Court Provides New Rule On Valuation Of Easement Rights

Easements are valuable property rights in many real estate acquisitions. A recent case decided by the Court of Appeal could provide clarification on damages valuation for the loss of an easement. Generally, for the loss of an appurtenant easement, damages are measured by the diminution in value of the dominant estate. SCI California Funeral Services, Inc. v. Five Bridges Foundation involves a situation where a real property purchase transaction disintegrated and the court awarded damages to the buyer for the loss of an easement right associated with the property based on the value of removal of the easement to the servient estate. (2012 WL 447991 (Cal.App. 1 Dist.)).

In SCI California Funeral Services, Inc., SCI, as the buyer, entered into a contract to purchase cemetery property from Five Bridges predecessor, as seller. In the purchase contract, the property was defined as the current cemetery property, as well as seller’s rights under an option agreement to purchase additional parcels of an adjacent property and an easement right to signage on a nearby property, both owned by Cypress Abbey. Unbeknownst to SCI, Five Bridges had previously entered into an oral agreement with Cypress Abbey to release its rights to the signage easement in exchange for the right to drill a well within the area burdened by such easement. Cypress Abbey further believed that the option to purchase the additional land was contingent on the release of the easement rights. After the purchase transaction closed with Five Bridges, SCI tried to exercise its option to the additional parcels but Cypress Abbey was unwilling to honor the option unless and until SCI agreed to release the signage easement based on Cypress Abbey’s agreement with Five Bridges.

Since SCI had entered into the agreement specifically to exercise its option for the additional land, which Cypress Abbey was unwilling to honor without the easement release, SCI sued Five Bridges for breach of contract, in addition to other causes of action. The lower court held that Five Bridges had breached the purchase agreement by failing to convey the easement to SCI. Since the purchase agreement did not specify how the parties valued the easement, the lower court turned to alternate means of valuing what SCI lost as a result of the breach by Five Bridges. The lower court stated that SCI was entitled to the “benefit of performance” for the loss of the easement. In determining the value of the “benefit of performance”, the court specially considered the easement’s potential value to SCI as a bargaining chip in its negotiations with Cypress Abbey since Cypress Abbey would not honor the option agreement without SCI’s release of the easement. The lower court ultimately settled on a damage amount to SCI of $1.7 million and Five Bridges appealed this determination.

On appeal, Five Bridges argued that the proper valuation of damages for the loss of an appurtenant easement is the diminution in value to the property that has the easement right (the dominant estate). Because SCI introduced no evidence valuing the easement under this methodology, Five Bridges argued that SCI did not prove any damages. The Court of Appeal recognized that in certain types of easements, such as easements which involve the right to pass over the land of another, the proper valuation is the diminution in value to the dominant estate.

However, in those cases there is no market for an appurtenant easement because it may not be severed from the dominant estate and separately transferred from it. Here, the Court of Appeal reasoned that the easement was an asset that could be sold or traded to the property owner burdened by the easement (the servient estate). The Court of Appeal found the easement had a great impact on Cypress Abbey’s property value because it prevented them from using the underlying land for its highest and best use. The Court of Appeal further held that this easement was uniquely valuable as an asset in negotiating with Cypress Abbey concerning the option to purchase the additional land. Therefore, the Court of Appeal upheld the $1.7 million dollar valuation in damages, which was based on the difference in value between the servient property encumbered by the signage easement and the unencumbered servient property.

It is appears that in SCI California Funeral Services, Inc, provided they use a reasonable value of computation, California courts will value the loss of an easement right differently depending on whether the easement is marketable on its own separate and apart from the dominant estate. In this case the Court of Appeal valued the easement based on the worth to the servient estate due to the fact it had market value on its own, whereas in other situations, like a right of way easement which specifically serves the dominant estate, it may find the value based on the loss of value to the dominant estate. Buyers who are purchasing property should be aware of any accompanying easements and their potential valuation of damages if ever there was a loss of such property rights.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben & Junius, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

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