Want the Government as Your Tenant? Be Careful What You Wish For
Here's a new one. Imagine you have a government agency as your tenant, paying above-market rent, and the lease is set to expire. The government tells you they're going to move to a new site, but they need to hold over for a while until the new site is built. You figure, fine, the parties will just continue with the same rental rate until the government tenant moves. Hey, what other option does the government have? It would be incredibly expensive to find a temporary site and do a temporary move until the permanent relocation site is finalized.
This logic may work with any typical private-market tenant. But this is the government. What power does the government have that others do not? You got it: the power to condemn. But could the government condemn a temporary leasehold interest in a building just because it can't negotiate a rental rate with the landlord? This exact story is unfolding as I type in Sacramento.
According to a News 10 story, "Feds use rare tool in Sacramento landlord dispute," the General Services Administration has been embroiled in a bitter dispute with its landlord in attempting to negotiate an eight month extension of its lease that just expired for its Military Entrance Processing Station. The government had been paying $32 per square foot pursuant to its lease, but it doesn't want to pay more than $19 for its short-term extension as it prepares for a move. Unable to negotiate an extension, the government has filed a federal condemnation action to acquire the needed 8 month lease. It's made a deposit of $342,000, which it claims is the fair market value of the leasehold interest it seeks to acquire.
You rarely see a story like this, but it appears there's a bit more behind the story. The landlord recently sued the government, claiming its search for a relocation site had been "subversive, noncompetitive and secretive," which prevented the landlord from bidding to retain the government as a tenant. So, perhaps the government's condemnation action is a trump card, or if nothing else, some sort of leverage to get the overall dispute resolved.
We'll see how this all shakes out.
This is indeed an interesting, and pretty unusual situation, and there is an extra twist to the story that Brad didn't explore. In this case, the condemning agency/tenant is the federal government, which means that the condemnation action gets filed in federal court.
This has a big impact on how the government gains legal possession of the property. In California, a governmental agency with a lease about to expire would have a legal problem. It could file a condemnation action and seek prejudgment possession, but that process takes time - several months as a best case scenario. This could be a huge problem if the lease is set to expire sooner than the agency could gain possession.
But where the federal government is involved, it's a different story. The federal government can file a Declaration of Taking at the outset of the condemnation action. That Declaration of Taking transfers title to the government, effective immediately (in this case, "title" to the leasehold extension).
In other words, nice to be the government in a leasehold dispute - but even nicer to be the FEDERAL government. -- Rick