Can lease termination clauses eliminate a tenant's right to condemnation compensation? UDOT v. Kmart Explained

In UDOT v. Kmart, the Utah Supreme Court addressed whether a lease termination clause could extinguish a tenant’s right to compensation in eminent domain proceedings, establishing important precedent for property owners and condemnors alike.

Background and Facts

UDOT condemned an access point from Bangerter Highway to the West Point Shopping Center in 2010. Kmart Corporation leased space in the shopping center under an agreement with FPA West Point, LLC that contained a condemnation provision with two key clauses: a termination clause and an allocation clause. The termination clause stated that the lease would terminate if condemnation “materially impaired” access to the property. After a bench trial, the district court found that the condemnation did materially impair access and caused the lease to terminate, but nevertheless awarded Kmart $1.4 million in condemnation damages.

Key Legal Issues

The central issue was whether a lessee can receive a condemnation award when their lease contains a termination clause that is triggered by the condemnation. Kmart argued that the court’s prior decision in Utah Department of Transportation v. FPA West Point, LLC, which adopted the aggregate-of-interests approach to valuation, rendered termination clauses inoperative in Utah. UDOT contended that the termination clause extinguished Kmart’s compensable property interest.

Court’s Analysis and Holding

The Utah Supreme Court adopted the termination clause rule followed by most jurisdictions, holding that when a lease agreement contains a termination clause, the lessee is not entitled to a condemnation award because any continuing interest in the property has been extinguished under the lease agreement’s terms. The court reasoned that this rule is consistent with both eminent domain principles (compensation requires a protectable property interest) and contract principles (parties are free to allocate risks). The court rejected Kmart’s argument that the FPA decision rendered termination clauses inoperative, explaining that the valuation method used does not affect which claimants are entitled to awards.

Practice Implications

This decision significantly impacts both lease drafting and condemnation proceedings. Lessees should carefully negotiate condemnation provisions to preserve compensation rights, while lessors can use termination clauses to ensure they receive the full condemnation award. In eminent domain cases, practitioners must thoroughly analyze lease agreements for termination clauses that may eliminate a client’s right to compensation, as Utah courts will enforce these contractual provisions even when the condemnation triggers the termination.