SATURDAY FAMILY LP, Petitioner v. COMMONWEALTH of Pennsylvania, Respondent
Techspec Inc., Petitioner v. Commonwealth of Pennsylvania, Respondent
No. 781 F.R. 2013 | No. 782 F.R. 2013
Commonwealth Court of Pennsylvania.
Decided August 14, 2017
Submitted on Briefs June 7, 2017
BEFORE; HONORABLE MARY HANNAH LEAVITT, President Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE ANNE E. COVEY, Judge HONORABLE MICHAEL H. WOJCIK, Judge HONORABLE JOSEPH M. COSGROVE, Judge
B. Lafe Metz, Pittsburgh, for petitioners. Jo Ann P. Collins, Senior Deputy Attorney General, Harrisburg, for respondent.
Pursuant to
Generally speaking,1 a lease for real property for a term of thirty years or more is subject to Pennsylvania‘s realty transfer tax. Section 1103-C.1 of the Tax
In determining the term of a lease under this paragraph, it shall be presumed that a right or option to renew or extend a lease will be exercised if the lessor and lessee cannot renegotiate the rental charges for the renewal or extension period unconditionally. A lessor and lessee cannot renegotiate a rental charge unconditionally if it is fixed at a set amount for the period or a method for establishing the rental charges is established. Renewals or extensions at the option of the lessee at fair rental value at the time of the renewal or extension are not included in determining the term of a lease.
In Saturday Family I, the Court examined the terms of the ground lease between Petitioners Saturday Family LP, as landlord, and Techspec Inc., as tenant, (collectively Taxpayers) for the lease of property located at 718 Y Street, Derry Township, Westmoreland County, Pennsylvania (Ground Lease). Specifically, the Ground Lease provides for an initial term of 29 years and 11 months (and 3 days).4 The Ground Lease provides the tenant with the option to renew the term for up to 6 periods of 5 years each for FMV rent as determined by the parties at the time of the extension based on rents for similar parcels in Westmoreland County and, if they are unable to agree, by appraisal. Applying both the governing statute and the Department‘s regulation, the Court held that because the Ground Lease expressly provided the lessee with the option to renew the Ground Lease at expiration for an additional 5-year term at FMV rent at the time of renewal, the term of the extension should not be included in the lease term. Accordingly, the Ground Lease, which was for a term of less than 30 years, is not subject to the realty transfer tax.
The Commonwealth takes exception in a brief that largely tracks the arguments set forth in its original merits brief. In its first exception, the Commonwealth initially challenges not this Court‘s decision but an alleged failure by Taxpayers “to claim a valid exemption from [r]ealty [t]ransfer [t]axes.” (Cmwlth. Br. on Exceptions at 14.) The Commonwealth relies on instances in the record and in Taxpayers’ initial brief to the Court where Taxpayers refer to a nonexistent provision in the Tax Code, specifically “72 P.S. § 8102-C.3(24).”
We acknowledge those citation errors but do not view them as fatal. Taxpayers have consistently argued that because the Ground Lease has a renewal option at FMV rent, the renewal period should not be included for realty transfer tax purposes. In their initial brief, for example, Taxpayers include the following in their Statement of the Case; “Renewal options at fair market value are not counted toward the 30-year lease term test for [t]ransfer [t]ax purposes.
The balance of the Commonwealth‘s first exception is directed largely to this Court‘s construction of Section 1103-C.1 of the Tax Code and the Department‘s related regulation—
Because the panel in Saturday Family I did not reach the same conclusion, the Commonwealth contends that the panel (a) failed to consider the language in Section 1103-C.1 of the Tax Code, focusing only on the final sentence in
First, the panel in Saturday Family I fully considered all relevant provisions of the Tax Code and the Department‘s regulation in applying the clear language set forth in the Department‘s regulation. Saturday Family I, 148 A.3d at 934-35. In reality, the language of the Department‘s regulation largely tracks Section 1103-C.1 of the Tax Code, with the exception of the added language in the regulation dealing with extensions at FMV rent. The Court‘s interpretation in Saturday Family I is not inconsistent with the language in the Tax Code, unless of course the Department is suggesting that its own regulation, particularly the FMV language, is inconsistent with the Tax Code. The Department, however, does not make such an argument. The Department, therefore, is bound to follow both the statute and its regulation. Popowsky v. Pa. Pub. Util. Comm‘n, 853 A.2d 1097, 1106-07 (Pa. Cmwlth. 2004) (en banc), aff‘d, 589 Pa. 605, 910 A.2d 38 (2006).
The truth is that this case would not be here (or at least not in this context) but for the Department‘s decision to include in its regulation the language dealing with renewals/extensions at the option of the lessee at fair rental value at the time of renewal/extension. That language is not in Section 1103-C.1 of the Tax Code. Nonetheless, as noted above, we do not have before us a legal challenge to the validity of the Department‘s regulation. The Department insists that the panel‘s decision deprives Section 1103-C.1 “of all meaning” and, therefore, is absurd. We disagree. Like the panel, we agree that the lease does not fix a future rental price; rather, the rental price will only be determined at the time of lease renewal and then at FMV. We do not interpret the language of the Ground Lease as establishing a “method” for calculating the rental charge for the extension period, regardless of how that term is defined. Rather, we, like the panel in Saturday Family I, interpret the Ground Lease as firmly establishing, consistent with the Department‘s regulation, that the lease may be extended at the option of the lessee for additional periods at a FMV rent.8 FMV is not a “method“—it is a future, unknown, objective amount. Thus, the Court‘s construction is entirely consistent with the language in Section 1103-C.1 of the Tax Code.
Third, as for the remaining portions of Article 32 of the Ground Lease, we disagree that any provisions in the agreement preclude the parties from freely negotiating the FMV rent at the time of extension. Indeed, paragraph C of Article 32 clearly provides that FMV rent for the extension period will be determined by the lessor and lessee “based on rents for similar parcels of land in Westmoreland County (or if Tenant and Landlord are unable to agree, determined by appraisal as set forth herein).” (Ground Lease, Stipulation of Parties at Ex. “A,” p. 18) (emphasis added).) Ac
The regulation provides that the extended period will not be counted so long as the lease extension is (1) “at the option of the lessee” and (2) is “at fair rental value at the time of the renewal or extension.”
The Department‘s argument assumes that a FMV rent is only that rent with which both parties agree at the time of renewal—i.e., a rent that “they can renegotiate ... unconditionally at the time of the extension.” (Commonwealth Exceptions Br. at 43 (emphasis in original).) The Department‘s regulation, however, providing that the rental at renewal/extension must be at FMV in order to exclude the additional lease period from the calculation of the term of the lease for realty transfer tax purposes, itself places a condition on the parties’ negotiations. To avoid the tax consequence, the parties are restrained in their negotiations of the renewal rate. They are not free to set any agreed-to renewal rate. According to the Department‘s regulation, the rate must be a FMV rate if the parties wish to exclude the renewal/extension period from the original lease term for realty transfer tax purposes. If a father offers to sell his 2016 Mercedes C350 sedan to his son for $1 and his son agrees to purchase it at that price, their agreement alone does not represent a FMV for that vehicle. Likewise, if the parties to a 29-year, 11-month (and 3-day) lease agree to a 5-year extension at a rental rate of $12, that alone does not represent a FMV rate.
FMV is defined as “[t]he amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.” Black‘s Law Dictionary 597 (6th ed. 1990) (emphasis added). In other words, it is a market value—the value of the asset on the market. Usually, the actual price that parties negotiate would be a FMV price. Id. This is not always the case, however, as the Department is well aware. In its regulations dealing with the imposition of sales tax on vehicles, for example, the Department recognizes that the actual sales price negotiated between the parties may not represent the actual FMV of the vehicle. If that is the case, the Department will impose sales tax not on the actual negotiated price but on the “prevailing market price of the vehicle,” or FMV.
In reality, parties sometimes cannot reach agreement on how much to pay
If the Ground Lease did not include any of the provisions on which the Department fixates, a dispute could still arise at lease renewal over the rent for the renewal period. Taxpayers are permitted to resolve that dispute somewhere, if only to enforce their respective contractual rights. The dispute resolution provisions set forth in the Ground Lease are detailed, but from a practical and legal perspective our analysis would be no different if the Ground Lease provided only that “disputes over fair rental value shall be resolved in the courts of common pleas.” We would construe such contractual language, as we do the actual language in the Ground Lease, as providing for a method of dispute resolution, and not a “method for calculating the rental charge” under Section 1103-C.1 of the Tax Code and
Fourth, like the panel, we agree that the language in the Department‘s regulation is clear and unambiguous. The panel‘s decision in Saturday Family I, which we adopt and buttress herein, adheres to the clear and unambiguous language of the statute and the Department‘s regulation. Upon review of the panel‘s decision, we do not see any instance where the Court applied statutory construction principles in derogation of the same.
We now turn our attention to the Department‘s second exception, wherein the Department argues that the panel in Saturday Family I erred by not deferring to the Department‘s interpretation of Section 1103-C.1 of the Tax Code and
The Department‘s interpretation is simply unreasonable. At page 43 of its brief in support of its exceptions, the Department contends that in order for a renewal period to be excluded from the term of the lease for transfer tax purposes, the lease must provide “only that the renewal or exten
Unfettered free and open negotiations would not serve the purpose of either the Tax Code9 or the regulation, as explained above, because it could lead to mischief. Instead, the only reasonable interpretation of the language in the regulation is that in order to exclude any renewal/extension term from the original term of a lease, for purposes of avoiding realty transfer tax, any rental for the extension/renewal period must be at FMV and not, as the Department proffers, any price that the parties “freely and openly agree to without legally binding conditions.” Such a condition ensures that the rent at renewal as closely as possible approximates what the lessor could have demanded on the open market had it simply executed a new lease with a new tenant. The Department‘s interpretation, then, is not reasonable and, instead, is inconsistent with the regulation. It, therefore, is not entitled to deference.
In addressing this matter, we note also that in addition to construing the Department‘s regulation and the Tax Code, the Court has also reviewed and interpreted the terms of the Ground Lease itself, particularly the terms identified by the Department in its exceptions. The Department clearly disagrees with the Court‘s interpretation and characterization of those terms as dispute resolution provisions. In response, we note that “[t]he function of contract interpretation and construction is a question of law peculiarly within the province of this Court.” Dep‘t of Transp. v. Mosites Constr. Co., 90 Pa. Cmwlth. 33, 494 A.2d 41, 43 (1985).
Accordingly, we overrule the Commonwealth‘s exceptions to the Court‘s opinion and order in Saturday Family I, thereby confirming the Court‘s order of October 17, 2016.
ORDER
AND NOW, this 14th day of August, 2017, the exceptions filed by Respondent Commonwealth of Pennsylvania to this Court‘s opinion and order in Saturday Family LP v. Commonwealth of Pennsylvania, 148 A.3d 931 (Pa. Cmwlth. 2016), are hereby OVERRULED. The order of the Board of Finance and Revenue in the above-captioned matter, dated September 25, 2013 (mailed on September 27, 2013), is REVERSED.