The Top Five: Eminent Domain and Leasehold Estates

Eminent domain questions come up with some regularity, especially so because this topic can be tested both in Property and in Constitutional Law.  A subtopic that comes up requires an understanding as to what happens to a leasehold if leased realty is taken by eminent domain.  The following are some points to remember:

(1):  If leased property is taken by eminent domain, the leasehold and the reversion merge in the taker  (often the state) and so the leasehold is terminated.

(2):  Once the leased property is taken by eminent domain there is no longer an obligation for the lessee to pay rent.

(3):  Both the lessor and lessee will be entitled to "just compensation" once the property has been taken by eminent domain.

(4):  The measure of "just compensation" provided is as follows:  The lessor is entitled to receive the value of the leased property (including the value of rent to be received) minus the value of the leasehold interest that has already been conveyed to the lessee.  The lessee is entitled to receive the value of the leasehold.

(5):  In a sense, the lessee benefits from the eminent domain as the obligation to pay rent ceases. As such, the rent that the lessee otherwise would have been required to pay is generally deducted from the value of the leasehold when determining the amount at which to compensate the lessee.