Public agencies own significant amounts of property throughout California and the United States. Sometimes, those properties are not being put to a public use, and the government acts as a landlord, leasing out property to private entities. But when the government is ready to put the property to a public use, and it terminates the lease, is there a “taking” of private property triggering the need to pay just compensation? A recent unpublished Court of Appeal decision, California Cartage Company v. City of Los Angeles, addressed this issue and held that the government’s termination of a lease in accordance with its terms does not trigger inverse condemnation liability.

In California Cartage, the public agency leased property to a private entity since the 1950’s pursuant to a series of fixed-term leases, but then, more recently, as a month-to-month tenancy. Over the course of 60 years, the tenant constructed extensive physical improvements; its was operating a large business that generated over $65 million in annual revenues and employed hundreds of workers. In order to make way for a public project, the agency sent the lessee — in accordance with the lease — a 30-day notice to terminate. The lessee filed an inverse condemnation action, claiming that the termination of its lease was the “substantial equivalent” of a taking.

Both the trial court and Court of Appeal found no liability:

[T]he termination of Plaintiff’s short-term contractual right to occupy the land already owned by the City . . . does not constitute a taking for purposes of eminent domain law.

The Court distinguished situations in which an agency provides a notice of intent to condemn, but then purchases private property under threat of eminent domain and terminates the lease. In such cases, there is a substantial equivalent of condemnation because the agency acquires the property “not as a result of bargaining in the open market, but rather in the broad exercise of its power to condemn private property for public use.” In other words, simply having the power to condemn is not sufficient; there must be some actual exercise of that power either by condemnation or the threat of condemnation.

In conclusion, for purposes of takings-liability, public agencies operating in the open market without exercising (or suggesting the potential use of) eminent domain should be treated similarly to other private market participants. The fact that a public agency’s lease termination was for a public use is irrelevant if there was no taking. But keep in mind that the agency does not need to condemn to trigger liability; in California Cartage Company, the court concluded that the agency had never even threatened to use its power of eminent domain — a key factor in the court’s finding of no taking.

Note also that this analysis may be different in the context of a claim for relocation reimbursement if a person or business is displaced by a public project, which has a different set of regulations that do not necessarily require a taking of private property. While the case law is only partially developed, there is a reasonable argument that the standard for qualifying for relocation benefits as a displacee is lower than the standard for proving a taking for inverse condemnation liability.