Beware of Unintentionally Terminating a Leasehold Upon Sale

Often times, a public agency will be successful in negotiating a purchase and sale of occupied property without the need to file an eminent domain complaint.  However, unlike a simple arms-length sale and unless otherwise stated, an acquisition in lieu of eminent domain terminates the lease as a matter of law.  See Code Civ. Proc. § 1265.110 (“[w]here all the property subject to a lease is acquired for public use, the lease terminates”).  This may not be the agency’s intended consequence since oftentimes project construction is not ready to begin, and it is desirous to have the tenant remain in possession for several more months (or years) paying rent to the agency.

Thus, when purchasing occupied property needed for a public project, be certain to include a recital in the purchase and sale agreement which clarifies whether the leasehold is to terminate upon the close of escrow pursuant to Code Civ. Proc. § 1265.110, or whether the agency is purchasing the property “subject to” the lease.  In the latter scenario, the leasehold continues until such time as it expires by its own terms or is separately terminated by the agency at some future date.

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