New Haven Unified School Dist. v. Taco Bell Corp.

• Decision Date: 11 May 1994
• Docket Number: No. A058609,A058609
• Citation: 30 Cal.Rptr.2d 469,24 Cal.App.4th 1473
• Parties: , 90 Ed. Law Rep. 1131 NEW HAVEN UNIFIED SCHOOL DISTRICT, Plaintiff and Appellant, v. TACO BELL CORPORATION, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

Page 469

30 Cal.Rptr.2d 469

24 Cal.App.4th 1473, 90 Ed. Law Rep. 1131

NEW HAVEN UNIFIED SCHOOL DISTRICT, Plaintiff and Appellant, v. TACO BELL CORPORATION, Defendant and Respondent.

No. A058609.

Court of Appeal, First District, Division 1, California.

May 11, 1994.

Review Denied Aug. 11, 1994.

Quaresma, Benya, Hall, Connich, O'Hara & Nixon, David M. O'Hara, Fremont, for appellant.

Tobin & Tobin and Martin H. Orlick, San Francisco, for respondent.

NEWSOM, Associate Justice.

New Haven Unified School District (School District), the plaintiff in an action to condemn a leasehold interest in Union City, California, appeals from a judgment awarding compensation to the lessee, Taco Bell Corporation (Taco Bell).

In 1989, School District announced plans to expand a high school within its jurisdiction by acquiring an adjacent shopping center along Alvarado Niles Road, a principal thoroughfare of Union City. Later that year, it filed a complaint in eminent domain against the owner of the shopping center, Howard Van Orden, Jr., and each of the tenants, including Taco Bell. The School District ultimately negotiated purchase of the underlying fee from the landlord, Van Orden.

Taco Bell had operated its restaurant in the shopping center under a long-term lease which was negotiated in 1975 between the predecessor of Van Orden and another restaurant chain specializing in Mexican fast food. The lease extended to the year 2006, including one renewal period plus an option to extend for a further 10 years beyond 2006, and offered substantially below market rental. Taco Bell took over operation of the restaurant in 1983 after purchasing the other restaurant chain. The restaurant proved to be highly profitable under its management, earning operating profits of over $100,000 a year, and owed part of its success to the favorable terms of the 1975 lease.

After receiving notice of School District's intention to acquire the restaurant, Taco Bell began a search for another site. Within two years, it succeeded in leasing an existing restaurant only .4 miles away at a prime location within the existing trade area--the intersection of Alvarado Niles Boulevard and Decoto Road, the two most heavily traveled streets in this part of Union City. In April 1991, it moved the restaurant to the new location. Though offering certain benefits, the relocation entailed a capital investment of $625,000 and required Taco Bell to enter into a lease with higher rental. At the time of trial, it appeared that the new restaurant would generate higher sales but incur additional operating costs.

The proceedings against Taco Bell came on for trial on January 7, 1992, before the Honorable Richard A. Hodge. Apart from the minor issue of trade fixtures, Taco Bell sought compensation for loss of goodwill. Two expert witnesses, Michael Elliot-Jones and Jeffrey Martin, valued the goodwill of the former restaurant location by projecting the anticipated cash flow of the restaurant to the year 2006--the end of the lease term. This figure was then discounted to arrive at a present value. By this method, Elliot-Jones valued the goodwill at $866,000; Martin put the value at $963,937. Both agreed that the forced relocation of the restaurant resulted in a complete loss of goodwill because of the relocation costs and higher expenses at the new location.

School District's expert witness, Aaron Amster, distinguished between goodwill enjoyed by the restaurant at the former location and the leasehold bonus value representing the value of the below market rental over the remaining lease term. He valued the goodwill at $205,000 and found that the restaurant retained goodwill worth $121,000 at the new location, resulting in a net loss of only $84,000. Through separate calculations, he assigned a value of $283,000 to the bonus value of the Taco Bell's favorable lease which was lost in the condemnation proceeding.

The trial court adopted the general approach of Taco Bell's experts but modified several assumptions to arrive at the value of $525,000 for lost goodwill. The statement of decision did not assign a specific value to leasehold bonus value, or even distinguish between goodwill and leasehold bonus value, but it clearly reveals that the court included compensation for the loss of the favorable terms of the original lease in the compensation for loss of goodwill. The court separately awarded $59,000 for loss of trade fixtures resulting from the taking of the restaurant leasehold. In further orders, the court awarded to Taco Bell costs of $6,418.17, interest of $38,922.65, and litigation expenses of $229,859.98.

In its first assignment of error, School District insists on the distinction between leasehold bonus value and goodwill. Though the distinction may be academic in some cases, it assumes practical importance here because of a deleted provision of the 1975 lease referring to "bonus value." We will examine the distinction and then consider the lease provision.

"Historically, business goodwill was not an element of damages under eminent domain law. As recently as 1975, the California Supreme Court reaffirmed the principle that damage to a business conducted on property condemned for public use was not compensable as a property right under the just compensation clause of the California Constitution." (Community Development Com. v. Asaro (1989) 212 Cal.App.3d 1297, 1301, 261 Cal.Rptr. 231.) A business lessee, however, did have certain rights of compensation; the cases held that "a lessee is entitled to the fair market value of his leasehold interest in the part taken." (S.F. Bay Area Rapid Transit Dist. v. McKeegan (1968) 265 Cal.App.2d 263, 271, 71 Cal.Rptr. 204; County of San Diego v. Miller (1975) 13 Cal.3d 684, 688, 119 Cal.Rptr. 491, 532 P.2d 139; Costa Mesa Union Sch. Dist. v. Security First Nat. Bk. (1967) 254 Cal.App.2d 4, 10, 62 Cal.Rptr. 113.) The principle was first established in the early case, Kishlar v. Southern Pacific R.R. Co. (1901) 134 Cal. 636, 66 P. 848, which held: "the measure of damages was the market value of the lease,--what, upon the evidence, it would bring if the plaintiff desired to sell, and a purchaser desired to buy and paid a fair price." (Id. at p. 638, 66 P. 848.)

As proof of market value, the Kishlar court admitted evidence of "what he [the lessee] paid as rental, and what the market value of the rental was, regardless of what he paid." (134 Cal. at p. 638, 66 P. 848.) A later decision, City of Pasadena v. Porter (1927) 201 Cal. 381, 385, 257 P. 526, described this element of compensation as the "bonus value of the lease," the term generally employed in the legal literature. (6 Miller & Starr, Current Law of Cal. Real Estate (2d ed. 1989) § 18.83, p. 203, fn. 43.) The bonus value can be more precisely defined as the present value of the difference between economic rent, i.e., the value of market rental, and the contract rent through the remaining lease term. (Horgan, Some Legal and Appraisal Considerations in Leasehold Valuation under Eminent Domain (1953) 5 Hastings L.J. 34, 36.)

The bonus value usually assumes importance only in long-term commercial leases. Condemnation of the leased premises serves to terminate a lease, releasing the lessee from further obligation to pay rental; thus, the value of the lost possession must be offset by the value of the cancelled rental obligation. In short-term leases, the lessee will have at best a small claim against the condemning authority. In long-term leases, which typically involve commercial properties, the lessee may still have no claim if the lease rental equals or exceeds the market rental. But the parties may sometimes miscalculate, or bargain away, increases in market rental over the lease term. Where this occurs in the negotiation of long-term leases, the lease bonus value may amount to a considerable sum. (See Goldberg, Merrill & Unumb, Bargaining in the Shadow of Eminent Domain: Valuing and Apportioning Condemnation Awards Between Landlord and Tenant (1987) 34 UCLA L.Rev. 1083, 1086-1092.)

A correlative rule limits the lessor's claim of compensation to the present value of the rental owing under the actual terms of the lease. "Thus, the measure of the value of the Lessor's interest is: (a) The present worth (discounted value) of the future net rents under the terms of the lease; in addition to (b) The present worth (discounted value) of the property at the end of the lease, which is called the reversionary value." (State of California v. Whitlow (1966) 243 Cal.App.2d 490, 498, 52 Cal.Rptr. 336; County of Los Angeles v. American Sav. & Loan Assn. (1972) 26 Cal.App.3d 7, 9, 102 Cal.Rptr. 439.)

Whether or not the lessor and lessee are joined in a single proceeding (see Code Civ.Proc., § 1260.220), these rules will ordinarily result in an aggregate award to both lessor and lessee equal to market value of the property. Where the lease rental falls below market value, the lessor will have a claim to less than the full market value of the property, since he is restricted to the present value of actual contract rental; but the lessee will have a right to recover the balance of the market value, above that recovered by the lessor, as lease bonus value.

Recovery of business goodwill in a condemnation proceeding was first authorized in 1975 by the enactment of Code of Civil Procedure section 1263.510 as part of a comprehensive revision of eminent domain law. Subdivision (b) of section 1263.510 defines goodwill as follows: "Within the meaning of this article, 'goodwill' consists of the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage." While goodwill as so defined is conceptually distinct from leasehold bonus value, the statutory definition was construed in People ex rel. Dept. of Transportation v. Muller (1984) 36...