Almota Farmers Elevator & Warehouse Co. v. United States

409 U.S. 470, 93 S. Ct. 791, 35 L. Ed. 2d 1, 1973 U.S. LEXIS 138

• Court: Supreme Court of the United States
• Decided: January 16, 1973
• Docket: 71-951
• Status: Published

Opinions

Mr. Justice Stewart

delivered the opinion of the Court.

Since 1919 the petitioner, Almota Farmers Elevator & Warehouse Co., has conducted grain elevator operations on land adjacent to the tracks of the Oregon-Washington. Railroad & Navigation Co. in the State of Washington. It has occupied the land under a series of successive leases from the railroad. In 1967, the Government instituted this eminent domain proceeding to acquire the petitioner’s property interest by condemnation. At that time there were extensive buildings and other improvements that had been erected on the land by the petitioner, and the then-current lease had 7y% years to run.

In the District Court the Government contended that just compensation for the leasehold interest, including the structures, should be “the fair market value of the legal rights possessed by the defendant by virtue of the lease as of the date of taking,” and that no consideration should be given to any additional value based on the expectation that the lease might be renewed. The petitioner urged that, rather than this technical “legal rights theory,” just compensation should be measured by what a willing buyer would pay in an open market for the petitioner’s leasehold.

As a practical matter, the controversy centered upon the valuation to be placed upon the structures and their appurtenances. The parties stipulated that the Government had no need for these improvements and that the petitioner had a right to remove them. But that stipulation afforded the petitioner only what scant salvage value the buildings might bring. The Government offered compensation for the loss of the use and occupancy of the buildings only over the remaining term of the lease. The petitioner contended that this limitation upon compensation for the use of the structures would fail to award what a willing buyer would have paid for the lease with the improvements, since such a buyer would expect to have the lease renewed and to continue to use the improvements in place. The value of the buildings, machinery, and equipment in place would be substantially greater than their salvage value at the end of the lease term, and a purchaser in an open market would pay for the anticipated use of the buildings and for the savings he would realize from not having to construct new improvements himself. In sum, the dispute concerned whether Almota would have to be satisfied with its right to remove the structures with their consequent salvage value or whether it was entitled to an award reflecting the value of the improvements in place beyond the lease term.

In a pretrial ruling, the District Court accepted the petitioner's theory and held that Almota was to be compensated for the full market value of its leasehold “and building improvements thereon as of the date of taking . . . , the total value of said leasehold and improvements ... to be what the interests of said company therein could have been then sold for upon the open market considering all elements and possibilities whatsoever found to then affect the market value of those interests including, but not exclusive of, the possibilities of renewal of the lease and of the landlord requiring the removal of the improvements in the event of there being no lease renewal.” The court accordingly ruled that the petitioner was entitled to the full fair market value of the use of the land and of the buildings in place as they stood at the time of the taking, without limitation of such use to the remainder of the term of the existing lease.

On appeal, the Court of Appeals for the Ninth Circuit reversed, 450 F. 2d 125; it accepted the Government’s theory that a tenant’s expectancy in a lease renewal was. not a compensable legal interest and could not be included in the valuation of structures that the tenant had built on the property. It rejected any award for the use of improvements beyond the lease term as “compensation for expectations disappointed by the exercise of the sovereign power of eminent domain, expectations not based upon any legally protected right, but based only . . . upon ‘a speculation on a chance.’ ” 450 F. 2d, at 129. The court explicitly refused to follow an en banc decision of the Court of Appeals for the Second Circuit, relied upon by the District Court, which had held that for condemnation purposes improvements made by a lessee are to be assessed at their value in place over their useful life without regard to the term of the lease. United States v. Certain Property, Borough of Manhattan, 388 F. 2d 596, 601.

In view of this conflict in the circuits, we granted certiorari, 405 U. S. 1039, to decide an important question of eminent domain law: “Whether, upon condemnation of a leasehold, a lessee with no right of renewal is entitled to receive as compensation the market value of its improvements without regard to the remaining term of its lease, because of the expectancy that the lease would have been renewed.” ¹ We find that the view of the Court of Appeals for the Second Circuit is in accord with established principles of just-compensation law under the Fifth Amendment, and therefore reverse the judgment before us and reinstate the judgment of the District Court.

The Fifth Amendment provides that private property shall not be taken for public use without “just compensation.” “And ‘just compensation’ means the full monetary equivalent of the property taken. The owner is to be put in the same position monetarily as he would have occupied if his property had not been taken.” United States v. Reynolds, 397 U. S. 14, 16 (footnotes omitted). See also United States v. Miller, 317 U. S. 369, 373. To determine such monetary equivalence, the Court early established the concept of “market value”: the owner is entitled to the fair market value of his property at the time of the taking. New York v. Sage, 239 U. S. 57, 61. See also United States v. Reynolds, supra, at 16; United States v. Miller, supra, at 374. And this value is normally to be ascertained from “what a willing buyer would pay in cash to a willing seller.” Ibid. See United States v. Virginia Electric & Power Co., 365 U. S. 624, 633.

By failing to value the improvements in place over their useful life — taking into account the possibility that the lease might be renewed as well as the possibility that it might not — the Court of Appeals in this case failed to recognize what a willing buyer would have paid for the improvements. If there had been no condemnation, Almota would have continued to use the improvements during a renewed lease term, or if it sold the improvements to the fee owner or to a new lessee at the end of the lease term, it would have been compensated for the buyer’s ability to use the improvements in place over their useful life. As Judge Friendly wrote for the Court of Appeals for the Second Circuit:

“Lessors do desire, after all, to keep their properties leased, and an existing tenant usually has the inside track to a renewal for all kinds of reasons — avoidance of costly alterations, saving of brokerage commissions, perhaps even ordinary decency on the part of landlords. Thus, even when the lease has expired, the condemnation will often force the tenant to remove or abandon the fixtures long before he would otherwise have had to, as well as deprive him of the opportunity to deal with the landlord or a new tenant — the only two people for whom the fixtures would have a value unaffected by the heavy costs of disassembly and reassembly. The con-demnor is not entitled to the benefit of assumptions, contrary to common experience, that the fixtures would be removed at the expiration of the stated term.” United States v. Certain Property, Borough of Manhattan, 388 F. 2d, at 601-602 (footnote omitted).

It seems particularly likely in this case that Almota could have sold the leasehold at a price that would have reflected the continued ability of the buyer to use the improvements over their useful life. Almota had an unbroken succession of leases since 1919, and it was in the interest of the railroad, as fee owner, to continue leasing the property, with its grain elevator facilities, in order to promote grain shipments over its lines. In a free market, Almota would hardly have sold the leasehold to a purchaser who paid only for the use of the facilities over the remainder of the lease term, with Almota retaining the right thereafter to remove the facilities — in effect, the right of salvage. “Because these fixtures diminish in value upon removal, a measure of damages less than their fair market value for use in place would constitute a substantial taking without just compensation. ‘[I]t is intolerable that the state, after condemning a factory or warehouse, should surrender to the owner a stock of secondhand machinery and in so doing discharge the full measure of its duty.' ” United States v. 1,132.50 Acres of Land, 441 F. 2d 356, 358.²

United States v. Petty Motor Co., 327 U. S. 372, upon which the Government primarily relies, does not lead to a contrary result. The Court did indicate that the measure of damages for the condemnation of a leasehold is to be measured in terms of the value of its use and occupancy for the remainder of the lease term, and the Court refused to elevate an expectation of renewal into a com-pensable legal interest. But the Court was not dealing there with the fair market value of improvements. Unlike Petty Motor, there is no question here of creating a legally cognizable value where none existed, or of compensating a mere incorporeal expectation.³ The petitioner here has constructed the improvements and seeks only their fair market value. Petty Motor should not be read to allow the Government to escape paying what a willing buyer would pay for the same property.

The Government argues that it would be unreasonable to compensate Almota for the value of the improvements measured over their useful life, since the Government could purchase the fee and wait until the expiration of the lease term to take possession of the land.⁴ Once it has purchased the fee, the argument goes, there is no further expectancy that the improvements will be used during their useful life since the Government will assuredly require their removal at the end of the term. But the taking for the dam was one act requiring proceedings against owners of two interests.⁵ At the time of that “taking” Almota had an expectancy of continued occupancy of its grain elevator facilities. The Government must pay just compensation for those interests “probably within the scope of the project from the time the Government was committed to it.” United States v. Miller, 317 U. S., at 377. Cf. United States v. Reynolds, 397 U. S., at 16-18. It may not take advantage of any depreciation in the property taken that is attributable to the project itself. Id., at 16; United States v. Virginia Electric & Power Co., 365 U. S., at 635-636. At the time of the taking in this case, there was an expectancy that the improvements would be used beyond the lease term. But the Government has sought to pay compensation on the theory that at that time there was no possibility that the lease would be renewed and the improvements used beyond the lease term. It has asked that the improvements be valued as though there were no possibility of continued use.⁶ That is not how the market would have valued such improvements; it is not what a private buyer would have paid Almota.

“The constitutional requirement of just compensation derives as much content from the basic equitable principles of fairness, United States v. Commodities Trading Cory., 339 U. S. 121, 124 (1950), as it does from technical concepts of property law.” United States v. Fuller, post, at 490. It is, of course, true that Almota should be in no better position than if it had sold its leasehold to a private buyer. But its position should surely be no worse.

The judgment before us is reversed and the judgment of the District Court reinstated.

1 This was the statement of the question presented by the Government in opposing the grant of the petition for certiorari. As the petitioner phrased the question, the Court was asked to decide: “In awarding just compensation to a tenant in the condemnation of a leasehold interest in real property, including tenant owned building improvements and fixtures situated thereon, may an element of great inherent value in the improvements be excluded merely because it does not, by itself, rise to the status of a legal property right.” (Emphasis added.)

2 The compensation to which Almota is entitled is hardly “totally set free from [its] property interest,” as the dissent suggests. Post, at 484. The improvements are assuredly “private property” that the Government has “taken” and for which it acknowledges it must pay compensation. The only dispute in this case is over how those improvements are to be valued, not over whether Almota is to receive additional compensation for business losses. Almota may well be unable to operate a grain elevator business elsewhere; it may well lose the profits and other values of a going business, but it seeks compensation for none of that. Mitchell v. United States, 267 U. S. 341, did hold that the Government %vas not obliged to pay for business losses caused by condemnation. But it assuredly did not hold that the Government could fail to provide fair compensation for business improvements that are taken — dismiss them as worth no more than scrap value — simply because it did not intend to use them. Indeed, in Mitchell the Government paid compensation both for the land, including its “adaptability for use in a particular business,” id., at 344, and for the improvements thereon.

3 Hence, this is not a case where the petitioner is seeking compensation for lost opportunities, see United States ex rel. TVA v. Powelson, 319 U. S. 266, 281-282; Omnia Commercial Co. v. United States, 261 U. S. 502. The petitioner seeks only the fair value of the property taken by the Government.

Nor is this a case where compensation is to be paid for “the value added to fee lands by their potential use in connection with [Government] permit lands,” United States v. Fuller, post, p. 488, at 494, for neither action by the Government nor location adjacent to public property contributed any element of value to Almota’s leasehold interest.

4 It was established at oral argument that while the. Government had contracted to acquire the railroad’s interest, it had not acquired the fee at the time of the taking of the leasehold, nor did it have possession at the time of the trial or appeal.

5 “It frequently happens in the ease of a lease for a long term of years that the tenant erects buildings or puts fixtures into the buildings for his own use. Even if the buildings or fixtures are attached to the real estate and would pass with a conveyance of the land, as between landlord and tenant they remain personal property. In the absence of a special agreement to the contrary, such buildings or fixtures may be removed by the tenant at any time during the continuation of the lease, provided such removal may be made without injury to the freehold. This rule, however, exists entirely for the protection of the tenant, and cannot be invoked by the condemnor. If the buildings or fixtures are attached to the real estate, they must be treated as real estate in determining the total award. But in apportioning the award, they are treated as personal property and credited to the tenant.” 4 P. Nichols, Eminent Domain § 13.121 [2] (3d rev. ed. 1971) (footnotes omitted).

6 Similarly, the dissent today would value the petitioner’s interest after the Government has condemned the underlying fee, and thus after the value of the petitioner’s interest has been diminished because the risk of nonrenewal of the lease has materialized. But there was only one “taking,” and at the time of that “taking” there was not only a risk that the lease would not be renewed, but a possibility that it would be and that the improvements would be used over their useful life.