People By and Through Dept. of Public Works v. Lynbar, Inc.

• Decision Date: 25 August 1967
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE of the State of California, Acting By and Through the DEPARTMENT OF PUBLIC WORKS, Plaintiff and Appellant, v. LYNBAR, INC., a corporation, Tidewater Oil Company, a corporation, and Tide Water Realty Company, a corporation and County of Los Angeles, a body politic and corporate, Defendants and Respondents. Civ. 29226.

Page 320

62 Cal.Rptr. 320

253 Cal.App.2d 870

The PEOPLE of the State of California, Acting By and Through the DEPARTMENT OF PUBLIC WORKS, Plaintiff and Appellant, v. LYNBAR, INC., a corporation, Tidewater Oil Company, a corporation, and Tide Water Realty Company, a corporation and County of Los Angeles, a body politic and corporate, Defendants and Respondents.

Civ. 29226.

Court of Appeal, Second District, Division 3, California.

Aug. 25, 1967.

Rehearing Denied Sept. 21, 1967.

Hearing Denied Nov. 22, 1967.

Harry S. Fenton, Sacramento, R. B. Pegram, Joseph A. Montoya, Richard L. Franck and Philip F. Lanzafame, Los Angeles, for appellant.

Ervin, Cohen & Jessup, Melvin S. Spears, Beverly Hills, Jerrold A. Fadem and Gideon

Kanner, Los Angeles, for respondent Lynbar, Inc.

John C. Sample, Jr., Los Angeles, for respondent Tidewater Oil Co.

COBEY, Associate Justice.

This is an appeal by the condemnor, the People of the State of California acting by and through the Department of Public Works, from a judgment in condemnation for freeway purposes awarding to the condemnees, Lynbar, Inc. et al, ¹ the sum of $125,000 for the taking in fee simple absolute by the condemnor of certain real property and all of the interests therein.

This judgment rests upon a stipulation of the parties, made in open court, that $125,000 was the fair market value of the real property involved as of the valuation date of August 1, 1963, or date of condition as it is sometimes known. This stipulation, however, expressly reserved to the condemnor all of its rights of appeal from the subsequent judgment thereon.

This appeal by the condemnor nevertheless, is grounded solely on the proposition that since this valuation of $125,000 is based in part upon the effect of the existence of Tidewater's leasehold in the real property taken, such valuation is legally improper and impermissible as contrary to the codification of the undivided fee rule accomplished impliedly by Code of Civil Procedure, section 1246.1.

On or about May 24, 1961, Lynbar, Inc. ground leased the real property involved, which was then the site of an operating retail service station in the northern part of the City of Long Beach, to Tidewater for 20 years, commencing on June 1, 1961, at a minimum rental of $725 per month. On August 1, 1963, the aforementioned valuation date, this lease, which was quite advantageous to Lynbar, Inc., was in full force and effect and had 17 years 10 months to run. The retail service station on the property was then in full operation.

The condemnees' sole valuation witness, Metcalfe, testified that in his expert opinion this service station site, including all the interests therein, had a fair market value on the aforementioned August 1, 1963, of $180,000 giving consideration to the existence of this leasehold then being used by the lessee, Tidewater, which had assets of 'about a billion dollars.' At the conclusion of Metcalfe's testimony the condemnor moved to strike his testimony on the ground that since it had elected to proceed in this case under the aforementioned Code of Civil Procedure, section 1246.1, the fair market value of the property sought to be condemned must be valued as if it were in a single ownership, and this Metcalfe obviously had not done. The trial court initially decided to grant this motion but after further argument denied it.

The condemnor's first valuation witness, Flavell, testified that in his expert opinion the property involved had a fair market value as of the aforementioned August 1, 1963, of $55,000. On cross-examination and over objection, he was asked what would be the effect on his opinion if he were to take into account the existence of Tidewater's leasehold. He replied that this would raise his opinion of the property's fair market value to $89,475.

The condemnor's second valuation witness, Culver, testified that in his expert opinion, the property involved, in a single ownership, had a fair market value as of the aforementioned August 1, 1963, of $52,000 but that his opinion of such value rose to $125,000 when he took into account Tidewater's existing leasehold in the property. Thereafter, with this witness still on the stand, the parties stipulated, in open court, as indicated at the outset of this opinion, to a fair market value of the property involved of $125,000, subject to the condemnor's right to attack such valuation on appeal.

The aforementioned Code of Civil Procedure, section 1246.1, since its enactment in 1939, has always read as follows: 'Where there are two or more estates or divided interests in property sought to be condemned, the plaintiff is entitled to have the amount of the award for said property first determined as between plaintiff and all defendants claiming any interest therein; thereafter in the same proceeding the respective rights of such defendants in and to the award shall be determined by the court, jury, or referee and the award apportioned accordingly. The costs of determining the apportionment of the award shall be allowed to the defendants and taxed against the plaintiff except that the costs of determining any issue as to title between two or more defendants shall be borne by the defendants in such proportion as the court may direct.'

It is the condemnor's position that this statute requires, when a condemnor elects to use it, as here, that the fair market value of the property sought to be condemned must be determined as if the property were held in a single undivided ownership regardless of the fact that actually, on the valuation date, the property was owned by more than one owner, and such condition of multiple ownership actually enhanced its fair market value on that date.

In support of this position the condemnor argues that this is the established California law under People ex rel. Department of Public Works v. S & E Homebuilders, Inc., 142 Cal.App.2d 105, 107, 298 P.2d 53, hearing denied, and El Monte School Dist. v. Wilkins, 177 Cal.App.2d 47, 54--55, 1 Cal.Rptr. 715, hearing denied; that this is the general rule elsewhere as well in condemnation valuations of this type of divided fee, based upon the application of the simple mathematical principle that the sum of the valuations of the separate parts of the whole cannot exceed (or raise) that of the whole. (Commonwealth of Kentucky, etc. v. Sherrod, Ky., 367 S.W.2d 844, 849); that this view is consistent with the fundamental in rem and real property nature of condemnation proceedings since what is being ignored thereby is the effect on the fair market value of the property of a purely personal contractual right of the lessor to receive rent over a period of time; ² and that this view is in accord with the governing constitutional principle of just compensation because it permits the condemnor to pay only the price of what it actually seeks to acquire, which is an undivided fee, instead of the higher price of what the sellers have to sell, which is a fee in divided ownership. In short, under the constitutional principle of just compensation, the condemnor should pay the fair market value of only the property it actually takes and not the fair market value of that property plus the value of the lessor's personal right to receive rents under an existing lease over an extended period of time.

This undivided fee rule is undoubtedly the majority view within the United States and support for it may be found quite generally in the condemnation treatises and cases which, however, also recognize the minority rule covering such a situation--the aggregate of interests rule--and also various exceptions to the application of the majority rule. (See Notes, 69 A.L.R 1263; 166 A.L.R. 1211; 1 Orgel, Valuation Under Eminent Domain, 2d ed. 1953, ch. IX; 4 Nichols, Eminent Domain, §§ 12.36, 12.42; Jahr, Eminent Domain (1957), ch. XVIII; 2 Lewis, Eminent Domain, 3d ed. 1909, § 716.)

The condemnees' position in this case is that the question before us for decision is whether the effect upon the fair market value of the property taken in condemnation of the existence of a lease, having a relatively long unexpired term and a comparatively high rental, can and should be taken into consideration in determining that value. They argue that this question is solely an evidentiary one which must be answered in the affirmative in view of People ex rel. Department of Public Works v. Dunn, 46 Cal.2d 639, 641--642, 297 P.2d 964, and the comparatively new statute providing special rules of evidence applicable only to eminent domain and inverse condemnation proceedings, now article II, chapter 1 of Division 7 of the new Evidence Code (§§ 810 through 822) ³ and particularly section 817 thereof.

Section 817, in part a codification of the rental income holding of the Dunn case, provides in relevant part as follows: 'When relevant to the determination of the value of property, a witness may take into account as a basis for his opinion the rent reserved and other terms and circumstances of any lease which included the property or property interest being valued or any part thereof which was in effect within a reasonable time before or after the date of valuation.'

It is true that in the Dunn case, a section 1246.1 case, ⁴ our Supreme Court expressly recognized the general rule that rental income is a proper element to be considered in arriving at just compensation in eminent domain proceedings and on this basis held that the trial court in that case committed reversible error when it struck the testimony of one of the condemnees' expert valuation witnesses and instructed the jury to disregard all of his testimony with respect to an existing lease on the property. But we do not regard this decision as controlling here in view of the fact, among other things, that its existence and contents were both called specifically to our Supreme Court's attention when a hearing was denied by that court in the aforementioned S & E case ⁵ which...