State Ex Rel. Miller v. Gannett Outdoor Co. of Arizona, Inc.

795 P.2d 221, 164 Ariz. 578, 62 Ariz. Adv. Rep. 49, 1990 Ariz. App. LEXIS 222
Court of Appeals of Arizona·Decided June 14, 1990·No. 1 CA-CV 88-506·Published·Cited by 8 cases

Opinions

OPINION

VOSS, Presiding Judge.

The sole issue on appeal is whether a lessee’s expectation of continued lease renewals is a compensable property interest when the underlying land is taken by the state. For the reasons below, we affirm the trial court’s finding that it is not com-pensable.

Background

The facts are undisputed. Pursuant to a written agreement, appellant Gannett Outdoor Company of Arizona (Gannett) leased property from the Salt River Project Agricultural Improvement & Power District (SRP), on which Gannett maintained a sign structure. The original lease term was for three years ending September 30, 1983. Paragraph 5 of the lease provides;

5. After the term hereof, this agreement shall continue in force from year to year, unless terminated at the end of such term, or any additional year thereof, upon a written notice of termination by either party, served not less than thirty days before the end of such term or additional year.

Paragraph 5 clearly allows either party to terminate the year to year lease subject only to the notice provision. This availability of non-renewal notwithstanding, the lease extended from year to year after the expiration of the original term.

On September 19, 1986, the state filed a complaint in condemnation seeking possession of the leased premises as well as Gan-nett’s sign structure. The parties agreed to the value of the sign and, therefore, this case does not involve valuing improvements. However, a dispute remained concerning the value of the leasehold, specifically, whether Gannett was entitled to compensation beyond the value of the unexpired lease term. The state moved for partial summary judgment, arguing that Gannett was not entitled to compensation for the anticipated renewal of the lease. Gannett opposed the motion relying on undisputed testimony that the lease would be renewed. The trial court granted summary judgment in favor of the state. Formal judgment was entered August 29, 1988, and this appeal followed.

Discussion

Both the United States and the Arizona Constitutions provide that the state must provide just compensation for the taking of private property. U.S. Const. Amend. V; Ariz. Const, art. 2, § 17.1 Preliminarily we note that a lessee is entitled to compensation for the unexpired term of his lease. Alamo Land & Cattle Co. v. Arizona, 424 U.S. 295, 303, 96 S.Ct. 910, 916, 47 L.Ed.2d 1 (1976). Likewise we note that a lease term containing an unconditional right to renew in favor of the lessee may constitute a legally compensable inter[580] est. See State ex rel. Morrison v. Carlson, 83 Ariz. 363, 365, 321 P.2d 1025, 1027 (1958) (unconditional right of renewal compensable element where facts demonstrated likelihood that lessee would exercise right). Here, however, we must decide whether a lessee’s mere expectancy of continued lease renewals is sufficient to require compensation.2

The federal courts have held that an expectancy in the continuation of a lease does not constitute a compensable property interest. In United States v. Petty Motor Co., 327 U.S. 372, 66 S.Ct. 596, 90 L.Ed. 729 (1946), the Supreme Court held that “[t]he fact that some tenants had occupied their leaseholds by mutual consent for long periods of years does not add to their rights.” Id. at 380 n. 9, 66 S.Ct. at 601 n. 9. The Petty Motor Court cited with approval Emery v. Boston Terminal Co., 178 Mass. 172, 59 N.E. 763 (1901), in which Holmes, C.J., set forth his often quoted statement regarding the non-compensability of a lessee’s expectation in the continuation of his tenancy: nothing to the tenants’ legal rights, and legal rights are all that must be paid for. Even if such intentions added to the salable value of the lease, the addition would represent a speculation on a chance, not a legal right.

It appeared that the owners had been in the habit of renewing the petitioners’ lease from time to time____ The evidence merely showed that the landlords and the tenants were mutually satisfied and were likely to keep on together. It added nothing except by way of corroboration to the testimony that they both intended to keep on. Changeable intentions are not an interest in land, and although no doubt such intentions may have added practically to the value of the petitioners’ holding, they could not be taken into account in determining what the respondent should pay. They added

Id. 178 Mass, at 185, 59 N.E. at 765.

This principle was followed in Scully v. United States, 409 F.2d 1061 (10th Cir. 1969), cert denied, 396 U.S. 876, 90 S.Ct. 152, 24 L.Ed.2d 134 (1969), which is factually similar to the present case. In Scully, the lessees held property under a series of one year leases. Though the leases did not provide for unconditional renewal, a market for them had developed due in part to the lessor’s practice of renewing the leases. The court held that “the lessee of a one year term is not entitled to recover the market value added by a mere expectation that the lease will be renewed.” Id. at 1065.

Gannett attempts to distinguish Scully, as well as other cases mentioned here, by arguing that those cases did not involve a lease provision which allowed the lessor to passively acquiesce to yearly extensions. We do not agree with Gannett’s distinction. Like Scully, the lease provision in this case merely established the possibility of yearly renewals as opposed to an unfettered grant of right to the lessee. Clearly the lessor maintained the right to not renew the arrangement at the end of the term in any given year; this is the key distinction.

The bright line rule established by these earlier cases was somewhat obscured by the 1973 Supreme Court decision in Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 93 S.Ct. 791, [581] 35 L.Ed.2d 1 (1973). In Almota, the Supreme Court reaffirmed that a lessee’s expectation in continued lease renewals was not a compensable interest. Id. at 476, 93 S.Ct. at 795. Notwithstanding the acknowledgment of this long-standing rule of law, the court allowed the opposite result— compensating an unrecognized interest — by allowing compensation for the lessee’s expectancy in the continued use of an improvement. See id. at 481, 93 S.Ct. at 798 (Rehnquist, J., dissenting).

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State Ex Rel. Miller v. Gannett Outdoor Co. of Arizona, Inc., 795 P.2d 221, 164 Ariz. 578, 62 Ariz. Adv. Rep. 49, 1990 Ariz. App. LEXIS 222 (Ark. Ct. App. 1990).

795 P.2d 221 (State Ex Rel. Miller v. Gannett Outdoor Co. of Arizona, Inc.) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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