We get asked this question often. And, in true lawyer fashion, the answer is “maybe.” Before you roll your eyes (which you may have already done), hear me out. The answer is “maybe” because it depends on what the lease says or doesn’t say. The lease is the document that details the rights and obligations of the tenant in the real estate, and the lease language on condemnation, or the absence of such language, determines whether the tenant has a path to compensation.

Leases often include a provision that specifically deals with eminent domain actions (also known as condemnation). The lease may provide that the tenant is not entitled to any of the proceeds or damages from an eminent domain taking of the real estate. However, the lease may provide that the tenant is entitled to receive a certain portion of the overall just compensation paid by the entity taking the property by eminent domain. In its simplest form, let’s assume the lease says that the tenant is entitled to receive 30% of any just compensation award in a condemnation proceeding. If the just compensation award were $100,000, then the tenant would be entitled to receive $30,000. You can rightly assume that most lease provisions are not that clear. But the example drives home the point that the wording of the lease may dictate how much, if any, of the condemnation award the tenant is entitled to receive. 

What happens when the lease is silent on the issue? If there was only a partial taking, and the tenant can continue its occupation and use of the leased space unaffected, then the tenant may not receive any compensation. Otherwise, and most often in the event of a complete taking, Indiana law says that “[g]enerally, a tenant is entitled to compensation for an unexpired term of a lease terminated by condemnation.” Peter C. Reilly Trust v. Anthony Wayne Oil Corp., 574 N.E.2d 318, 320 (Ind. Ct. App. 1991). That raises the obvious question of how you value the unexpired term of the lease. According to the Indiana Supreme Court, the measure of damages “is the fair market value of the unexpired term of the lease over and above the rent stipulated to be paid.” State v. Heslar, 274 N.E.2d 261, 263 (Ind. 1971). If the fair market value is less than what the tenant will pay in rent, then the unexpired lease term has no market value to the tenant and no compensation would be due the tenant. Conversely, if the fair market value is more than what the tenant will pay, then the tenant’s leasehold has market value and the tenant would be entitled to recover damages. Typically, the “fair market value of the unexpired term” will be the subject of dispute in any eminent domain proceeding. If a tenant does not agree with the valuation others put on its interest, the tenant can always hire its own valuation expert and challenge the valuation in court.  

Regardless of whether the lease includes a provision concerning condemnation or not, it is important to remember that the entity taking the land just has to pay one price: the total just compensation for the real estate being taken. There may be several different parties with interests in the property, but those individual interests cannot collectively exceed the value of the real estate being taken.   

Tenants can sometimes recover damages for their leasehold interests if the leased property is taken by eminent domain. Valuing that interest or interpreting the lease provision that governs the effect of, and the tenant’s interest in, any condemnation proceeding can be challenging. That is why it’s so important to engage an attorney early in the condemnation process to better understand your rights and get a better sense of whether (and how much) you might be entitled to recover as just compensation.