Court Blurs Line Between Goodwill and Relocation Benefits
In Los Angeles Unified School District v. Casasola (Aug. 5, 2010), the Court of Appeal examined the interrelationship between recovery of lost business goodwill pursuant to Code of Civil Procedure section 1263.510 and recovery of relocation expenses pursuant to Government Code section 7267 et seq.
My colleague, Gale Conner, prepared a good summary of the Casasola case detailing the facts and the Court's reasoning. The bottom line is that the Court held that items that might be recoverable under the Relocation Act cannot be included in a claim for loss of business goodwill.
At first glance, this does not seem surprising. Section 1263.510 contains an express limitation that a goodwill award not be duplicative of relocation benefits. And nearly 20 years ago, the court in Redevelopment Agency of the City of Emerville v. Arvery Corporation (1992) 3 Cal.App.4th 1357 held that expenses that could be recovered under the Relocation Act must be excluded from an award of business goodwill.
But the Casasola opinion expands these concepts, holding that even if the expenses cannot be recovered under the Relocation Act, they are nonetheless precluded under the goodwill statute if they are the types of things that might have been recoverable under the Relocation Act.
In Casasola, for example, the business owner spent over $1 million on business reestablishment costs to prepare the relocation site. Since the Relocation Act caps such costs at $10,000, the court held that anything above that amount was not compensable -- under either the Relocation Act or as business goodwill.
The Casasola court concluded that it could not second guess the Legislature's decision to place a $10,000 cap on reestablishment costs by allowing the claim to come in under the guise of the goodwill statute.
In my mind, this conclusion misses the mark. Yes, the Relocation Act and section 1263.410 both deal, very generally, with the same subject matter. But the policies behind the two statutory schemes are quite different, and the court's failure to understand this difference led it down the wrong path.
Relocation benefits are available to every displaced business, whether that business is profitable or not. The policy is that a government taking should not force someone out of business, even if the business is not economically viable. However, the Legislature understandably wanted to draw some lines in this respect, and it capped some of what may be recovered as a relocation expenses (including the $10,000 cap on reestablishment costs).
Loss of business goodwill is a whole different animal. Not every business possesses goodwill, and not every displacement causes a business to lose goodwill. But where a business does possess goodwill, and where the owner can prove that a displacement causes a loss of that goodwill, section 1263.510 makes that loss recoverable.
The Legislature also placed limits on goodwill recovery, including an express requirement that the business owner take reasonable steps to mitigate the loss of goodwill. And the goodwill statute contains no $10,000 cap on what the owner must spend in an effort to preserve goodwill.
All one needs to do is flip the numbers from Casasola to see the problem with the Court's conclusion. Instead of spending $1,300,000 to preserve $126,000 (as happened there), imagine a business that must spend $126,000 in order to preserve $1,300,000 in goodwill. If the only viable relocation site for this $1,300,000 business requires $126,000 in reestablishment costs, the business must either (1) shut its doors, or (2) spend the $126,000. Under section 1263.510, the owner clearly cannot opt to close the doors, claiming a total loss of goodwill; the owner would have failed to take reasonable steps to mitigate.
Thus, the owner must spend the money or its goodwill claim will be barred. But the Relocation Act makes any such reestablishment costs over $10,000 non-compensable as relocation expenses. And the Casasola opinion now also makes those costs non-compensable as lost business goodwill.
Yet, the owner had to incur those costs, and they unquestionably lower the business' value. (A hypothetical buyer facing $126,000 in relocation costs would clearly pay less than a hypothetical buyer not facing such costs.)
Moreover, such relocations often do not proceed with such bright lines. If the owner spends $126,000 out of pocket to render the site suitable, it is presumably an ineligible "reestablishment cost" (now barred under Casasola). But if the landlord pays those costs as a tenant improvement allowance, subsuming the costs within the tenant's new rent, any increased rental expense qualifies as a classic example of something that impacts goodwill. (Indeed, the obligation to pay higher rent at the replacement site was a fundamental issue in the first California Supreme Court opinion to address business goodwill claims under section 1263.510, People v. Muller.)
Should recoverability really come down to whether the tenant pays the costs up front or gets them included within its rent?
You exactly nailed the mistakes in the Court's rationale. And the Court never needed to go there; the "mitigation" expenses of nearly ten times the goodwill that was being preserved were clearly unreasonable and, thus, non-recoverable.
In the end, I expect this ruling will actually cost public agencies money overall because owners will have little incentive to really look at relocation spaces that will take significant work to make them functional for there businesses. And the owners will have a decent argument that "reasonable" mitigation efforts do not require them to spend substantial amounts which they will never see again.
Hopefully, the Legislature will figure out to fix this poor ruling. (And increase the $10,000 cap, which is not indexed for inflation and which is now, years and years later, a completely inadequate amount.
Rick,
That's an amazing and interesting decision, particularly when Loss of Business and Business Goodwill are specifically excluded from eligible reestablishment and other relocation reimbursements. That decision will certainly add additional frustration to future business relocations. Thanks for the update.
Martyn Daniel