## Facts

- J.J. Newberry Co. (Newberry), a retail variety-store operator, entered into a 25‑year lease in 1953 for a parcel of real estate and improvements in East Chicago, Indiana, to operate its store. ()  
- The lease required Newberry to pay a fixed monthly rent plus a percentage of its gross annual income from the business. ()  
- The lease contained a “fire clause” requiring the lessor to reconstruct the building if it was damaged or destroyed by fire. ()  
- In 1971, a fire of unknown origin destroyed the building and its improvements, preventing Newberry from operating its store. ()  
- The lessor failed to rebuild as required; Newberry sued the lessor in 1973 seeking specific performance of the fire clause or, alternatively, damages for lost profits, and ultimately obtained a judgment of approximately $116,910.33 in its favor. ()  
- On June 16, 1976, while the lease and fire‑clause litigation was pending and with knowledge of that litigation, the City of East Chicago, through its redevelopment department, condemned the property and exercised eminent domain over the leased premises. ()  
- In the condemnation proceeding, the trial court awarded Newberry $760 plus interest as compensation for its leasehold interest, based on expert testimony valuing the leasehold. ()  
- Newberry appealed to the Indiana Court of Appeals, contending that the award failed to provide just compensation for the taking of its leasehold and its interest in the property as a going business location. ()  

## Issues

1. Whether, in an eminent-domain taking of property subject to a commercial lease, just compensation for the tenant’s leasehold interest should be based solely on the difference between the economic rental value and the contract rent, or instead should reflect the value of the property as a going concern, including the tenant’s advantageous lease and use. ()  
2. Whether the tenant, whose premises had been destroyed by fire and whose lessor had failed to rebuild in violation of a fire clause, nevertheless retained a compensable leasehold interest when the city condemned the property. ()  
3. Whether the $760 award to Newberry constituted constitutionally adequate “just compensation” for the taking of its leasehold interest under Indiana eminent-domain law. ()  

## Decision

- The Indiana Court of Appeals held that a tenant under a valid lease retains a compensable leasehold interest in property taken by eminent domain, even when the premises have been damaged and there is related litigation, so long as the lease remains legally in force. ()  
- The court adopted the principle that when property is taken by eminent domain, it is the property as a whole—considered as a going concern where appropriate—that is valued, and that value is then apportioned among the various interests (landlord and tenant), rather than separately valuing each partial interest in isolation. ()  
- The court concluded that the proper measure of Newberry’s compensation was the fair market value of its leasehold interest at the time of taking, taking into account the value of the lease in relation to market rent and the property’s potential as income‑producing property, not merely the nominal value assigned by the trial court. ()  
- The appellate court determined that the $760 award was inadequate under these principles and reversed the trial court’s judgment, remanding for a new determination of just compensation consistent with the correct valuation method. ()  

## Legal Principles

- In eminent-domain proceedings, just compensation is generally measured by the fair market value of the property taken, viewed as a whole and as a going concern when appropriate, at the time of the taking. Competing interests in the property (e.g., landlord and tenant) are allocated shares of that unified value. ()  
- A leasehold interest is a compensable form of property under eminent-domain law; a tenant is entitled to compensation for the value of its leasehold when condemned, which is often measured by the difference between the fair rental value of the property and the contract rent over the remaining lease term (sometimes adjusted for business use and other circumstances). ()  
- The existence of prior or ongoing litigation between landlord and tenant (such as a suit to enforce a fire‑reconstruction clause) does not automatically extinguish the tenant’s compensable interest; the legal rights existing under the lease at the moment of taking define the tenant’s entitlement. ()  
- Condemning authorities take property subject to existing interests and knowledge; when they condemn with knowledge of an ongoing lease and related litigation, their obligation to pay just compensation extends to all recognized interests as they stand at the time of the taking. ()  

## Conclusion

J.J. Newberry Co. v. City of East Chicago clarifies that tenants under commercial leases possess a compensable property interest when leased premises are condemned, even amid fire damage and unresolved contract disputes. The case underscores that just compensation in eminent domain must reflect the fair market value of the property as a whole, including its status as a going concern, and that this value must then be fairly apportioned among all holders of interests in the property, ensuring that a tenant’s leasehold is not undervalued by nominal awards.


J.J. Newberry Co. v. City of East Chicago, 441 N.E.2d 39 (Ind. Ct. App. 1982)