The condemnation clause covers what happens when a government agency takes all or part of the property through eminent domain, or buys it under the threat of doing so. It sets when the lease ends, when either side can terminate after a partial taking, how rent is reduced, and how the compensation is divided.
What this clause does
Government agencies can take private property for public use, such as a freeway interchange, a rail line, a flood channel or a utility corridor, as long as they pay just compensation. That power is called eminent domain, and the legal process is called condemnation. A sale to the agency made under the threat of condemnation is usually treated the same way.
Takings are not common, but industrial buildings tend to sit next to the infrastructure agencies expand: freeways, interchanges, rail corridors, port access roads, flood channels and power lines. That proximity is a big part of why a site works for logistics, and it is also why this clause deserves a real read.
The lease clause answers three questions. Does the lease end, in whole or in part? If only part of the property is taken, can either side terminate? And who receives the money?
Partial takings are the real risk for industrial users
A full taking of the building is rare and fairly simple: the lease ends when the agency takes possession. The harder case is a partial taking. For an office tenant, losing a strip of landscaping barely registers. For an industrial occupier, a strip along the frontage can eliminate trailer parking, shrink the truck court below the depth you need to maneuver a 53-foot trailer, remove a driveway, or cut off dock doors.
Many lease forms give the tenant a termination right when more than a set percentage of the building, or of the land outside the building, is taken. Percentages are a blunt tool. Losing a small share of the land can make a cross-dock building unworkable if it takes the truck court depth you depend on. Ask for a termination right tied to function: if the taking materially impairs truck access, usable dock positions, trailer parking or the parking you need for your workforce, you can walk away.
Access matters as much as land. A project that closes a median, removes a left turn into your driveway or reroutes truck traffic can hurt a distribution operation even when no land is taken. Whether that loss is compensable depends on state law, so raise it with your attorney early.
Rent and restoration
If the lease continues after a partial taking, rent typically drops by the share of usable space lost. Make sure the reduction also accounts for lost yard and parking, not only building square footage, because your rent reflects the whole site.
The landlord is usually required to restore what remains to a workable condition using the award. Confirm that obligation is in the lease, that it has a timeline, and that your rent is reduced while the restoration work disrupts your operation.
Think about temporary takings, too. An agency may need a construction easement for a year or more to stage equipment along your frontage, even if it takes nothing permanently. That can block a driveway or a row of trailer stalls for the duration. Ask that temporary takings be treated like partial takings for rent reduction, and that you receive the part of any award covering the period within your term.
Who gets the award
Most leases give the landlord the award for the land and building, including any value created by your lease being below market. Tenants typically keep the right to pursue a separate claim against the agency for relocation costs, moving expenses, trade fixtures and improvements they paid for, and in some states lost business goodwill. Make sure your lease preserves that right rather than assigning everything to the landlord.
Timing matters as well. Agencies usually give notice and begin appraisals and negotiations long before anyone takes possession. The lease should require the landlord to tell you promptly when it receives notice of a proposed taking, so you have time to evaluate the impact and plan.
Public projects move slowly and are usually announced years ahead. When you are touring buildings, ask your broker to check for planned road widenings, interchange work, rail projects and flood control improvements near the site. Have a real estate attorney review the condemnation language before you sign, and if a taking is ever threatened, bring in an attorney who handles eminent domain early.
If you are the tenant
- Ask for a termination right triggered by loss of truck access, dock positions, trailer parking or required employee parking, not just a percentage of square footage.
- Make sure any rent reduction accounts for lost yard and parking area, not only building area.
- Preserve your right to file your own claim for relocation costs, trade fixtures and improvements you paid for.
- During site selection, check for planned road, rail and flood control projects near the property.
If you are the owner
- Keep the award for the land, building and leasehold value, while allowing the tenant a separate claim that does not reduce yours.
- Define when restoration is required after a partial taking and limit it to the award you actually receive.
- Draft any function-based termination trigger to fit the specific site, so a minor taking on a multi-tenant project does not empty buildings unexpectedly.
Go deeper in Justin's books
Both books walk through leases chapter by chapter, from the tenant side and the owner side.
Common questions
What happens to my lease if the government takes the property?
If the whole property is taken, the lease usually ends when the agency takes possession. If only part is taken, the lease often continues with a proportional rent reduction, and you may be able to terminate if the loss is large enough. The details are in the condemnation section of your lease.
Do tenants receive any of a condemnation award?
Most leases give the land and building award to the landlord. Tenants typically keep the right to pursue their own claim for relocation costs, trade fixtures and improvements they paid for, depending on state law. Check that your lease does not waive that right.
General information about how industrial leases commonly work, not legal advice. Every lease is different: have a California real estate attorney review yours before you sign.