A Primer on Tenants’ Rights to Condemnation Awards in New Jersey

by: Michael Realbuto
26 Sep 2022

When the government takes private property using its power of eminent domain, it is required to pay the property owner “just compensation.” With that being said, the allocation of a condemnation award is not always clear cut and legal disputes often arise in the context of leaseholds.

Allocation of a condemnation award to persons claiming an interest in property is generally a matter of no concern to the condemning authority. Jersey City Redevelopment Agency v. Costello, 252 N.J. Super. 247 (App. Div. 1991). The “unit rule” in New Jersey requires a single, lump-sum award reflecting the fair market value of the taking. Thus, the owners of subsidiary property interests must be compensated from the single award created by the condemnation action. Allocation of the single award among competing legal interest holders is a difficult task determined by the court in a specific allocation proceeding, which traditionally occurs after the award of just compensation is made.  As a result, if the parties in a condemnation matter do not agree on how an allocation could or should occur, any party can move to have the court decide how to allocate the compensation but if there are material facts in dispute, the allocation will then normally occur after the trial in which the jury awards just compensation for the taking.  That means that it is possible, if not likely, that multiple parties may be present at trial and may offer their own respective evidence about the claims and award of compensation.

The value of a tenant’s leasehold interest is evaluated and compensated from the lump-sum compensation. In many leaseholds, the allocation of proceeds and rights is often spelt out in lease language known as a “condemnation clause.” The lead case explaining the apportionment of the tenant’s interest is New Jersey Highway Auth. v. J. & F. Holding Co., 40 N.J. Super. 309, 314 (App. Div. 1956). In the absence of a qualifying or contrary stipulation of the parties, the total deprivation of the tenant’s possession and enjoyment of the premises by condemnation terminates the relationship between landlord and tenant. On the other hand, where a leasehold terminates under a valid lease “condemnation clause” and the tenant has waived its claim to any part of the award as to the value of the leasehold, the tenant lacks standing to participate in the allocation proceeding.

In the absence of waiver language in the lease, the termination of the leasehold does not prevent the tenant from asserting the value of its lease in the apportionment of the award. The tenant is given the opportunity to secure the value of the leasehold during allocation proceedings where it can point to “the period of the unexpired term of the lease, the options, if any, therein to renew or of the landlord to terminate, the characteristics of the demised premises and the amount of the rent reserved.” An unambiguous waiver of the tenant’s right to share in the proceeds of the condemnation will be strictly enforced by the courts. Therefore, it is vital for landlords and tenants to thoroughly vet any lease language regarding termination and the allocation of proceeds.

A tenant’s recoverable damage, if any, is determined by a comparison of the fair value of its leasehold, taking into account any right to renew, and the rent reserved. Wayne Co., Inc. v. Newo, Inc., 75 N.J. Super. 100 (App. Div. 1962). If a tenant’s interest is valuable because it is paying less than fair market rent at the time when the property is taken, the tenant may be entitled to a share of the award. Bloomfield Township v. Roasanna’s Figure Skating, 253 N.J. Super. 551 (App. Div. 1992). The burden is upon the tenant to disclose by a fair preponderance of the evidence that the fair market value of the lease was greater than the rent reserved. A landlord may demonstrate that the rent reserved in the lease represented less than fair market value. New Jersey courts have recognized that it is not easy to accurately ascertain and determine the market value of the unexpired term of a leasehold interest in real property taken by eminent domain. New Jersey Highway Auth. v. J. & F. Holding Co., 40 N.J. Super. 309 (App. Div. 1956); Newark v. Cook, 99 N.J. Eq. 527 (Ch. 1926).

Finally, it is important to note that a tenant or other occupant of property that has been taken by eminent domain may also be entitled to relocation assistance and benefits in addition to any rights that party may have to receive just compensation.  Relocation claims are ordinarily processed as a separate administrative proceeding and can include a variety of benefits including actual and reasonable moving expenses, expenses to disconnect, reconnect and accommodate machinery and equipment, and other related expenses.  These expenses should not be subject to recoupment by the landlord but tenants should still carefully review their lease agreements to ensure that they reserve the right to make these separate relocation claims against the condemning authority.

As you can see, it is very important for landlords and tenants to protect their respective rights regarding the allocation of a condemnation award in a lease agreement. McKirdy, Riskin, Olson & DellaPelle, P.C. has a proven track record of staunchly defending its client’s property rights. Please do not hesitate to contact our office for a complimentary consultation.