The City of San Jose Redevelopment Agency cannot use its power of eminent domain to escape from a contract that gave a company an exclusive right to negotiate a development agreement, the Sixth District Court of Appeal has ruled.

The city could not use eminent domain because there was no real property involved — only a contract that did not establish an interest in real property, the unanimous three-judge panel held.

The ruling is another setback in San Jose’s attempt to redevelop a downtown parking lot with a mixed-use project. While this litigation was proceeding, the company chosen by the agency to redevelop the site, Palladium Co. of New York, backed out of the project (see CP&DR Deals, May 2002).

In 1997, the Redevelopment Agency entered into an agreement with San Jose Parking, Inc. (SJP) that gave the company an exclusive right for 10 years to negotiate a disposition and development agreement for the Fountain Alley parking lot. The company was also allowed to operate the parking lot and keep the revenues. In exchange, the company was to pay $25,000 per month for the first five years. If the city and SJP failed to reach a development agreement, the city would refund the monthly payments and half of the interest.

Three years later, the Urban Land Institute provided the city with a study that identified the Fountain Alley parking lot as a key parcel in downtown redevelopment. The ULI recommended development of a mixed-use project with housing and shops. In January 2001, the agency entered into an exclusive negotiating agreement with Palladium for the proposed mixed-use project. The following month, SJP sued the agency, seeking a restraining order and demanding that the agency negotiate with SJP for the mixed-use development.

In April, the agency filed its eminent domain action seeking to condemn SJP’s interest in the parking lot as established by the 1997 contract. An agency appraiser set the value of SJP’s interest at $3.7 million.

After a trial, Santa Clara County Superior Court Judge William Martin ruled for the agency. On appeal from SJP, the Sixth District overturned the trial court’s ruling and held the agency could not acquire SJP’s interest via eminent domain.

The agency presented numerous arguments to prove that its agreement with SJP conveyed an interest in real property as defined in Health and Safety Code § 33391. All of the arguments failed.

“Since the Legislature has chosen to limit agency’s eminent domain power to the power to condemn real property while granting other entities the power to condemn property, whether real or personal, we think a strict interpretation of the meaning of real property is warranted,” Presiding Justice Conrad Rushing wrote.

The agency argued that the contract was similar to an option to purchase. The court, however, ruled that a long line of cases established that “an option contract relating to the sale of land conveys no interest in the land.” Among other cases, the court cited Leslie v. Federal Finance Co., Inc., (1939) 14 Cal. 2d 73, Rollins v. Stokes, (1981) 123 Cal.App. 3d 701, and Richardson v. Hardwick, (1882) 106 U.S. 252.

The agency pointed to County of San Diego v. Miller, (1974) 13 Cal.3d 684, in which the court held that the government’s taking of an unexercised option to purchase land was compensable. But the Sixth District held that Miller only addressed the issues of compensation and fairness — not the power to condemn.

The agency contended the agreement with SJP was similar to a lease. The court would not accept that argument, either. The agreement specifically stated that it did not grant SJP “any leasehold interest,” the court noted. Furthermore, as SJP’s monthly payments were potentially refundable, the agreement did not require the payment of rent, which the court called a “fundamental attribute of a lease.”

The agency argued that the agreement had the attributes of a license. Again, though, the court ruled, “[C]ase law makes clear that licenses create no interest in real property.”

Finally, the court addressed an argument put forth on the agency’s behalf by the California Redevelopment Association. The association contended the agreement’s language expressly stating that the agreement did not convey an interest in property was merely standard language that made clear the agency was not disposing of an interest in land. The court held that this argument supported the court’s conclusion: If the agency had not disposed of an interest in land, then there was no interest for the agency to condemn.

The Case:
San Jose Parking, Inc. v. Superior Court (City of San Jose Redevelopment Agency), No. H024871, 03 C.D.O.S. 6740, 2003 DJDAR 8442. Filed July 29, 2003. Modified September 3, 2003 at 2003 DJDAR 9913.
The Lawyers:
For San Jose Parking: Norman Matteoni, Matteoni, Saxe & O’Laughlin, (408) 441-7800.
For Superior Court: T. Brent Hawkins, McDonough, Holland & Allen, (916) 444-3900.
For the agency: C. Donald McBride and Robert Fabela, city attorney’s office, (408) 277-