that DHS' leasehold would automatically terminate in the event the property was acquired by a public authority through eminent domain, and that compensation attributable to such acquisition would be payable exclusively to MPL. ¹

By March, 1969, DHS had sold no condominium units and the City was withholding a building permit for the project. Nonetheless, MPL did not exercise its power to terminate the lease. Indeed, on June 16, 1969 DHS filed suit in the first circuit court to compel the City to issue a building permit, and in due course, the court issued a writ of mandamus to this effect. By that time, DHS had expended $86,373.61 in initial development costs for the proposed project, including expenses for feasibility studies, preliminary and final architectural plans and drawings, promotional literature, local and national advertising, and legal costs and fees.

On August 5, 1969, the City Council adopted an ordinance which amended the General Plan for the City and County of Honolulu for the Diamond Head area, changing the use thereof from hotel-apartment and residential to park. By his measure the City and County was committed to making an extension of Kapiolani Park in the direction of Diamond Head, and pursuant thereto it filed this suit to condemn the subject property twenty days after the passage of the ordinance. Nearly one year later, on May 28, 1970, the City and County deposited with the clerk of the first circuit court $961,500.00 as estimated just compensation for the property pursuant to HRS § 101-29. On June 5, 1970, the City and County filed a motion for Order Putting Plaintiff in Possession, and on the same date the trial court issued an order to this effect, to become effective ten days after service of the order on the parties. Although the condemnees were served on June 10, 1970, they did not withdraw this money until June 15, 1970, on which date it was agreed by the condemnees that DHS could satisfy the full measure of its claim for just compensation, $86,373.61, from the deposit thus withdrawn. At trial the only issue was the amount of just compensation due the condemnees, and on April 14, 1972 the jury returned a verdict in favor of DHS in the amount of $86,373.61 and in favor of MPL in the amount of $950,198.00. The former figure was a verdict directed by the trial court and the latter figure represented the jury's estimation of the fair market value of the subject property on August 25, 1969, the date of summons.

Prior to the entry of judgment on the foregoing awards, on May 19, 1972, the City and County deposited $75,071.61 with the circuit court as an additional estimate of just compensation. Because certain conditions were attached to this deposit, however, this sum was not withdrawn by the condemnees until June 2, 1972. On July 14, 1972, the trial court entered a judgment in the case which incorporated the jury's verdict and which, in addition, awarded interest at various rates as blight of summons damages on the $86,373.61 amount payable to DHS and the $950,198.00 amount payable to MPL.

From this judgment MPL and the City and County appealed, raising numerous points with respect to the conduct of the trial, the correctness of jury's awards of just compensation and the trial court's adjudication of interest thereon.

I. THE APPEAL OF THE CITY AND COUNTY

A. The Award of $86,373.61 to DHS

The trial court directed the jury to return a verdict in the amount of $86,373.61 as 'damages' to DHS for expenditures it made in developing the property for condominium use pursuant to the 'Developer's Lease.' This award was not intended to represent any component of the fair market value of the property to which DHS was entitled, but rather constituted compensation to DHS for its out-of-pocket expenditures for development that were rendered worthless by the condemnation. The trial court apparently considered itself bound to direct the jury to make this award by article I, section 18 of the Hawaii Constitution, which provides that '(p)rivate property shall not be taken or damaged for public use without just compensation' (emphasis added). It was not until a constitutional amendment in 1968 that the words 'or damaged' were included in this provision.

One purpose of adding these words to the Constitution was to conform it to the constitutions of 25 other states with respect to the range of property interests compensable in the exercise of the power of eminent domain. See Mattoch, The Amended Just Compensation Provision of Hawaii Constitution: A New Basis for Indemnification of the Condemnee, 6 Hawaii Bar J. 55 (1969). Prior to the amendment, only the owner of physically 'taken' property was entitled to compensation in Hawaii, and those whose property was merely consequentially 'damaged...