A Loss for the Tax Man: Usufructs in Georgia
In Georgia, the term “lease” is a generic term for an agreement between two parties for one to occupy and use real property of, and pay rent to, the other. While perhaps sufficient for casual conversation, the term is not for resolution of certain legal issues.
A Georgia lease may classify either as a “usufruct” (a civil law concept recognized in Louisiana and somehow in Georgia, a common law state) or an “estate for years.” The owner of an estate for years generally has the use of the property to the full extent as would a fee simple owner, subject to the terms of the agreement. An estate for years is a real property interest that, for example, may be insured by title insurance. The holder of a usufruct has a more restricted right to possess and use the property. A usufruct is not an interest in real property, is not insurable, is not subject to levy and sale, and, subject to the terms of the agreement, may not be conveyed without the landlord's consent.
Georgia leases of retail, office, and industrial spaces are customarily usufructs, and a well-drafted lease will expressly identify itself as one and specify the parties as “landlord” and “tenant.” These leases impose varying, multiple restrictions and requirements on the tenants and generally have a term of five to ten years, perhaps with the opportunity for the tenant to extend the term under specified circumstances. A ground lease is usually an estate for years, and a well-drafted one will identify itself as such and designate the parties as “lessor” and “lessee.” Another distinction is that a usufruct is not a taxable interest but an estate for year is.
In Clayton County Bd. of Tax Assessors v. Aldeasa Atlanta Joint Venture, 2018 Ga. LEXIS 437, 2018 WL 3014452 (Ga. June 18, 2018), the Georgia Supreme Court analyzed a lease agreement to determine in part whether it created a nontaxable usufruct or a taxable estate for years. Aldeasa signed a five-year agreement with the City of Atlanta in 2007 for the use of retail spaces at Hartsfield-Jackson Atlanta International Airport, a portion of which is in Clayton County. The Clayton County Board of Tax Assessors assessed real property taxes for 2011 and 2012 on Aldeasa’s interest under the agreement. Aldeasa appealed to the Clayton County Superior Court, which determined that the agreement created a nontaxable usufruct. The county appealed and argued to the Georgia Supreme Court, among other contentions, that the agreement established not a usufruct but a taxable estate for years.
The agreement expressly stated that it created a usufruct, and that provision should have been dispositive from a textualist perspective, which some commentators believe the Court has fully adopted, in light of the applicable statute:
All renting or leasing of real estate for a period of time less than five years shall be held to convey only the right to possess and enjoy such real estate, to pass no estate out of the landlord, and to give only the usufruct unless the contrary is agreed upon by the parties to the contract and is so stated in the contract.
O.C.G.A. § 44-7-1 (b) (emphasis added). See also Macon-Bibb County Bd. of Tax Assessors v. Atlantic Southeast Airlines, 262 Ga. 119, 119 (414 SE2d 635) (1992) (a rebuttable presumption exists that a lease for five years or more creates a taxable estate for years). Not in tax cases:
[S]ince this case involves a tax dispute and not merely a dispute between the contracting parties, the provisions of the agreement must be objectively scrutinized to determine the legal effect of the agreement, despite its terms stating it creates a usufruct and not an estate in real property.
Aldeasa, fn 3. So the parties and the Court moved beyond the statutory presumption and the express usufruct designation and dug deeper into the agreement.
Clayton County emphasized the terms of the agreement consistent with the creation of an estate for years, such as the requirement that Aldeasa maintain insurance coverage and a prohibition against Aldeasa’s allowing any liens to be imposed on the premises. The County argued that the lien prohibition demonstrated that the parties intended to create an estate for years since a lien cannot attach to a usufruct.
The Court juxtaposed the limitations that the agreement placed on Aldeasa. The City had the right to terminate at any time without cause with thirty-days’ notice, require Aldeasa to relocate or make certain changes to its retail spaces at any time, use certain delivery companies, and use certain types of cash registers. The City also had the right to control Aldeasa’s prices and hours of operation. The Court weighed these restrictions as indicating a usufruct. Clayton County therefore could not tax Aldeasa’s interest under the Agreement.