The rule that real property is valued at its highest and best use free and clear of leases, mortgages or other encumbrances regardless of actual use is so fundamental that almost every eminent domain decision begins with a recitation of it.
Firstly, the act of condemnation extinguishes any interest on the property. In 1931, the Court of Appeals wrote, In Matter of City of New York (Allen Street), “the City pays for what it takes and nothing else. By such taking it extinguishes all existing rights and interests in the property taken.” 256 NY 236 (1931). The Court stated, “even if the lease by the landlord to the tenant in this case had not contained a clause expressly providing that ‘the term of the lease shall cease’ when possession of the property is taken by the city, nevertheless, by virtue of the fiat of the sovereign, the lease would ‘cease and determine and be absolutely discharged’ upon vesting of title which, indeed, preceded the actual taking of possession.” 256 NY 236 at 242. Also see Matter of Willcox, 165 App Div 197 (2d Dept 1914). It is not a new principle. See Edmands v City of Boston, 108 Mass 535 (1871).
Secondly, in an eminent domain case, the property taken is valued as of the date of taking. Village of Lawrence v Greenwood, 300 N.Y. 231 (1949). As Justice Gerges wrote in Matter of City of New York (Crown Heights), 1 Misc3d 913(A) (Sup. Ct. Kings 2004), it is beyond dispute that the measure of just compensation in an eminent domain proceeding must be fixed as the date of the taking. )Saratoga Water Servs. v Saratoga County Water Auth., 83 NY2d 205; Chemical v Town of East Hampton, 298 AD2d 419; County of Nassau v 408 Realty, 283 AD2d 644; City of Newburgh v Kirchner, 234 AD2d 364; Gold-Mark 35 Assocs., 210 AD2d 377.) Indeed, it has been noted that “[i]t would be a serious departure from principle, and most unsound, to announce that fair compensation is to be determined not as of the day of taking but, instead, as of the time of trial, whenever that might happen to be” (Arlen of Nanuet v State, 26 NY2d 346, 354-355, rearg. denied 27 NY2d 737, motion to amend remittitur denied 27 NY2d 737).
Thirdly, in a condemnation trial, the property to be awarded just compensation must be valued on the highest and best use of the property, even though the owner may not have been utilizing the property to its fullest potential when it was condemned. Matter of City of New York (Clearview Expressway), 9 NY2d 439 (1961). Also see Matter of City of New York (Minkin), 34 AD2d 782 (2d Dept 1970). In two recent decisions, the Appellate Division, Second Department stressed that the measure of damages must reflect the fair market value of the property in its highest and best use on the date of the taking regardless of whether the property is being put to such use at the time. Gyrodyne Company of America, Inc. v State of New York, 89 AD3d 988 (2d Dept 2011) and New York Central Lines, LLC v State of New York, 101 AD3d 966 (2d Dept 2012).
When determining highest and best use, the claimant is not limited to existing zoning regulations on the property. If a reasonable probability of rezoning can be established, the property’s highest and best use will be based on this new zoning designation. The leading case for this proposition is the Court of Appeals decision Matter of Town of Islip (Mascioli), 49 NY2d 354, 360-361 (1980). In Mascioli, Judge Wachtler stated:
Ordinarily, the potential uses the court may consider in determining value are limited to those uses permitted by the zoning regulations at the time of taking. When, however, there is a reasonable probability of rezoning, some adjustment must be made to the value of the property as zoned. An increment should be added to this amount if there is a reasonable probability of rezoning to a less restrictive category.
The Court affirmed a value based on the probability of rezoning residentially zoned land to a business. It is important to note that the standard employed to find the market value was that of a “knowledgeable buyer,” which means a sophisticated realtor with a full understanding of the methods and means required for potential development. A claimant is never limited to what the owner has done to its property. Rather, the law allows a condemnee to have its property valued on the basis of what could be reasonably accomplished by a prudent, knowledgeable real estate investor. Further, it is not necessary to show that there was an ante litem plan for the highest and best use. Matter of City of New York (Broadway Cary Corp.), 34 NY2d 535 (1974).
A highest and best use need only be established as reasonably probable. A claimant does not have to prove every aspect of the highest and best use in the near future absolutely. The degree of discount is an issue of fact. Indeed, it has been held that no discount need be taken if relevant market conditions establish the rezoning was a near certainty. Matter of City of New York (Nelkin), 51 NY2d 921 (1980).
The Court of Appeals has stated in Keator v State of New York, 23 NY2d 337 (1968):
It is the general rule that “just compensation” is to be determined by reference to the fair market value of the property at the date of taking, and that the fair market value is the price for which the property would sell if there was a willing buyer who was under no compulsion to buy and a willing seller under no compulsion to sell. In the determination of the fair market value, the condemnee is entitled to have the appraisal based on the highest and best available use of the property irrespective of whether he is so using it. That is, considering the best use to which the property could reasonably be put, what is its fair market value?
The highest and best use of the property is predicated on its being free and clear of all leases, regardless of actual use on title vesting date, or as Judge Keating put in Keator, “irrespective of whether he is so using it.” Also see Matter of Rochester Urban Renewal Agency (Patchen Post, Inc.), 45 NY2d 1, 8 (1978); Chemical Corp. v Town of East Hampton, 298 AD2d 419, 420-421 (2d Dept 2002) and Matter of County of Suffolk v Kalimnios, 275 AD2d 455 (2d Dept 2000).
In sum, condemnation extinguishes all leases, mortgages, and other interests on the property, the property is valued as of the date of taking, and just compensation is determined by the property’s highest and best use, which can include a reasonable probability of rezoning.