The “Undivided Fee Rule” Goes to Washington

The illogical and economically absurd — particularly in this case — “undivided fee rule” has been submitted for SCOTUS review in a case out of Wisconsin, City of Milwaukee Post No. 2874 Veterans of Foreign Wars v. Redevelopment Agency, 768 N.W.2d 749 (Wis. 2009). The Petition for certiorari has just been filed, and a response from the city is due by May 5, 2010. The docket number is 09-1204.

The undivided fee rule has it that in a condemnation case of a property in which several parties have interests (e.g., landlord and tenant) the court and the appraisers must indulge in the fiction that the building is owned by one person, and must value it as such even though that is contrary to undisputed fact. That means that the appraisers cannot consider and capitalize existing rents, but must instead ask what would the building rent for on the date of value — which, of course,¬†values another, fictitous building, not the one sitting on the subject property. Why inherently speculative fiction should be preferred to demonsttrable reality, no one, to the best of our knowledge has explained.

This case presents a particularly vicious application of the rule, because here a divided Wisconsin Supreme Court held 4 to 3 that notwithstanding that a tenant has a valuable, long-term lease, with a conceded six or seven figure value, the tenant’s award is zero where the building’s condition, brought about by the landlord’s neglect, is zero because the cost of demolition and remediation is higher than the fair market value.

The petition for certiorari presents the question of the constitutionality of this “rule,” noting that there is a three-way split of authority. Some courts apply it, some don’t, and still others apply it but depart from it where its application would deprive a party with an interest of the subject property, of just compensation.

For a detailed analysis of the case and the petition, see our fellow blogger, Robert Thomas’ take at¬†

There is a special wrinkle to this case. The Milwaukee Journal Sentinel reports (Tom Daykin, Former Hotel Site Remains a Vacant Lot, Oct. 27, 2009) that after spending some $856,000 on acquisitions in 2001, and after blowing another $970,000 on remediation in 2003 – a half-dozen years ago – the city has done nothing with all that land that, being now publicly owned, has presumably been removed from public tax rolls, and is just sitting there. The debt of $3.69 million that is “tied to” the now-vacant site (as the Milwaukee Journal Sentinel puts is), now has to be paid off by city funds diverted from tax revenues while the subject site just sits there, doing no one any good.

Full disclosure: your faithful servant is one of the lawyers for the VFW.