Lease terms can impact the value of just compensation.  That’s the lesson of Dept of Transportation versus Adams outdoor Advertising of Charlotte.  Here are the facts:

• In October 2001 Adams outdoor acquired a billboard in Charlotte, North Carolina.
• In 2006 the lease expired and Adams Outdoor negotiated a new lease with the landlord which ran for 10 years and then automatically renewed for 10 years.  At the end of 20 years the lease would be extended for additional 10 year terms provided that neither party objected
• In 2011, the North Carolina DOT purchased the property and filed a condemnation of the billboards.   Adams and the DOT could not agree as to whether just compensation was due on the billboard.  A trial court ruled that just compensation was due.  The court of appeals said the billboard was a non-compensable personal property and reversed the ruling. Adams appealed.
• In September 2017, the North Carolina Supreme Court ruled that just compensation was due Adams for the taking of the billboard and the leasehold interest in the billboard. This is the way courts almost always rule on the issue.  Two items in the decision caught Billboard Insider’s eye.
• First, the Supreme Court ruled that automatic renewal provisions in the lease should be taken into account when determining the fair market compensation. “…Adams Outdoor essentially had a contractual right to possess the least property for 20 years (the initial 10 year term plus the automatic 10 year extension). The fact that the lease allowed Adams Outdoor to cancel the lease if one of a small set of specific circumstances arose does not change our analysis… Because under Petty Motor, a provision that guarantees a contractual right to renew is a proper factor for the trial fact to considering determining the fair market value of a leasehold interest, it follows that this automatic extension which is even stronger and substance, is also a proper factor…”
• Second, the Supreme Court ruled that optional renewal provisions impacting renewal after 20 years were not compensable: ” The Supreme Court of the United States has drawn a distinction between the contractual right to renew, which is compensable, and a mere expectancy in the renewal of the lease, which is not… The lease provision concerning these optional extensions, did not give Adams Outdoor a right to renew lease since the landlord could choose not to go forward with the renewal; the provision created only an expectancy of the renewal of the lease… Adams Outdoor’s expectation that it would continue to possess the lease land and rent space on its billboard on that land, despite either party’s ability to cancel the optional lease renewals at will, is a mere expectancy that may not be considered in determining the fair market value of Adams Outdoor’s leasehold interest.”

Billboard Insider’s Take:  Lease terms impact just compensation.  A right to renew adds value to a lease.  An option to renew so long as neither party objects is better than nothing but isn’t as valuable to you as the right to renew and may not have value in court.

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