Opinion ID: 1387222
Heading Depth: 3
Heading Rank: 1

Heading: Compensation Should be Paid for Any Improvements Which TNC Owned Under the Lease.

Text: The State claims that just compensation does not include the value of improvements made by the State as lessee because TNC did not contribute to the improvements and because a condemning authority should not pay for its own precondemnation improvements. The State's argument that TNC is not entitled to compensation for the improvements because it did not contribute to them is incorrect. A condemnee is entitled to compensation based on what it has lost, id. at 566, not based on its contributions to what it lost. In addition, in the transfer of the land to TNC, TNC succeeded to the interests of the United States in the land. 43 U.S.C. § 1613(g). As a result, TNC should be considered to have paid whatever consideration for the improvements the United States paid. The requirements in the lease that the State construct an airport on the site, the nominal rent paid under the lease ($10 a year), and the State's use of free fill from other BLM land (also selected by TNC) for improving the airport may be considered consideration for the non-removable improvements paid by the United States as lessor. The State's primary argument  that a condemning authority should not pay for improvements on the property it made as lessee  is supported by some precedent. In State v. Earl, 233 Ark. 348, 345 S.W.2d 20, 26 (1961), the court rejected the landowner's claim for compensation for improvements placed on the land by its original lessee, who subsequently assigned his interest to the condemning authority. The landowner originally leased the premises to another private individual for use as an airport. The lease required the lessee, as consideration for the lease, to sod the runway, provide necessary artificial drainage, construct fencing, and make other improvements. Id., 345 S.W.2d at 21-22. The State conceded that the improvements made by the original lessee amounted to several thousand dollars, and one witness testified that the improvements had a value of $25,000. Id., 345 S.W.2d at 26. The lease did not grant the lessee any right to remove the improvements. Id. The landowners claimed that they were entitled to compensation for the improvements because they had a reasonable expectation that they would receive them at the expiration of the lease. The court rejected this claim, holding that a condemnor need not pay for his own improvements[ [2] ] when they have been made prior to the act of condemnation. Id. (quoting 1 Lewis Orgel, Valuation under the Law of Eminent Domain 409 (2d ed. 1953)). In the sentence quoted by the court, Orgel is discussing condemnors who are technically trespassers. In a footnote to this sentence Orgel states: A somewhat analogous situation is presented where a lessee who has improved property subsequently condemns it. If the lessee has the right to remove the improvements, the lessor is of course not entitled to be compensated for their value nor is cost of removal taken into consideration since this does not increase the value except to the condemnor. But where the lessee has no right to remove the improvements, their value is properly taken into account, for in this case the lessor has by contract a right to the improvements on termination of the lease. 1 Orgel, supra, at 409 n. 1 (citations omitted). Orgel thus draws a distinction between pre-condemnation improvements made under a contract giving the landowner the right to keep improvements  in which case the condemnee gets compensation for the improvements  and pre-condemnation improvements which are made under a contract not allowing the lessor to retain improvements or which are made by a trespassing condemning authority. The Arkansas Supreme Court purported to rely on Orgel but did not follow this distinction; therefore, its decision in Earl is questionable. The distinction drawn by Orgel is a reasonable one. There is a difference between improving property under the mistaken belief that one has good title to it and improving property under a contract which specifically assigns the right to improvements to another party. As noted above, we have defined just compensation in terms of what the owner has lost. Gackstetter, 618 P.2d at 566. Where the condemning authority improves property under the mistaken belief that it owns the property or even with the intention to condemn the property immediately, the owner of the property has not lost anything by virtue of the premature construction. However, where the State specifically agrees to build improvements on leased property and leave them there at the termination of the lease, but subsequently condemns the property before the expiration of the lease, the owner of the property will lose his reasonable expectation of receiving the improvements at the end of the lease. [3] A number of cases have recognized the rule that the lessor's right to compensation for improvements built by the condemning authority/lessee is controlled by the terms of the lease. In United States v. Certain Space in Rand McNally Bldg., 295 F.2d 381 (7th Cir.1961), the United States entered into a lease which provided that the lessee would retain removable improvements but could not remove structural improvements. After making structural improvements, the United States condemned the building. The court stated that the rights of the parties were controlled by the terms of the lease. Id. at 383. The court concluded that the non-removable improvements became the property of the landowner by the contract of the parties and the property rights of the landowner therein were taken and extinguished by the government's exercise of its power of eminent domain. Id. at 384. In United States v. Five Parcels of Land, 180 F.2d 75 (5th Cir.), cert. denied, 340 U.S. 812, 71 S.Ct. 39, 95 L.Ed. 597 (1950), the United States leased land for the purpose of constructing a ship-building facility. To this end, the United States dredged a channel, filled and leveled portions of the land, and constructed structural improvements and facilities on the land. Id. at 75-76. The leases provided that the United States retained the right to remove facilities and improvements which it placed upon the land. Id. at 75. The landowners did not seek compensation for any removable improvements or facilities. Id. They did, however, seek compensation for the increased value of the land which resulted from the dredging, filling, and leveling. The court held that as the United States was not authorized to take back the fill, undo the leveling, or fill what had been dredged, the dredging, filling, and leveling were normal, incidental, and contemplated fruits of the leases which rightfully inured to the landowners. Id. at 76-77. In making this determination, the court relied on the terms of the leases. The owners were thus entitled to compensation for the value of the land as improved. Similar results were reached in United States v. 52.67 Acres of Land, 150 F. Supp. 347 (E.D.Ill. 1957), and United States v. Certain Parcels of Land, 90 F. Supp. 27 (W.D.Va. 1949). In 52.67 Acres, the court denied the landowner compensation for fixtures and structures affixed by the government lessee because the lease provided such fixtures and structures remained the property of the government and could be removed by the government at the end of the lease term. 150 F. Supp. at 349-50. The court also determined, however, that the grading, leveling, altering, and changing of the surface of the ... real estate could and should be considered as `fruits of the lease' and as becoming a part of the real estate and inuring to the benefit of the lessors. Id. at 351. In Certain Parcels, the lease provided that the government had the right to improve the property and that [a]ll such alterations, additions, structures, fixtures, and improvements except walks, service driveways, underground utilities (and appurtenances), and roads shall be and remain the property of the Government and may be removed from the premises by the Government. 90 F. Supp. at 29. The court concluded that on the subsequent condemnation of the property, the landowner was entitled under the lease to compensation for the property as improved with walks, service driveways, underground utilities, and roads. Id. at 33-34. The State argues that giving Teller compensation for the improvements would require the government to pay twice for the same thing, resulting in a windfall to Teller. While this windfall argument may have merit in the context of premature construction by a trespassing condemnor, see Anderson-Tully Co. v. United States, 189 F.2d 192, 197 (5th Cir.), cert. denied, 342 U.S. 826, 72 S.Ct. 47, 96 L.Ed. 624 (1951), it is not relevant where the pre-condemnation construction was governed by a contract between the parties. No windfall exists where the government has voluntarily entered into a contractual relationship with the landowner rather than condemning the property initially, and has either explicitly agreed to build improvements as part of the consideration for the lease or has, without contractually reserving its right to remove improvements, made improvements that cannot be easily removed. [4] As the court in Certain Parcels of Land stated in response to a similar windfall/pay twice argument: A brief answer to this argument is that it ignores entirely the obligation which the Government undertook with respect to the improvements when it entered into the lease. No doubt had the Government acquired the fee in this tract in 1944, when it was unimproved, the cost of it would have been much less than it is now required to pay. But instead it decided to lease the land under a contract whereby, in consideration for its use, it enhanced the value of the property. Having now at this later time decided to acquire the absolute title to the property, it is not ridiculous nor is it unjust that it should pay its present value. 90 F. Supp. at 34.