When is a lease that everyone agrees is worth more than a million dollars totally worthless? When it’s an eminent domain case and the court applies the “undivided fee” rule, that’s when.
Update: Professor Kanner adds his thoughts here.
Most eminent domain attorneys know about the infamous undivided fee rule (aka as the “unit rule” in some jurisdictions), a legal fiction which requires a trial courtto calculate valuation of property as if a single owner possessed everything, even when it is held by more than one interest. Under the rule, the condemnor is not required to compensate eachseparate interest in the property, but treats the property as if it had one owner.
For example, ifa condemned building is being leased to tenants, compensation ismeasured by the value of the undivided fee simple absolute value of thebuilding, not the aggregate value of the building and the leases. The building owner and the tenants must divide up the condemnation award by contract. In many if not most cases, the rule is uncontroversial. But in a few cases its rigid application works very unusual and unfair results.
A recently-filed cert petition challenges the rule’s constitutionality, asserting that when it is applied to deprive a property owner of a valuable lease, it violates the Fifth and Fourteenth Amendments’ guarantees of Just Compensation.
In City of Milwaukee Post No. 2874 Veterans of Foreign Wars of the United States v. Redevelopment Agency of the City of Milwaukee, No. 2006AP2866 (July 17, 2009), a sharply divided Wisconsin Supreme Court applied the rule to conclude first that a tenant who owned an admittedly valuable long term lease ($1 rent per year, plus goodies) was not entitled to any compensation because the value of the building was zero.
We deconstructed the Wisconsin Supreme Court’s opinion in this post: Wisconsin Supreme Court: The Whole Is Lesser Than The Sum Of Its Parts.
The petition presents the following issues:
When the Milwaukee Redevelopment Authority took by eminent domain the 11-story downtown building that housed the offices of Post 2874 of the Veterans of Foreign Wars (VFW) as a long-term lessee, the Wisconsin Supreme Court held 4 to 3 that—as a matter of law—the VFW was not entitled to present any evidence of value, nor entitled to recover any compensation whatever for its concededly valuable long-term leasehold.
The questions presented are:
1. Does it violate the 5th and 14th Amendments for Wisconsin—like some jurisdictions, but in conflict with others and with this Court’s repeated insistence that the appropriate question in an eminent domain proceeding is “what has the owner lost, not what has the taker gained”—to apply its “undivided fee rule” in such circumstances?
2. Did the court below violate VFW’s constitutional right to due process of law by precluding it, as the owner of a valuable interest in property being taken through eminent domain, from introducing any evidence of the value of its leasehold property?
The petition points out the split of authority in the lower courts on the applicability of the undivided fee rule. Some twenty states (Hawaii included) apply the rule regardless of the circumstances. Seven other jurisdictions never apply the rule. Still others (eight states and several federal courts) apply the rule, but are willing to deviate from it when its application would deny just compensation. A split of authority is one of the surest tickets to Supreme Court review. To add to this case’s chances, the Court has appeared to be interested in the question of just compensation recently. During the oral arguments in Kelo v. City of New London, for example, two Justices asked counsel about it, even though just compensation was not at issue in that case.
The petition sums up the basic issue, and the equities:
The question is whether valuation by this fictional technique satisfies the 5th and 14th Amendments’ guarantee that those whose property is commandeered for public use will receive just compensation, usually defined as fair market value. The result below speaks eloquently. The Veterans of Foreign Wars received $0 as compensation for a long-term lease, a lease that the majority opinion had to concede had value, even though application of the undivided fee rule forbade the VFW from presenting any evidence as to that value or receiving any compensation from the Redevelopment Authority for its taking.
Petition at 4-5. More to follow if and when a brief in opposition — currently due no later than May 5, 2010 — is filed.
The case is docketed as No. 09-1204 (docket entry here). This is one worth watching closely.