Eminent Domain and the Fairhope Single Tax Colony

For the original article with more explanation, an example and definition of terms used, click here.

     This is a ruling concerning eminent domain and the distribution of funds to owners and lessees of property condemned by the State of Alabama.

     In 1992, Alabama condemned property for a public easement. The Fairhope Single Tax Colony and the lessee, SouthTrust Bank, had agreed the appraised value of the condemned property was $28,260, plus accrued interest, for the condemned property. The value of the leasehold interest over the duration of the lease was determined by a testifying witness to be $29,809. Since in Alabama the lessee's losses are covered first, FSTC likely wouldn't have gotten much if any had they proceeded with the new trial. Instead, after the Court of Civil Appeals sent it back to the trial court, FSTC and SouthTrust Bank settled out of court and had the settlement sealed. 

Presumably, the formula for distribution of State funds of eminent domain properties concerning owners and lessees is as follows: Take the purchase price plus economic rent less the contract rent subtracted from State funds with the remainder going to the FSTC.

For Example: The State has agreed to pay $10,000 for a piece of land to expand the highway. The tax value on the land is $10,000, therefore the contract rent is $20 per year. The economic rent is $100 per year.

Price of Land + Economic Rent = Total Value  
10000 + 9900 = 19900
Economic Rent x Remainder of Lease = Total Economic Rent  
100 x 99 = 9900

Contract Rent x Remainder of Lease = Total Contract Rent
20 x 99 =  1980

Economic Rent - Contract Rent = Leaseholder Value  
9900 - 1980 = 7920

Leaseholder Value + Purchase Price = Total Leaseholder Value

10000 + 7920 = 17920

State Funds - Total Leaseholder Value = Remainder

10000 - 17920 = -7920

Remainder + Contract Rent = Colony Share
-7920 + 1980 = -5940

     In this simplified example (every case will be fact specific), the Leaseholder Value and Colony Share exceeded what the State had agreed to pay. In this instance, Alabama law states a lessee must be reimbursed first. This means the leaseholder would get $10,000 and the Colony would receive $0. The leaseholder loses $7,920 in property value and the Colony loses $1,980 due to the state only paying $10,000 for a piece of property worth $19,900.    

Summaries of each section are in bold italics.

Court of Civil Appeals of Alabama.

SouthTRUST BANK OF BALDWIN COUNTY v. FAIRHOPE SINGLE TAX CORPORATION.

 2951430.

-- February 07, 1997

Jessica W. Thompson of Chason & Chason, P.C., Bay Minette, for appellant.

Samuel N. Crosby and L. Brian Chunn of Stone, Granade & Crosby, P.C., Bay Minette, for appellee.

     This is a condemnation case, involving a portion of land owned by Fairhope Single Tax Corporation (owner) and leased by SouthTrust Bank of Baldwin County (leaseholder). In 1992 the State of Alabama (State) condemned a certain portion of land to be used as an easement for a public road. The State and the leaseholder appealed the condemnation proceedings from the probate court to the circuit court.   Thereafter, the State appealed to this court. See State v. SouthTrust Bank of Baldwin County, 634 So.2d 561 (Ala.Civ.App.1994). 

 Land was condemned by the State for an easement in 1992. The State and SouthTrust (STB) appealed to the circuit court after not liking the proceedings in the probate court. After this, the State appealed to this court, the
Court of Civil Appeals of Alabama.

     In February 1996 the State, the owner, and the leaseholder entered into a consent agreement regarding the amount of compensation to be paid for the condemned property. The parties agreed that the State owed $28,260, plus accrued interest, for the condemned property. The consent agreement stated that “[the consent agreement] does not purport to affect any rights either [the owner or the leaseholder] may have to all or a portion of the award.” The owner and the leaseholder requested a hearing to determine their respective rights to the award.

 In February of 1996, the State, FSTC and STB agreed the value of the land is
$28,260, plus interest without stating who gets what. FSTC and STB ask for a hearing to establish how much each gets.

     The circuit court held a hearing on July 15, 1996. On August 19, 1996, the circuit court issued an order, stating “[t]hat said amount is hereby apportioned between the parties with [the owner] receiving 85% and [the leaseholder] receiving 15%.”

 The hearing was held in circuit court on 7-15-1996. One month later the court rules FSTC gets 85% and STB receive 15%.

     The leaseholder appeals.

 STB says no thanks and appeals.

     The dispositive issue is whether the trial court committed reversible error in its apportionment of the condemnation proceeds between the owner and the leaseholder.

The issue is whether or not the court made the right decision. 

     Our review of the record reveals the following pertinent facts:  In December 1989 the owner and the leaseholder entered into a 99-year lease for a 150-by 300-foot parcel of unimproved property. Testimony revealed that the annual rental for the parcel in 1992, the year of the condemnation, was $1,742. Gary Purvis, a senior vice president for the leaseholder, testified that the leaseholder leased the parcel so that it might build a branch location on the parcel at some point in the future.

Review of record determines these facts: STB leased the land in 1989, the annual rent in 1992 was $1,742, Senior VP for STB said the bank's intent for leasing the land was to possibly build a bank on the property.

     In 1992 the State condemned a portion of this parcel, which measured 150 feet wide by 40 feet deep. It is undisputed that the State condemned 15% of the total leasehold. Purvis testified that while the leaseholder still planned to build a branch location on the parcel, the condemnation affected the leaseholder's plans regarding the type of facility to be located on the site.

The condemnation by the State in 1992 affected the type of building STB was planning to build there. STB still planned to build there.

     Several witnesses testified at the July 15, 1996, hearing regarding their opinions of the apportionment of the condemnation proceeds between the owner and the leaseholder. There was a wide range of opinions, e.g., the leaseholder was entitled to amounts of $300 to $29,809 of the condemnation proceeds for its interest in the property.

At the hearing on 7-15-1996, several witnesses testified STB was entitled to amounts ranging from $300 to $29,809.

     We would note that only one witness, Joe Courtney, a real estate appraiser, testified regarding the fair market value of the leasehold interest. Courtney testified regarding his method of calculating the estimated value of the leasehold interest in the condemned portion of the parcel, i.e., the economic rent less the contract rent multiplied by the unexpired term of the lease. Courtney stated that he calculated the value of the leasehold interest over the duration of the lease to be $29,809.

One of the witnesses, Joe Courtney, a real estate appraiser, calculated the value of STB's interest over the duration of the lease to be $29,809. He calculated this by taking the economic rent less the contract rent multiplied by the unexpired term of the lease.

     Our supreme court stated the following in Drummond Coal Co. v. State, 548 So.2d 430, 432-33 (Ala.1989):

Alabama Supreme Court ruling from 1989 statements are listed below. 

“Generally speaking, the measure of damages for a leasehold interest taken under eminent domain is the fair market value of the lease. In Alabama, two methods of determining fair market value have been approved.

Under eminent domain, the amount one receives is based on fair market value. Alabama has two methods for determining this value.

“First, fair market value, i.e., the measure of a lessee's damages for a leasehold taken under eminent domain, may be the economic rent (or fair rental value of the leasehold) less the rent reserved under the terms of the lease. Under this approach, the value of the leasehold interest is the difference between the fair rental value of the leased premises for the unexpired term of the lease, and the rent reserved in the lease.

First Method: Value of the land minus the rent charged.

“Second, fair market value may be assessed as the difference between the reasonable market value of the unexpired portion of the lease, and the amount of rent that would have been due and paid by the lessee for the unexpired term of the lease. Whether there is any substantive difference between this method and the one first described is not entirely clear.

Second Method: Market Value of remainder of lease minus rent for remainder of lease. It is not clear if there is a difference in these two options.

“Courts have created a third method, perhaps not yet expressly articulated in Alabama, of assessing the value of leasehold interests:  actual or intrinsic value of the leasehold. Fair and just valuation of all the interests at stake in eminent domain proceedings requires that this method be recognized.

Other courts have created a third method that accounts for many factors. This method should be used.

“[W]e conclude that the fact finder should be allowed to consider the following factors in determining the value of a leasehold interest as that value affects the fair market value of the land:

“a) The length of the unexpired term of the lease;

“b) the fair market value, if any, of the unexpired term of the lease;

“․

“e) the highest and best use of the property;

“f) the utility, if any, of any portion of the land in which the leaseholder has an interest, remaining after the condemnation;  and

“g) any other actual damages sustained by the leaseholder.

“We stress that a lessee is not entitled as a matter of law to recover the cost of any specific item. Rather, evidence of the above factors, reduced to present value as necessary, may be considered only to the extent that they bear upon the fair value of the leasehold interest at the time of the condemnation.”

Present value of these factors are considered at the time of condemnation. Lessees are not entitled to recover costs of specific items only fair value of interest of the lease.

(Citations omitted) (emphasis in original).

     The circuit court, as well as this court, is bound by the decisions of our supreme court. Ala.Code 1975, § 12-3-16. It is clear that the trial court did not comply with the methods expressed in Drummond.   Consequently, in light of the foregoing, we find that the circuit court committed reversible error in its apportionment of the condemnation proceeds between the owner and the leaseholder.

The circuit court and this court, the Court of Civil Appeals of Alabama, are bound by the decisions of the Alabama Supreme Court. The circuit court made an error in its judgement on the distribution of proceeds by not complying with the methods expressed in the Drummond case.

     The trial court's judgment is due to be reversed and remanded for proceedings consistent with the above.

This case must go back to the lower court for a retrial using methods from the Drummond case.

     The foregoing opinion was prepared by Retired Appellate Judge RICHARD L. HOLMES while serving on active duty status as a judge of this court under the provisions of Ala.Code 1975, § 12-18-10(e).

REVERSED AND REMANDED.

RICHARD L. HOLMES, Retired Appellate Judge.

All the judges concur.