Does Minimum Compensation Have Any Impact on the Unit Rule?

Under the traditional method of valuing property (fair market value based upon appraisals) the "Unit Rule" required that a gross award be made for the property as a whole, which would then be allocated between the various parties holding an interest in the property based upon the amount of damage they will suffer as a result of the taking. County of Hennepin v. Holt, 207 N.W.2d 723 (Minn. 1973). Under the Unit Rule no party has a right to any award made to the other by the condemning authority because it is their compensation for the damages they will incur as a result of the taking of their interest in the property. Id.

In the case of a tenant with a compensable leasehold interest the commissioners determine the overall value of the property being taken and then apportion that award between the owner of the property and the tenant. However, the award being apportioned is based upon the value of the property being taken.

This raises a two potentially interesting questions:

1. Whether a Minimum Compensation claim by a property owner/occupant under Minnesota Statute 117.187 affects a tenant's ability to make a leasehold interest claim under the Unit Rule.
2. If a Minimum Compensation claim made by the property owner/occupant does not affect a tenant's ability to make a leasehold interest claim, does that tenant still have a traditional leasehold valuation appraisal done to calculate their damages.

As noted above, the Unit Rule requires a gross award for the property being taken, which is then apportioned between the various parties having an interest in the property. However, under Minimum Compensation, the damages paid to the property owner/occupant are not based upon the fair market value of their property, but upon what it will cost them to purchase a comparable property within their community.

This means the property owner/occupant is paid what it will cost for them to buy another property, which, in many cases, will be more than the appraised fair market value. This also means there is no traditional gross award for the property being taken that can be apportioned among the various parties having an interest in the property. If a tenant's leasehold interest claim is based upon a leasehold advantage they have over the market for the property they occupy, can they make a claim to a Minimum Compensation award when that payment is not based upon the property they occupy.

The easy answer is to simply act as if the Minimum Compensation payment is just another measure of damages like fair market value and that is the gross award that must be apportioned, but is that the right course of action to take. Couldn't a property owner/occupant just as easily argue that there is no gross award for the property being taken because the tenant's long-term lease does not contribute to the determination of the damages awarded and so no apportionment should occur. There is no easy answer to this question and because of the limited number of leasehold interest claims, this may just be an academic exercise anyway.

Assuming a tenant can make a leasehold interest claim in a Minimum Compensation case, is the traditional leasehold advantage appraisal still the best way to make that claim. As the determination of a leasehold advantage is based upon the tenant's rent versus what they should be paying to occupy a similar property, there really is no relation to a property owner/occupant's Minimum Compensation claim and so it would appear that the traditional leasehold advantage appraisal would still be the best way to document a tenant's damages.

Practically speaking, a Minimum Compensation claim may also make it easier for the property owner/occupant to accept the payment for a tenant's leasehold advantage. The reason for this is that the gross award is no longer the fair market value of the property, with any payment to a tenant is coming right off the top of what the property owner would be entitled to receive for their property. Instead, in a Minimum Compensation case the gross award can be substantially higher than the fair market value of the property, which would mean the property owner/occupant could pay the tenant for the value of their leasehold advantage and still receive more than the appraised value of the property.

This exact scenario happened to me in a recent leasehold interest claim in the out-state area. In that case the property owner/occupant could not stand the thought of having to pay my client anything for the value of his leasehold advantage (following the Minnesota Supreme Court's decision in the MAC v. Noble case, http://www.lawlibrary.state.mn.us/archive/supct/0904/OPA062400-0409.pdf the lease had a questionable condemnation clause). On several occasions I offered to assist the property owner/occupant with making a Minimum Compensation claim as a way to increase the amount of damages they were potentially entitled to receive and to make the payment to my client more palatable. However, the property owner/occupant, and their attorney, refused my offers and as far as I am aware only made a claim for the property based upon a traditional fair market value analysis.

In the end we were able to settle my client's leasehold interest claim and instead of that payment coming out of a larger pot of money based upon Minimum Compensation, it came right off the top of the appraised fair market value for the property. I am not sure which process would have been better, but I know what process I would have chosen had I been the property owner/occupant.

Do you have any thoughts on this issue?