California Eminent Domain Report

When a business subject to a franchise agreement is condemned, questions often arise as to the allocation of proceeds between the franchisor and franchisee.  When the question involves payment for lost business goodwill, the courts have placed strict limits on the franchisor's ability to recover. 

In particular, courts have long held that a franchisor cannot make a claim for lost business goodwill because the franchisor fails one of the key entitlement prongs:  the franchisor does not operate a business on the property.  (See Redevelopment Agency v. International House of Pancakes, Inc. (1992) 9 Cal.App.4th 1343.) 

In an opinion issued this week, Galardi Group Franchise & Leasing, LLC v. City of El Cajon (June 7, 2011, Case No. D056737), the court focused on two purported twists to the longstanding IHOP rule:

1. The Weinershnitzel franchisor structured the franchise agreement to make it appear that the franchisor had an ownership interest in the business, going so far as (a) to include a condemnation provision with a blanket waiver by the franchisee of any right to recover for business goodwill, and (b) to limit the franchisee to a month-to-month rental of the property, while the franchisor retained ownership of everything, down to the fixtures and equipment.
2. After the condemnation commenced and the restaurant was closed, the franchisee expressly assigned its right to recover lost business goodwill to the franchisor.

The court was not swayed by the franchisor's creative structuring, applying the IHOP rule to bar the franchisor from making a business goodwill claim in its own right.  Despite the lengths the franchisor went to, it still failed to meet the test of operating a business on the property.

With respect to the assignment, the trial court rejected that claim as well, concluding that the franchisee's waiver of its right to recover lost goodwill in the franchise agreement meant that the franchisee had no claim left to assign once the inverse condemnation action took place.

The Court of Appeal disagreed, concluding that the parties' intent to assign the goodwill claim to the franchisor appeared both in the franchise agreement and in the specific assignment once the inverse condemnation action was commenced.  The Galardi court found no reason the franchisee could not assign its goodwill claim, and it held that the franchisor could pursue the claim, standing in the franchisee's shoes. 

We'll have more to say about this opinion and the impact it may have on future cases, but for now, we just wanted to get a quick summary out there.  In the meantime, if you must know more about the case immediately, take a look at Robert Thomas' blog post, Who "Owns" the Weinershnitzel?