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United States v. Certain Land

decided: September 4, 1969.


Lumbard, Chief Judge, Feinberg, Circuit Judge, and Timbers, District Judge.*fn*

Author: Lumbard

LUMBARD, Chief Judge:

This appeal by the United States and cross-appeal by the defendants challenge that portion of the condemnation award rendered by the district court which is based on the "risk of vacancy" created upon the subject building by the unique short-term option aspect of the takings exercised by the government. The United States contends that there should be no award for the risk of vacancy factor, while defendants maintain that the award is insufficient.

We reverse, because we find that the risk of vacancy award of $555,833.33 far exceeds the actual economic loss suffered by defendants as a result of the options. But because the record indicates that the options did have a direct adverse economic effect upon defendants we remand to the district court so that it may take further evidence and arrive at a fair valuation of defendants' loss caused directly by the options.

The subject property is the Borgfeldt Building, constructed in 1909, an eleven story loft structure located at the northwest corner of Irving Place and East 16th Street in Manhattan, which the government used for offices. From 1945 through 1947 the government was in possession of the premises under a sublease, but after 1947 the possession was extended by four condemnations. The defendants in this litigation were first the owners and later the lessees of the building under a sale and lease-back transaction during the years covered by this proceeding, July 1, 1960 through June 30, 1964.

The government initiated its first condemnation proceeding in 1947. This was a taking for one year but with the added provision, as was true in the succeeding takings, that the government could exercise options for the use and possession of premises for each of the next four years. The only condition upon its exercise of these options was that notice be given at least 30 days prior to the expiration of each yearly term. A similar proceeding, once again providing for a one year term and options to extend for a maximum of four additional years, was initiated in 1953. The third taking, instituted in 1958, was identical to the two previous except that the options extended only for three years past the initial term. Finally, a fourth taking was instituted in 1962, with the options extending for four years past the initial term. This litigation involves the last two years of the third taking, i.e., 1960 through 1962, and the first two years of the fourth taking, i.e., 1962 through 1964.

The parties do not object to the basic fair rental value found by the district court for the years in question. This value was set by the court at $230,000 per annum, after it declined to adopt the government expert's figure of $207,500, and the defendants' expert's figure of $385,000, the latter estimate taking into account the options. The disagreement centers on the additional awards for the "risks of vacancies" -- i.e., the risk that the building would stand vacant if the government did not exercise one of its short notice options and defendants were not able to secure immediately another tenant. The government contends that no award should have been made for this risk, since in fact the government exercised all of its options and thus no actual vacancies occurred. The defendants contend that the award was inadequate as it does not take into account the risk of vacancy for each of the four years, but rather proceeds on the assumption that there was only one risk for each of the two-year takings.

The theory behind the risk of vacancy award requires some explanation. Under the terms of the takings the government was not required to exercise its option for the coming year until 30 days prior to the expiration of the current yearly term. Thus with respect to each of the four years in question it was possible for the government to give notice thirty days prior to the expiration of the yearly term that it would not exercise its option for the coming year. This would have left the defendants with their building standing vacant until they were able to secure new tenants. Due to the large size of the building this task of securing new tenants might occupy a considerable period of time, during which the property would be producing no income.

The district court found that it would take 18 months for the owners of the Borgfeldt Building to obtain and install a new tenant after receiving notice that the building would become vacant. From this the court concluded that the fair market value of the option was equal to the fair rental value for the eighteen month period during which the building would remain vacant if the government had not exercised its options. The actual risk of vacancy award was for only seventeen months rent, since under the taking the government obligated itself to give 30 days notice.

The situation concerning the years 1960 and 1961 is slightly different owing to the outcome of the previous litigation affecting the government's third taking. Judge Knox, in a ruling that was affirmed by this court, United States v. 396 Corp., 264 F.2d 704 (2d Cir.), cert. denied, 361 U.S. 817, 80 S. Ct. 60, 4 L. Ed. 2d 64 (1959), modified the notice provision by requiring the government to give six months notice of its intention to exercise or not exercise the option. While that litigation itself concerned only 1958, the district court in the present case found that the six months notice had been given also in 1960-61 and 1961-62. Thus in figuring the risk of vacancy for these two yearly periods the district court subtracted six months from the 18 month vacancy period, and then awarded as compensation for the option the rental value for a 12 month period.

In addition, since 1962 was to be the last year of occupancy under the third taking, this amounted to a 12 month notice. This, when combined with the six month notice ordered in 1961 by Judge Knox, eliminated any risk of vacancy in 1962.

The above calculations resulted in a risk of vacancy award of $230,000 for the last two years of the third taking, i.e., 1960-62 and $325,833.33 for the first two years of the fourth taking, i.e., 1962-64, for a total risk of vacancy award of $555,833.33, plus interest.

We reject the government's contention that the previous consideration by Judge Knox of the value of the options held by the government for the years 1956 through 1960 barred defendants, by virtue of collateral estoppel, from introducing proof relating to the valuation of the options for the years 1960 through 1964 in this litigation. Judge Knox, as noted above, required the government to give six months notice of its intent to renew or not to renew. The government points to the language of this Court in affirming Judge Knox "that the landlord was awarded all that, in all conscience, it was entitled to, under the Constitution." United States v. 396 Corp., 264 F.2d 704, 708 (2d Cir. 1959). Since the terms of the taking reviewed by Judge Knox and that of the takings involved in the present litigation are identical, the government submits that defendants are barred from relitigating the value of the options.

But neither Judge Knox nor this Court purported to set a value on the options. Instead Judge Knox attempted to reach a result justified by the limited evidence presented to him with respect to the options. If, in this litigation, defendants are able to submit additional evidence which establishes some element of direct economic loss to them as a result of the options, then we believe they are entitled to an award increased by this amount. Because of the repeated options taken by the government the defendants have been forced to bear the burdens of litigation for each yearly period for which the parties have been unable to agree on an appropriate rent. With this burden ...

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