Clarifying the Procedure for Claiming Loss of Business Goodwill in Eminent Domain Cases

In eminent domain cases involving the taking of property where a business is operated, the owner is entitled to compensation for the loss of goodwill. While business goodwill can often be difficult to quantify, a recent decision by the California Court of Appeal in The People ex rel. Department of Transportation v. Presidio Performing Arts Foundation, Case No. A145278 (November 3, 2016) (Presidio), may help to ease some of the burden on business owners in making such compensation claims. The Presidio court found that there is no single valuation method for quantifying business goodwill, and establishes that a business need not even be profitable in order to claim/receive compensation for its business goodwill.

WHAT IS BUSINESS GOODWILL?

The injury to a business resulting from an eminent domain taking is not expressly compensable under State or the U.S. Constitutions. Instead, the right to compensation for the loss of goodwill is created by statute. In California, Section 1263.510 of the Code of Civil Procedure provides that a business owner "shall be compensated for loss of goodwill," where certain enumerated factors are satisfied. Section 1263.510 defines goodwill as the "benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage."

In order to recover compensation for lost goodwill under Section 1263.510, the business owner must satisfy a two-step process. First, the owner must present sufficient evidence to the trial court to establish entitlement to goodwill. If the owner meets this initial burden, the matter proceeds to the second step, in which the jury determines the amount of the loss and the compensation due. In upholding this two-step process, the Court of Appeal in Presidio held that an owner need not quantify goodwill in order to establish entitlement in the first phase. Such a holding is consistent with the remedial nature of Section 1263.510, which requires the statute to be liberally construed and creates a low threshold to satisfy the initial burden on business owners.

THE PRESIDIO DECISION

The Presidio Performing Arts Foundation (the Foundation) is a non-profit theatre in San Francisco that held a below-market lease provided in recognition of its charitable purpose. The California Department of Transportation (CalTrans) began the Doyle Drive Replacement Project, a highway...