Mobil Oil Corp. v. Phoenix Cent. Christian Church

• Decision Date: 30 August 1983
• Docket Number: CA-CIV,I,No. 1,1
• Citation: 675 P.2d 284,138 Ariz. 397
• Parties: MOBIL OIL CORPORATION, a New York Corporation, Defendant-Appellee, v. PHOENIX CENTRAL CHRISTIAN CHURCH, an Arizona corporation; Arizona Rebekah Lodgendependent Order of Odd Fellows, Defendants-Appellants. 5509.
• Court: Arizona Court of Appeals

Page 284

675 P.2d 284

138 Ariz. 397

MOBIL OIL CORPORATION, a New York Corporation, Defendant-Appellee, v. PHOENIX CENTRAL CHRISTIAN CHURCH, an Arizona corporation; Arizona Rebekah Lodge No. 1, Independent Order of Odd Fellows, Defendants-Appellants.

No. 1 CA-CIV 5509.

Court of Appeals of Arizona Division 1, Department B.

Aug. 30, 1983.

Reconsideration Denied Oct. 21, 1983.

Review Denied Jan. 24, 1984.

Ryley, Carlock & Ralston by John W. Wall, Phoenix, for defendant-appellee

Burch & Cracchiolo, P.A. by Frank Haze Burch, Arda S. Rutherford, Edwin C. Bull, Phoenix, for defendants-appellants.

OPINION

GRANT, Acting Presiding Judge.

This is an action for an allocation of a condemnation award between the lessor and the lessee of the condemned property. We reverse the decision of the trial court because there is no evidence in the record to support the amount of damages awarded to the lessee.

The realty involved in this lawsuit is owned by Phoenix Central Christian Church, appellant, and leased to Mobil Oil Corporation, appellee. On January 28, 1963, Phoenix Central's predecessor in interest, as lessor, and Mobil, as lessee, executed a service station ground lease of a parcel situated at the southeast corner of Central and Southern Avenues in Phoenix, Arizona. The base term ran from April 1, 1964, through March 31, 1974, and included three options to renew for successive terms of five years each. During the first renewal period, on December 15, 1976, the City of Phoenix filed a complaint in condemnation in connection with the widening of South Central Avenue. A total of 2,471 square feet, or 21%, of Phoenix Central's parcel was taken. Improvements installed at lessee's expense were also taken.

The evidence in the record indicates that before the taking, the gas station had two gas pump islands on the western side of the leased property which pumped gas to cars on both sides of each island. After the taking, the western side of one of the islands could no longer be used, reducing the pumping locations from four to three. The gas pump island affected was a selfservice island which pumped a higher volume of gasoline than the inner island. Maneuvering and parking space at the station were also impaired by the taking. Mobil continues to operate a service station on the smaller site, and pays the same rent as it paid before the taking.

Phoenix Central, the City of Phoenix, and Mobil stipulated prior to trial that just compensation for the fair market value of the property taken was $25,000.00. The trial court awarded Mobil $1,400.00 for improvements taken. Phoenix Central does not contest this award. Phoenix Central does contest the allocation of the $23,600.00 balance of the $25,000.00 stipulated amount. The court allocated $12,638.00 to Phoenix Central. This sum was determined to be the present worth of Phoenix Central's reversionary interest of $23,600.00, using a nine percent annual discount rate of 7.29 years, the remaining term of the lease. The residual amount, or $10,962.00, plus $1,400.00 for improvements taken, for a total of $12,362.00 was allocated to Mobil.

Phoenix Central argues on appeal that Mobil did not prove damages to its leasehold interest. More specifically, they object to the trial court's utilization of the "present worth of discounted value" method (also referred to as the "capitalization approach") of allocation of damages between the parties in this case. They argue that the lessee is required to prove damages on the basis of evidence supporting the before and after "bonus value" ¹ of the leasehold interest. It is claimed that the "capitalization approach" sidesteps proof and, through the use of annuity tables, produces an amount to be awarded the lessor. Then, regardless of whether the leasehold suffers any damage, the residue of the total award is given to the lessee.

A lessee is entitled to a sum which will adequately compensate for any pecuniary loss resulting from the exercise of the power of eminent domain. State v. Carlson, 83 Ariz. 363, 321 P.2d 1025 (1958). The lessee is also entitled to the value of an option of renewal in addition to the value of the unexpired term of the lease. Id. The owner of the leasehold estate bears the burden of establishing the damages sustained to its leasehold estate as a result of the partial taking of the land. County of Maricopa v. Shell Oil Co., 84 Ariz. 325, 327 P.2d 1005 (1958). Where, as here, only a portion of the leasehold is condemned, the measure of damages is the difference between the fair market value of the lease before and after the taking. Id.; Annot. Eminent Domain--Leasehold, 17 A.L.R. 4th 337, 372 § 5 (1982); 29A C.J.S. Eminent Domain § 143, p. 616 (1965). While values and damages in condemnation proceedings are not always susceptible of precise proof, nevertheless, they must be arrived at through a recognized method which cannot be fundamentally unfair and unjust. City of Tucson v. Rickles, 109 Ariz. 82, 505 P.2d 253 (1973). Three traditional appraisal approaches for determining market value recognized by the courts of this and other jurisdictions are the "income approach," the "market data" or sales approach, and the "cost approach." City of Tucson v. Rickles; City of Scottsdale v. Eller Outdoor Advertising Co., 119 Ariz. 86, 579 P.2d 590 (App.1978).

Mobil Oil defends its capitalization approach for allocating damages as one recognized by the courts, Orange State Oil Co. v. Jacksonville Expressway Authority, 110 So.2d 687 (Fla.App.), cert. denied 114 So.2d 4 (Fla.1959); Department of Public Works & Buildings v. Metropolitan Life Insurance Co., 42 Ill.App.2d 378, 192 N.E.2d 607 (1963), as well as the appraiser's profession. See Boyer and Wilcox, An Economic Appraisal of Leasehold Valuation in Condemnation Proceedings, 17 U.Miami L.Rev. 245, 267-68 (1963); Speir, Allocation of the Recovery Between Lessor and Lessee, Institute on Eminent Domain 159, 165-66 (1968); Johnston, "Just Compensation" for Lessor and Lessee, 22 Vand.L.Rev. 293, 305 and n. 55 (1969). We note, however, that the capitalization approach has been highly criticized by commentators. E.g., Boyer and Wilcox, supra at 270. ² The sum of the values of the leasehold and the reversion, as independently determined, is often less than the market value of a fee simple estate in the land. Application of the capitalization approach in such cases confers a windfall upon the lessee, who receives the balance of the award after computation of the value of the lessor's interest. See Johnston, supra at 309. Conversely, where the aggregate value of leasehold and reversion exceeds the value of a fee simple estate, one of the condemnees will be undercompensated. Id. at 309-10.

The problem is compounded when options to renew are available, as they are here. The court utilized a 7.29 year remaining term based on the presumption that Mobil would remain a tenant for the duration of the first five-year renewal period and exercise the option for the second five-year renewal period. Phoenix Central argues that only the 2.29...