North Carolina Eminent Domain: What About Renters?

By virtue of the eminent domain doctrine, in North Carolina, government agencies (and some private parties) are able to take private land (also known as "real property") for public use in exchange for payment of fair compensation. Generally, if the land has renters -- tenants -- they receive nothing in North Carolina from the government agency when the land is taken through the eminent domain process. This is true despite the fact that tenants have property rights and despite the fact that tenants are most often required to vacate the land. However, there are some exceptions and tenants may be entitled to a portion of the compensation paid to the landowner depending on what the lease says.

In legal terms, a tenant has rights pursuant to a lease. Thus, the rights of tenants are called "leasehold rights." In every American jurisdiction and under federal law, leasehold rights are recognized and enforceable as rights that are separate and apart from the rights of the owner. Many leasehold rights are based on various owner rights that are given over by the lease (such as the right to possess and use the land). But there are some leasehold rights that are more expansive than the rights of landowners. For example, in every state, a residential tenant has rights as against the owner with respect to eviction.

Because leasehold rights are property rights, and, by logic, under the doctrine of eminent domain, the government agency taking the land should be paying compensation for the property rights that are taken from a leaseholder. But, this does not typically happen in North Carolina. It seems that the justification is that the compensation that would be owed to a leaseholder is included as part of the compensation that is paid to the landowner. From the government's perspective, it is for the owner and the leaseholder to argue over apportionment of the compensation paid for the taking.

This seems consistent with the law in states that allow leaseholders to directly seek compensation for the taking of their leasehold property rights. In Florida, for example, a leaseholder is protected by the constitutional guarantee that prevents the taking of private property without just compensation. See Trump Enterprises, Inc. v. Publix Supermarkets, Inc., 682 So. 2d 168 (Fla. Appeals, 4th Dist. 1996). But, under Florida law, the amount of compensation paid to the leaseholder is a part of the total compensation paid to the landowner. The court is tasked with determining the total fair market value of the land taken and then apportioning the total amount between the landowner and any leaseholders.

Because of the foregoing, it is routine for property leases -- both commercial and residential -- to contain lease provisions that delineate the landlord's and tenant's rights if the land is taken via eminent domain. In commercial leases, these provisions are often quite lengthy and involved. In many leases, the leaseholder is required to waive any right to the compensation paid for a taking. This is often required by landowners for the practical reason that most rental property is encumbered by lender financing and, under most mortgages, lenders require the landowner to remit to the lender any and all eminent domain compensation.

As noted, there are some exceptions where a leaseholder is entitled to a separate compensation when their leasehold interest is taken in an eminent domain proceeding. Generally, this exception applies only where the leaseholder's rights are taken independently from the property rights of the landowner. This exception was discussed by the US Supreme Court in the case of United States v. Petty Motor Co., 327 U.S. 372, 381 (US Supreme Court 1946). In that case, the land in question had already been taken by the US government. At issue was the later taking of the leasehold rights of the tenants that remained. Mostly, the government had provided proper notices of lease termination and the tenants were owed no compensation. For a couple of the tenants, their lease terms extended beyond the date when the government ousted them from the land. For those tenants, they were entitled to compensation for fair market value of the use and occupancy of the leasehold for the remainder of the tenants’ terms, plus the value of the right to automatically renew the lease in the case of one tenant, minus the agreed rent which the tenant would pay for such use and occupancy.

A similar situation existed in the case of Department of Transportation v. Adams Outdoor Advertising of Charlotte Limited Partnership, 804 S.E.2d 486 (N.C. Supreme Court 2017) where the North Carolina Supreme Court held that a leasehold interest for an outdoor billboard was compensable where the DOT had already purchased the underlying land.

For more information, and to schedule a confidential consultation with experienced and dedicated property law attorneys in Charlotte, contact Arnold & Smith, PLLC. Use our “Contact” page or give us a call at 704.370.2828. We handle land use, zoning and condemnation legal matters in Mecklenburg County and elsewhere in North Carolina. We have offices in Charlotte, Lake Norman, and Union County.