When can a business claim loss of going concern?
When business real estate is acquired in Minnesota, property owners often mention lost profits and impacts on their business. And, although lost profits and businesses losses are generally not an element of damages in a condemnation case, in instances where a business or trade has been destroyed by the acquisition, an owner can make a claim for loss of going concern.
Loss of Going Concern
Minn. Stat. § 117.186 defines “going concern” as “the benefits that accrue to a business or trade as a result of its location, reputation for dependability, skill or quality, customer base, good will, or any other circumstances resulting in the probable retention of old or acquisition of new patronage.” Stated another way, “going concern” value refers to the intangibles which comprise “the many advantages inherent in acquiring an operating business as compared to starting a new business with only land, buildings and equipment in place.” Gray Line Bus Co. v. Greater Bridgeport Transit Dist., 449 A.2d 1036, 1039 (Conn. 1982); see also City of Omaha v. Omaha Water Co., 218 U.S. 180, 202-03 (1910).
“The general rule is that no compensation will be paid for the good will value or going concern value of a business operated on real estate that is being condemned.” 25 Minn. Prac., Real Estate Law § 10:30 (2014 ed.); See also Schutt, 256 N.W.2d at 261-62; 8A Nichols on Eminent Domain § G29.07. This is a facet of the business losses rule, which states, “when the government condemns the real property upon which a business is operated, the owner recovers only the value of the real property and the fixtures taken.” Lynda J. Oswald, Goodwill and Going Concern Value: Emerging Factors in the Just Compensation Equation, 32 B.C.L. Rev. 283, 286 (1991).
The business losses prohibition applies whenever a business can potentially be relocated, even if the business is not actually relocated, even if there are no suitable places for it to be relocated in close proximity to its original site, and even if the owner can show the good will of the business was somewhat damaged by the taking. Lambrecht, 663 N.W.2d at 548. Under circumstances where the business can potentially be relocated, the condemnation has only taken the real property and has not prevented the owner from actually moving the business. Id. “The general rule is that the state need not, as part of a condemnation award, compensate a business owner for loss of going concern value. Compensation is not required if the business is free to transfer its going concern value to a new location.” Matter of Condemnation by Petitioner, Minneapolis Cmty. Dev. Agency (MCDA), of Certain Lands in City of Minneapolis Situated in Franklin Ave. Redevelopment Project Area (“Kaplan Block”), 488 N.W.2d 319, 321 (Minn. Ct. App.).
However, if the business was actually destroyed by the taking, and the business could not have been relocated, a remedy is available. Under Minn. Stat. § 117.186, Subd. 2:
If a business or trade is destroyed by a taking, the owner shall be compensated for loss of going concern, unless the condemning authority establishes any of the following by a preponderance of the evidence:
- the loss is not caused by the taking of the property or the injury to the remainder;
- the loss can be reasonably prevented by relocating the business or trade in the same or a similar and reasonably suitable location as the property which was taken, or by taking steps and adopting procedures that a reasonably prudent person of a similar age and under similar conditions as the owner, would take and adopt in preserving the going concern of the business or trade; or
- compensation for the loss of going concern will be duplicated in the compensation otherwise awarded to the owner.
Minn. Stat. § 117.186 was enacted in 2006, but the Schutt test which existed prior to 2006 applied an analogous, slightly broader, standard: to obtain compensation for loss of “going concern,” a business owner had to meet two prongs: (1) his going concern value will, in fact, be destroyed as a direct result of the condemnation; and (2) his business either cannot be relocated as a practical matter, or relocation would result in irreparable harm to the interest. Schutt, 256 N.W.2d at 265. As discussed below, section 117.186 incorporated the Schutt test, but shifted the burden of proof.
Destruction of Business Required
The presumption that, like tangible assets not affixed to the land, business intangibles can also be moved to a new location, is one justification for the business’ losses rule, however, there are others: “In general, courts have held that a lessee is not entitled to compensation for a claim alleging loss of going concern because such a claim is not a taking under the constitution, the going concern value is too intangible to constitute property under the constitution, or the amount of damages resulting from the loss of this interest is too speculative.” Lambrecht, 663 N.W.2d at 547-48. In a very limited array of circumstances, exceptions to the rule exist which allow compensation for loss of going concern. But, these exceptions only apply when government action has completely eradicated the going concern, meaning the business intangibles cannot even be “potentially” moved. Kimball Laundry Co. v. United States, 338 U.S. 1, 15-16 (1949) (loss of going concern compensable for time of occupancy when government took over operations of laundry during wartime because taking over the operations of the business preempted the business from transferring the value of its intangibles); State by Mattson v. Saugen, 169 N.W.2d 37, 42 (1969) (liquor license tied to precise location of real estate was not transferrable, so going concern of liquor business was fully destroyed when premises were taken); Kaplan Block, 488 N.W.2d at 321 (no recovery for loss of going concern unless going concern value firmly bonded to the location rather than the particular owners or services provided, even if no suitable relocation sites readily available); Schutt, 256 N.W.2d 260 (no additional award for loss of going concern when 20 percent of business taken but business continued to operate). Consequently, compensation for going concern is available only “[i]f a business or trade is destroyed by a taking.” Minn. Stat. § 117.186 Subd. 2.
The Merriam-Webster Dictionary defines “destroy” as “to cause (something) to end or no longer exist.” In Schutt, appellants operated a parking ramp. Schutt, 256 N.W.2d at 261. The City of Minneapolis took approximately 20 percent of the total parking area, appellants were awarded no separate damages for loss of “going concern” and “efficiency” value, and appellants challenged the denial of going concern damages. Id. The Minnesota Supreme Court found the appellants continued to operate as a going concern, even if profits were somewhat reduced, and, therefore, no separate damages for loss of going concern were available. Id. at 263. When a business continues to operate, even in a somewhat reduced capacity, “it simply cannot be shown that its going concern value will be destroyed as a direct result of the condemnation.” Id. at 265.
Who Can Make Claims
Under Minnesota Law, the “owner” of a trade or business may make a claim for loss of going concern. (2) “owner” has the meaning given in section 117.025 and includes a lessee who operates a business on real property that is the subject of an eminent domain proceeding. Minn. Stat. § 117.186 Subd. 1(2). Minn. Stat. § 117.025 defines an “owner” as “all persons with any interest in the property subject to a taking, whether as proprietors, tenants, life estate holders, encumbrancers, beneficial interest holders, or otherwise.”
Who Determines What
Minn. Stat. § 117.186, Subd. 3 provides the procedure for loss of going concern claims. It states: “In all cases where an owner will seek compensation for loss of a going concern, the damages, if any, shall in the first instance be determined by the commissioners under section 117.105 as part of the compensation due to the owner. The owner shall notify the condemning authority of the owner’s intent to claim compensation for loss of going concern within 60 days of the first hearing before the court, as provided in section 117.075. The commissioner’s decision regarding any award for loss of going concern may be appealed by any party, in accordance with section 117.145.”
However, this procedure discusses “the damages” that will be determined by the commissioners and subject to appeal to a jury. Arguably, it does not alter the previous procedure which placed the initial question of whether a going concern has been taken with the court. Unchanged is the idea that whether there exists a compensable loss of going concern is a threshold legal question which must be answered before a commissioners’ hearing is held. As the Minnesota Practice Series puts it:
The district court lacks jurisdiction on appeal to review earlier orders allowing commissioners to consider going concern damages. To determine whether the loss of going concern forms a proper element of damages, therefore, the court should conduct an evidentiary hearing on the two issues set forth in the Schutt decision before the commissioners’ hearings are held. 25 Minn. Prac., Real Estate Law § 10:30 (2014 ed.) (emphasis in original). Citing State by Lord v. Pearson, 110 N.W.2d 206, 215 (1961) (holding that “proceedings prior to the award of the commissioners, including the petition and evidence thereon, are not before the court for review”); Minn. Stat. Ann. § 117.085 (authorizing commissioners to assess damages after a hearing).
Arguably, it remains up to the court, not the commissioners, to decide whether loss of going concern is a proper element of damages. This was true under the Schutt decision and its progeny, and does not appear to have changed when the legislature codified the Schutt standards formally within Minn. Stat. § 117.186 in 2006. The commissioners decide only the issue of “damages.”
In determining whether a going concern has been taken, the court should hold an evidentiary hearing, prior to submission to the commissioners, on whether all the statutory elements of Minn. Stat. § 117.186 have been met such that loss of going concern can be properly submitted to the commissioners as an element of damages. To get before the commissioners, along with the threshold elements for a loss of going concern claim, the court must find the condemning authority failed to meet its preponderance of the evidence burden in showing any of the exceptions of Minn. Stat. § 117.186, Subd. 2 (1)-(3) apply.
What changed with the adoption of section 117.186 relates primarily to the burden of proof. Previous to section 117.186, the owner making the claim needs to demonstrate he/she met the Schutt test. Under section 117.186, that burden has shifted. Once the owner makes the claim, the burden shifts to the condemning authority to demonstrate that one of the factors has not been met. See Minn. Stat. § 117.186, Subd. 3.
Valuation of Going Concern Loss – What is and what is not going concern value
“’[G]oing concern’ means the benefits that accrue to a business or trade as a result of its location, reputation for dependability, skill or quality, customer base, good will, or any other circumstances resulting in the probable retention of old or acquisition of new patronage.” Minn. Stat. § 117.186, Subd. 1(1). Going concern value is unquestionably an intangible asset. See generally Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993) (discussing good will and going concern value as intangibles); Saugen, 169 N.W.2d at 39 (discussing “[t]he intangible character of going concern value”); See also Maher v. Maher, 393 N.W.2d 190, 193 (Minn. Ct. App. 1986). Inventory, equipment, tools, cash, and land are tangible assets, and are not compensable in a claim for loss of going concern under the plain reading of Minn. Stat. § 117.186. See Minn. Stat. § 117.186, Subd. 1(1). Courts have repeatedly held that inventory specifically is a tangible asset for which recovery is not available at all, even if the taking reduces the value of the inventory. 8A Nichols on Eminent Domain § G29.07.
“The difference between ‘good will’ and ‘going concern value’ is a technical, and, in many cases, negligible one. The terms are used interchangeably by courts and appraisal experts alike and, like good will, ‘going concern value’ is excluded as an element of damages in most cases.” 8A Nichols on Eminent Domain § G29.07.
No Duplication of Payments
Minnesota law prohibits claims for loss of going concern where such claims would result in duplicative payments. See also Minn. Stat. § 117.186, Subd. 2 (3). The federal relocation rules also prohibit payments where such payments would be duplicative. 49 C.F.R. § 24.3. (Federal Rules adopted by reference in Minn. Stat. § 117.52.) A party may never recover duplicative damages. See, e.g., Abraham v. Cnty. of Hennepin, 639 N.W.2d 342, 347 (Minn. 2002).
In addition to the prohibition on duplicative payments, in eminent domain proceedings a condemnee cannot claim damages which would be logically inconsistent. See Frantz v. Bd. of Cnty. Comm’rs of Anoka Cnty., 210 N.W.2d 51, 52-3 (Minn. 1973) (auto salvage yard owners who presented evidence to get a higher damage award by proving the highest and best use of their land was actually residential could not also recover for claimed loss of going concern damages resulting from liquidation of salvage yard business). It is logically inconsistent to claim both relocation costs and damages for loss of “going concern.” Relocation payments contemplate moving the business. Recovery for loss of “going concern” contemplates the destruction of the business. Loss of “going concern” damages are not at issue when, at the time of the hearing, the business continues to operate at a new location. Cnty. of Dakota v. Cameron, 812 N.W.2d 851, 858 n. 2 (Minn. Ct. App. 2012) aff’d, 839 N.W.2d 700 (Minn. 2013).
The district court in Lambrecht found, “it would be inconsistent to claim eligibility for and receive relocation benefits and also claim [loss of going concern value]. Having used relocation benefits to establish the Manitou Island Inn, Shannon Kelly cannot also claim loss of going concern value.” 645 N.W.2d 157, 168 (Minn. Ct. App. 2002) rev’d, 663 N.W.2d 541 (Minn. 2003) (emphasis added). The district court’s ruling was upheld by the Minnesota Supreme Court (although having resolved the case on other grounds, the Supreme Court declined to specifically address the district court’s conclusion of acceptance of relocation benefits precludes a loss of going concern claim). Lambrecht, 663 N.W.2d at 543 (Minn. 2003).
Minnesota Statutes providing for “Minimum Compensation” further provides a limit on duplication of payments when it requires payment of minimum compensation “to the extent that the damages will not be duplicated in the compensation otherwise awarded to the owner of the property.” Minn. Stat. § 117.187. It appears to be logically inconsistent to provide compensation sufficient for an owner to relocate while at the same time providing compensation for loss of going concern for the owner. However, given the Minnesota Supreme Court’s decision in Cameron that the “comparable property” under section 117.187 need not actually be available, it is now theoretically possible to argue for both minimum compensation (an amount which would be sufficient to purchase a comparable property) and to argue the owner’s business has, nonetheless, been destroyed.
Driveway Access and Business Losses
Contained within the Loss of Going Concern Statute exists another exception to the prohibition on business’ losses claims in condemnations. Subdivision 4 of Minn. Stat. § 117.186 provides the following:
A business owner is entitled to reasonable compensation, not to exceed the three previous years’ revenues minus the cost of goods sold, if the owner establishes that the actions of a government entity permanently eliminated 51 percent or greater of the driveway access into and out of a business and as a result of the loss of driveway access, revenue at the business was reduced by 51 percent or greater. Determination of whether the revenue at the business was reduced by 51 percent or greater must be based on a comparison of the average revenues minus the average costs of goods sold for the three years prior to commencement of the project, with the revenues minus the costs of goods sold for the year following completion of the project. A claim for compensation under this section must be made no later than one year after completion of the project which eliminated the driveway access. The installation of a median does not constitute elimination of driveway access. Minn. Stat. § 117.186 Subd. 4.
This exception to the business’ losses prohibition applies only in a limited situation and provides a formula to determine damages which creates significant confusion, limitations, and questions. For example, it presumes a retail sale of goods which means service businesses impliedly could not be damaged by closure of accesses.
In making or defending loss of going concern claims, there are a couple of atypical timing requirements. First, there is a notice requirement contained in the statute, “The owner shall notify the condemning authority of the owner’s intent to claim compensation for loss of going concern within 60 days of the first hearing before the court, as provided in section 117.075.” Minn. Stat. § 117.186, Subd. 3. Second, documentation related to loss of going concern claims must be provided to the opposing party at least 14 days before the commissioners’ hearing. Minn. Stat. § 117.036, Subd. 5.