COURT OF APPEALS
DECISION
DATED AND FILED
January 23, 2008
David R. Schanker
Clerk of Court of Appeals
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NOTICE
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This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official
Reports.
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See Wis. Stat. § 808.10 and Rule 809.62.
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Appeal No.
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STATE OF WISCONSIN
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IN COURT OF
APPEALS
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City of Milwaukee
Post No. 2874 Veterans of Foreign Wars
of the United States,
Plaintiff-Appellant,
v.
Redevelopment Authority of the City of Milwaukee,
Defendant-Respondent.
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APPEAL
from a judgment of the circuit court for Milwaukee County: ELSA
C. LAMELAS, Judge. Reversed
and cause remanded.
Before Curley, P.J., Wedemeyer and Kessler, JJ.
¶1 WEDEMEYER, J. The City of Milwaukee Post 2874 Veterans of Foreign Wars of the United
States (VFW) appeals from a judgment dismissing its claim that the
Redevelopment Authority of the City of Milwaukee’s
(RACM) condemnation of the building within which the VFW had pre-paid for a
long-term lease without compensation for the lease was unconstitutional. Because the “unit rule” as applied in this
case is unconstitutional, we reverse the judgment and remand for further
proceedings consistent with this opinion.
BACKGROUND
¶2 The property involved in this case was the eleven-story hotel
building located at 2601 West
Wisconsin Avenue, which housed the VFW
headquarters in 5250 square feet on the ground floor. In 1942, the VFW owned the building located
on the property and used it as its post headquarters. In 1961, it conveyed the land and
improvements to Towne Metropolitan, Inc., who constructed the eleven-story
hotel. In exchange for the conveyance,
the VFW obtained a ninety-nine-year lease, with the option to renew for another
ninety-nine years. Under the leasehold,
the VFW paid $1.00 annually and the lessor would pay all real estate taxes, all
utilities, and cover maintenance on the property.
¶3 The property first operated as a Hilton Hotel and then as a
Holiday Inn. In 1986, Towne sold the
property to Marquette
University, which used it
as a dormitory. In 1994, the property
was sold to the Maharishi
Vedic University
for $600,000. Both sales required the
new owners to assume the responsibility to comply with the VFW’s lease. The Maharishi never occupied the building
after its acquisition.
¶4 In February 1998, RACM held a public hearing to consider
creating a redevelopment district for the area including the parcel of land at 2601 West Wisconsin Avenue. Following the hearing, RACM issued a
relocation order pursuant to Wis. Stat.
§ 32.05(1) (1999-2000). After locating three comparable
properties, RACM made a jurisdictional offer in the amount of $440,000 for the
property, listing both Maharishi and the VFW as owners. The award included both the hotel and the
adjoining parking lot located at 601
North 26th Street, which were owned solely by the
Maharishi. In December 2001, the
Honorable Michael P. Sullivan divided the $440,000 between the Maharishi and
the VFW, allocating $140,000 to the former and $300,000 to the VFW for the
value of its leasehold interest.
¶5 The VFW appealed the adequacy of the award to the
Condemnation Commission. The Maharishi
did not join the appeal. The Commission
requested instruction from the trial court as to how to value the
property. The trial court instructed the
Commission to value the property using the “unit rule.” The VFW petitioned for leave to appeal this
determination, which we initially denied, but subsequently granted. We concluded that the unit rule should be
used in the scheduled hearing before the Condemnation Commission, but we declined
to address the constitutional issue of whether this application violated the
Wisconsin Constitution. See City
of Milwaukee
Redev. Auth. v. Veterans of Foreign Wars Post 2874, 2003 WI App 225,
267 Wis. 2d
960, 671 N.W.2d 717, unpublished slip op. (Sept. 30, 2003).
¶6 Subsequently, a hearing was conducted before the Condemnation
Commission in December 2004 and it found the value of the property to be
$425,000, which was $15,000 less than the initial award. The VFW appealed the damage award to the trial
court under Wis. Stat. § 32.05(10)
(2003-04). On July 13, 2005, the
VFW moved the trial court for an order declaring the application of the unit
rule in this case unconstitutional. The
trial court denied the motion and that case was tried to a jury in September
2006. The issue considered by the jury
was the value of the property. The jury
returned a verdict that the hotel building at 2601 West Wisconsin Avenue had no
value. Judgment was entered against the
VFW in the amount of $387,348.24, which included the $300,000 it had already
been paid, plus accumulated interest and costs.
The VFW now appeals from that judgment.
DISCUSSION
¶7 The VFW argues in this appeal that: (1) the unit rule is unconstitutional as
applied to the particular facts and circumstances of this case; (2) RACM should
be estopped from claiming that the building has less value than the $566,000
tax assessment; and (3) this case should be reversed and remanded for a new
trial based on cumulative evidentiary errors.
Because we conclude that the unit rule as applied is unconstitutional,
we reverse and remand so that the VFW has an opportunity to prove the value of
its leasehold before the Condemnation Commission. Based on this disposition, it is not
necessary for us to address the other two issues raised. See Gross v. Hoffman, 227 Wis. 296, 300, 277 N.W.
663 (1938). The dispositive issue herein
involves a constitutional issue, which we review independently. See Schilling v. State Crime Victims Rights Bd.,
2005 WI 17, ¶12, 278 Wis.
2d 216, 692 N.W.2d 623.
¶8 Wisconsin Const. art. I, § 13
provides: “The property of no person
shall be taken for public use without just compensation therefor.” Yet, that is exactly the result of the
judgment in this case. The jury found
that the fair market value of the building at 2601 West Wisconsin Avenue was $0. The trial court ruled that based on the
application of the unit rule, the VFW was not entitled to any compensation for
the taking. Such a result violates the
Wisconsin Constitution and cannot be affirmed.
We begin our analysis with a brief review of the history of the unit
rule.
¶9 The unit rule “requires that real estate be valued in respect
to its gross value as a single entity as if there was only one owner.” 4-13 Nichols,
Eminent Domain § 13.01[16] § 13-28. There are two parts to the rule: “(1) there can be no separate valuation of
improvements or natural attributes of the land; and (2) the manner in which the
land is owned or the number of owners should not affect the value of the
land.” Id.
The first part appears to have its genesis in
the common law theory that anything that was attached
to a freehold was annexed to and considered to be a part of it. If fixtures such as those in question here
are attached to the real estate, they are treated as real estate in determining
the total award. In computing the total
award, they are considered to enhance the value of the fee. However, in condemnation proceedings, in
apportioning the award, the fixtures are treated as personal property to be
credited to the tenants.
Green Bay Broad. Co. v. Redevelopment
Auth., 116 Wis. 2d 1, 12, 342 N.W.2d
27 (1983), modified by 119 Wis. 2d 251, 349 N.W.2d
478 (1984). The second part, sometimes
referred to as the “undivided basis rule,” applies when there are different
interests or estates in the property acquired by condemnation. Id.
¶10 In simple terms, the unit rule has been used in condemnation
cases to determine the fair market value of the property “as a single entity as
if there were but one owner.” Id. (citing Milwaukee & Suburban Transp. Corp. v.
Milwaukee County, 82 Wis.
2d 420, 448, 263 N.W.2d 503 (1978)). In Appleton
Water Works Co. v. Railroad Commission of Wisconsin, 154 Wis. 121, 142 N.W. 476
(1913), the court applied the first of the two aspects of the “unit rule”
(although not by name) to a taking of a public utility:
[The] value
of the plant and business is an indivisible gross amount. It is not obtained by adding up a number of
separate items, but by taking a comprehensive view of each and all of the
elements of property, tangible and intangible, including property rights, and
considering them all not as separate things, but as inseparable parts of one
harmonious entity, and exercising the judgment as to the value of that entity.
Id. at 148. Thus, the rule was applied without calling it
the unit rule. In Luber v. Milwaukee County,
47 Wis. 2d
271, 177 N.W.2d 380 (1970), the court also does not discuss the “unit rule” per se; rather, the court was presented
with the issue of whether Wis. Stat.
§ 32.19(4) (i.e., net rental losses caused by the proposed public land
acquisition are compensable in eminent domain proceedings) was
unconstitutional. Luber, 47 Wis. 2d at 274. While the appellant argued that § 32.19(4)
was an arbitrary and unreasonable limitation on just compensation, the
respondent contended that compensation should be awarded only for the physical
property taken and that “consequential” damages are to be suffered in legal
silence. Luber, 47 Wis. 2d at 276. The Luber court acknowledged
that “‘just compensation’ has never been construed as requiring payment for all
injuries imposed upon persons or property by acts of government.” Id.
at 277 (citation and one set of quotation marks omitted). However, the court concluded that “one’s
interest in rental income is such as to deserve compensation under the ‘just
compensation’ provision of the Wisconsin Constitution.” Id.
at 279. “Just compensation is what the
owner has lost, not what the condemnor has gained.” Id. (citing
Volbrecht v. State Highway Comm’n, 31 Wis. 2d 640, 647, 143 N.W.2d 429
(1966)). Because land taken for
redevelopment is often commercial or industrial, “incidental damages are very
apt to occur and in some cases exceed the fair market value of the actual
physical property taken.” Id. at
280. Denying recovery for other than the
fair market value of the physical property actually taken is unjust. Id.
¶11 In Milwaukee & Suburban Transport Corp., 82 Wis. 2d 420, the court explicitly used the
term “unit rule.” It stated: “Under the
‘unit rule of damages,’ improved real estate is required to be valued as a
single entity. Buildings and
improvements are not valued in isolation from the market value of the land, but
are considered only to the extent that they enhance the value of the
land.” Id. at 448 (quoting 4 Nichols, Eminent Domain ( 3d ed.),
§§ 13.11, 13.11[2], pp. 13-8, 13-13 to 13-18).
In that case, Milwaukee
County condemned the
operating assets of the Milwaukee & Suburban Transportation Corporation
(“MSTC”). Id. at 426. At the taking, the MSTC was a franchised
monopoly-type public utility. Id. at
433. The issue in MSTC pertinent to this
discussion was whether the trial court erred in submitting a multiple-question
verdict to the jury. Id. at 448. The county argued that the verdict be limited
to a single question, which would ask the jury the fair market value of the
property at the date of the taking. Id. The court held that “[t]he requirement that
property be valued as an integrated and comprehensive entity does not mean that
the individual components of value may not be examined or considered in
arriving at an overall fair market value….
This approach does not contradict the ‘unit rule’ ….” Id.
at 449. The structure of the verdict was
consistent with the unitary approach because the first question asked the fair
market value of the property taken and the remaining questions merely asked
what calculations had gone into the jury’s determination of overall value. Id.
at 450. The court cited Appleton
Water Works Co. as further support for the unit rule valuation method
of a public utility.
¶12 In Maxey v. Redevelopment Authority of Racine, 94 Wis. 2d 375, 384, 288
N.W.2d 794 (1980), Maxey was the owner of a ninety-nine-year lease, and at the
time of the taking, forty years were left on Maxey’s leasehold interest. The Condemnation Commission made a total
compensation award of $350,000 to the persons having an interest in the
property, including Maxey, two mortgagees of his leasehold interest, and the
seven lessors who were owners of the fee.
Id. at
382. However, “[t]he [c]ircuit [c]ourt
found that, because of provisions in the lease between Maxey and the lessors,
Maxey’s interest in the lease terminated upon the taking of the property; and,
accordingly, neither he nor his mortgagees were entitled to share in the
proceeds. Id. at 383. The lease stated, in pertinent part:
If all the
rights, titles, interests and estates of both the lessors and lessees in said
demised premises and buildings and improvements thereon shall be sold in the
exercise of the right of Eminent Domain in condemnation proceedings … [s]uch condemnation shall terminate the
further liabilities of both the lessors and lessees under this lease ….
Id. at 400 (emphasis added).
¶13 First, the Maxey court concluded that under
ordinary circumstances, a lessee is entitled to some portion of the
condemnation award. “Under Wisconsin law, a lessee with a lease for more than one
year is a joint owner with the lessor of real property.” Id.
at 388 (citation omitted). A lessee has
an interest in the property and is entitled to compensation when that interest
is completely taken in a condemnation proceeding. Id.
at 400. The unit rule requires that
condemnation awards be based on the value of the property as a whole as if
there were only one owner. Id. at
401. As a result, a lessee’s interest is
not considered separately from the other “owners’” interests; rather, the value
of the lessee’s leasehold is only relevant in determining the amount of the
condemnation award apportioned to him.
“A leasehold is normally valued as the difference between the rental
value of the premises at the time of taking and the rent due the lessors during
the unexpired term.” Id. at 401. The compensation award should be thus “apportioned
to the lessor for the taking of his reversionary interest and to the lessee for
the taking of his leasehold.” Id. However, “[w]here the leasehold is relatively
long and rental values have substantially increased since the inception of the
lease term, the lessee’s share may exhaust the entire award.” Id.
¶14 Second, the court held that a lessee may be barred from sharing
in the proceeds of a condemnation award by a properly drawn lease
provision. Id.
Thus, the issue posed to the court in Maxey was whether the
language of the lease is sufficiently explicit to cause a forfeiture of the
lessee’s normal right to share in the compensation award. Id. at
402. “Wisconsin
law … abhors a forfeiture unless stated in most explicit terms.” Id.
at 403. If the terms of a lease are
susceptible to two different constructions, the lease should be construed as
not creating a forfeiture. Id. The court held that “the lease provision
merely terminates the respective liabilities of the lessors and the lessee,” id.
at 402, and did not cause a forfeiture of Maxey’s right to share in the
compensation award.
¶15 In Green Bay Broadcasting Co., the Redevelopment Authority
appealed the condemnation commission award because it alleged that the
Broadcasting Company’s (a lessee) fixtures were over-valued. Id., 116 Wis. 2d at 8-9. The court held that in such a
situation, an appellant is required to appeal from the whole award. Id. “The fact that there was an objection to the
method of calculation or of the valuation of the components of the gross award
… does not vitiate the condemnor’s appeal from the gross award.” Id.
at 14. Rather, “[t]he appeal from the
gross award was appropriate—indeed necessary under the unit rule—to attack the
correctness of the constituent components that went into the gross award.” Id.
at 15. The court rejected the
Authority’s assertion that the unit rule does not apply in Wisconsin,
and affirmed its acceptance in Wisconsin
jurisprudence. Id. at 11-12.
¶16 In Redevelopment Authority of Green Bay v.
Bee Frank, Inc., 120 Wis.
2d 402, 355 N.W.2d 240 (1984), Bee Frank was a lessee who owned immovable
fixtures in a condemned commercial building.
The issue in Bee Frank was whether the court can separate the amount
attributable to immovable trade fixtures from the purchase price of the land
and building in a condemnation award, for the purpose of determining
entitlement to litigation expenses. Id. at
407. The court held that an award for a
tenant’s immovable fixtures constitutes a separate award for the purposes of
applying Wis. Stat § 32.28(3)(d)
(award of litigation expenses to condemnee). Bee Frank, 120 Wis. 2d at 413. “While the unit rule of damages is a
controlling principle in eminent domain actions, its application in determining
entitlement to litigation expenses … contravenes … public policy ….” Id.
at 414. The court relied heavily upon
the public policy arguments in Green Bay Broadcasting Co.
¶17 In Van Asten v. DOT, 214 Wis.
2d 135, 138, 571 N.W.2d 420 (Ct. App. 1997), the plaintiffs owned and leased
property to Rollins Leasing Corp. Id
at 138. The lease contained a condemnation
clause, which provided in part:
If the entire leased premises … [are] taken … [by]
eminent domain … this lease shall terminate as of the date of such taking; and
… the LESSOR will reimburse the LESSEE for twelve months rent .… [T]he LESSOR shall receive the entire award,
including all amounts paid for the taking of the land, the taking or damage to
the buildings or other improvements.
Id. at 138-39.
¶18 The threshold issue in Van Asten was whether the language
of the condemnation clause was explicit enough to warrant a forfeiture of the lessee’s
normal right to share in the condemnation award. Id.
at 141. The court held that the
condemnation clause was controlling. Id. at
142-43. “We view the condemnation clause
as nothing more than a negotiated reapportionment of risk between a lessor and
a lessee. The condemnation clause was a
carefully bargained paragraph ….” Id. at
144. The court cited Green
Bay Broadcasting Co. and Maxey as authorities on the unit
rule, and distinguished Bee Frank from this case, because Bee
Frank did not involve an agreement, i.e., condemnation clause. Van Asten, 214 Wis. 2d at 145.
¶19 Finally, in Hoekstra v. Guardian Pipeline, LLC,
2006 WI App 245, ¶5, 298 Wis. 2d 165, 726 N.W.2d 648, the appellant alleged
that the trial court erroneously excluded evidence of damage to trees that were
either removed and/or transplanted as a result of installing a gas
pipeline. The court held that the
appellant’s argument requires the valuation of a property’s components
separately from the fair market value, which is precisely what the unit rule
prohibits. Id., ¶43. And as the court reiterates, “the ‘unit rule’
approach to assessing severance damages is well-established under Wisconsin law and ‘its acceptance is beyond question.’” Id., ¶43
(citing Green Bay Broad. Co., 116 Wis. 2d at 11).
¶20 What we can discern from reviewing the history of the “unit
rule” in Wisconsin
are the following. First, our supreme
court has determined that the unit rule applies in this state. Accordingly, we are bound by that
determination. Second, lessees with
leases for more than one year have a property interest in the real estate in
which they lease for purposes of receiving compensation in an eminent domain
action. Third, forfeitures are frowned
upon absent an explicit contractual agreement between the parties that the
lessee forfeits all rights upon condemnation.
Fourth, in certain circumstances, the lessee of an unexpired lease
terminated by condemnation has the right to prove the value of the lease and is
entitled to the proportionate share of an award.
¶21 In applying these principles to the instant case, we note that
the unique facts and circumstances here create a scenario that has not yet been
addressed. The VFW conveyed real
property in exchange for a very valuable leasehold—$1.00 per year for
ninety-nine years to include all maintenance, taxes, utilities and remodeling
costs for 5250 square feet of the building.
The VFW, through its conveyance, obtained minimal rent and free
occupancy costs provided in a long-term lease.
Moreover, the VFW’s lease did not contain a forfeiture clause upon
condemnation. Finally, the jury rendered
a judgment wherein the fair market value of the building as a single unit was
found to be worthless. Yet, it is
undisputed that the leasehold interest is of great monetary value.
¶22 So, the crux of the appeal is the following. Strict application of the unit rule results
in no compensation to the VFW. If the
real estate was not worthless, the VFW, as a long-term leaseholder, would have
the opportunity to prove the value of the leasehold for purposes of
apportioning the condemnation award.
Because of the application of the unit rule, however, the VFW was
prohibited from proving the value of its lease to the jury in this case. We conclude that the application of the unit
rule under these [e]xceptional circumstances is unconstitutional. See Mississippi & Rum River Boom Co. v.
Patterson, 98 U.S. 403, 408 (1878) (“[e]xceptional circumstances will
modify [even] the most carefully guarded rule .…”); United States v. 6.45 Acres of
Land, 409 F.3d 139, 147-48 (3rd Cir. 2005) (in some instances, a
departure from the unit rule may be necessary to avoid grossly unjust results).
¶23 The “just compensation” provision of the Constitution is one of
two express constitutional limitations on the power of eminent domain. “While it confirms the State’s authority to
confiscate private property, the text of the Fifth Amendment imposes two
conditions on the exercise of such authority: the taking must be for a ‘public use’ and
‘just compensation’ must be paid to the owner.” Brown v. Legal Found., 538 U.S. 216,
231-32 (2003). “The fundamental right
guaranteed by the Fourteenth Amendment is that the owner shall not be deprived
of the market value of his property under a rule of law which makes it
impossible for him to obtain just compensation.” McCoy v. Union Elevated R.R. Co.,
247 U.S.
354, 365 (1918).
[W]hen market value has been too difficult to find, or
when its application would result in manifest injustice to owner or public,
courts have fashioned and applied other standards…. [T]he dominant consideration always remains
the same: What compensation is ‘just’
both to an owner whose property is taken and to the public that must pay the
bill?
United
States v. Commodities Trading Corp., 339 U.S. 121, 123
(1950).
¶24 Although Wisconsin jurisprudence has consistently applied the
unit rule in determining fair market value for property in eminent domain
actions, this is the first time that such application would result in the
manifest injustice of the prepaid long-term leaseholder receiving nothing for
its interest in the property. It would
not receive any compensation, let
alone just compensation. Such would result in an unconstitutional
taking, which this court “abhors.” See Maxey,
94 Wis. 2d 403.
¶25 The situation in this case involves a set of particular facts
where designating fair market value as the sole
measure of compensation is inappropriate.
See United States v. 564.54 Acres of Land, 441 U.S.
506, 512 (1979). Although fair market
value is commonly used in eminent domain cases, it “is not an absolute standard
nor an exclusive method of valuation.
The constitutional requirement of just compensation derives as much
content from the basic equitable principles of fairness as it does from
technical concepts of property law.” United States v. Fuller, 409 U.S.
488, 490 (1973) (citations and internal quotation marks omitted).
¶26 As Justice Oliver Wendell Holmes once stated in addressing this
same issue: “[T]he question is, [w]hat
has the owner lost? not, [w]hat has the
taker gained?” Boston
Chamber of Commerce v. City of Boston,
217 U.S.
189, 195 (1910). In the instant case,
the taker gained, according to the jury in this case, a building that was
worthless when measured against fair market value. But what has the VFW lost? The jury was not allowed to consider the
value of the leasehold because of the unit rule. Such a result is inequitable, violates basic
principles of fairness, and, as already indicated, is unconstitutional.
¶27 We agree with the principles espoused by the Maryland Supreme
Court in City of Baltimore v. Latrobe, 61 A. 203, 206 (1905), that
sometimes the necessities of the particular case require an apparent exception
to the general unit rule. We conclude
that the necessities of the particular case here require an exception to the
general application of the unit rule. We
hold that the unit rule as applied to the unique circumstances in this case,
render its strict application unconstitutional and would result in a taking of
the VFW’s property interest without any compensation.
¶28 The particular circumstances requiring this conclusion include
the fact that the leasehold interest here was a long-term lease; that the lease
did not include a forfeiture provision, and that the fair market value of the
property was found to be $0. Under these
circumstances, the VFW must be afforded an opportunity to prove the value of
its separate leasehold interest. We
reverse the judgment and remand the matter for a determination of the value of
the VFW lease.
By the Court.—Judgment reversed and
cause remanded.