There are two important takeaways from last month’s Supreme Court decision in NCDOT v. Adams Outdoor Advertising of Charlotte Limited Partnership, (No. 206PA16) September 29, 2017:
1) The first is that a tenant’s right to automatic renewal options is compensable. Those of us who handle commercial lease litigation in the context of eminent domain law have long asserted that renewal options are fully compensable to the tenant based upon the U.S. Supreme Court’s ruling in United States v. Petty Motor Co., 327 U.S. 372 (1946), which held that, when a tenant has a contractual right to renew its lease, “[t]he measure of damages” includes “the value of the right to renew” the lease. Id., at 381. However, optional lease extensions, ones that can be terminated or adhered to by either the landlord or the tenant, are not compensable. This is the first time that the North Carolina Supreme Court has addressed the question in the context of a condemnation case.
2) The second point is that the “bonus value” method of determining a leasehold interest is not admissible, when the appraiser has not considered “all of the appropriate factors” which the Court said “a willing buyer and a willing seller would consider in valuing a property interest.” In this case, the Court determined that the State’s appraiser had not used a reliable method of calculating the fair rental value because he only took into account the rental value of the land and had excluded from his consideration the substantial income derived from the billboard and the value of the billboard permits that had been issued to the tenant. The Court further held that the billboard was not merely personal property but a valuable leasehold improvement.