Arizona Court ofAppeals Division Two Holds That Where a Lease Provides for Its Termination at the Lessor ’s Option on Condemnation of the Property, the Lessee Has No Right to Compensation for the Taking if the Option is Exercised.

Appellant All American leased property owned by Appellee Cardi.  Although the lease was to expire in 2015, it stated:  “Should all or a substantial portion of the premises . . . be taken by eminent domain, then Landlord may elect to, at its sole discretion, terminate this Lease.”  In January 2008, pursuant to a condemnation complaint, an order was entered allowing the State to take possession of the property All American was leasing.  Cardi then mailed a notice to All American terminating the lease.  In the condemnation proceeding, Cardi moved for partial summary judgment against All American based on the termination clause.  The court granted Cardi’s motion, finding that All American had no compensable interest in the property after Cardi exercised its option to terminate the lease.  All American timely appealed. 

The ArizonaAppeals Court affirmed.  The Court explained that a tenant generally has a compensable interest in the unexpired term of a lease upon condemnation.  Citing State v. Starzinger, 179 N.W.2d 761 (Iowa 1970), however, the Court also explained that when a lease provision gives the lessor the option of terminating upon condemnation, and that option is exercised, the lessee is barred from sharing in the damages awarded for the condemned property.  Accordingly, the Court held that Cardi’s termination of the lease based on the termination provision extinguished All American’s rights to compensation upon condemnation.

The Court rejected All American’s argument that the termination clause was ineffective and redundant because eminent domain naturally terminates a lease.  The court explained that it must consider all provisions of a lease when ascertaining the parties’ intent, and will not assume that the parties would include an inherently redundant or ineffective clause.          

Presiding Judge Eckerstrom authored the opinion; Judges Brammer and Vasquez concurred.