Showing 2 posts from August 2018.
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.
The Georgia Court of Appeals ruled in 2011 that a guaranty identifying the principal debtor solely by its trade name is unenforceable, in part because to do otherwise would extend the guarantor’s liability by implication or interpretation, which a court may not do. Playnation Play Systems, Inc. v. Jackson, 312 Ga. App. 340, 341-342, 718 SE2d 568, 569) (Ga. App.2011); cert. denied No. S12C0432 (Ga February 27, 2012). The Court recently faced a similar situation in Lynchar, Inc. v. Colonial Oil Industries, Inc., 341 Ga. App. 489 (801 SE2d 576) (2017) and took the opportunity to overturn Playnation.
Colonial agreed to sell and deliver products to Lynchar under written documents that named the corporate obligor variously as “Lynchar Inc. d/b/a T&W Oil Co.,” “T&W Oil Co.,” and “T&W Oil.” Messrs. Thompson and Derby signed personal guaranties that identified “T&W Oil, Inc.” as the principal debtor. Lynchar defaulted and Colonial sued the guarantors. The guarantors denied the allegations and moved for partial summary judgment, arguing that the guaranties were not enforceable because they failed to identify the correct principal debtor, Lynchar, Inc. Colonial countered with its own partial summary judgment motion, arguing sufficient identification of the debtor from various admissions in the record, emails from Derby, Derby’s deposition testimony, and Lynchar’s 2011 federal tax return that showed the corporate name as “Lynchar, Inc. d/b/a T&W Oil Company, Inc.” The trial court granted Colonial’s motion and denied that of the guarantors, ruling that the guaranties were enforceable, parol evidence being admissible to explain the ambiguity in the name. The Court of Appeals found Playnation dispositive and reversed. The Supreme Court this time granted certiorari. It both reversed the Court of Appeals in this case and overruled Playnation.
The Court began its analysis with O.C.G.A. § 13-5-30 (2), the provision of the Georgia statute of frauds that requires a promise to guarantee the debt of another to be in a writing signed by the guarantor. Acknowledging cases that further require identification of the debt, the principal debtor, the promisor, and the promisee, the Court observed that case law (supportive of the intention of the statute of frauds to prevent, not shield or enable, fraud) also establishes in other contexts that a trade name may be sufficient identification. Contrary to the reasoning of the Court of Appeals in both this case and Playnation, enforcing a guaranty that names the principal debtor by a trade name does not extend a guarantor’s liability. Parol evidence, introduced in response to the guarantor’s dispute of identity, is admissible because it does not add anything to, take anything from, or vary any provision of the guaranty. In short, the identification of the principal debtor by only its trade name does not vitiate an otherwise enforceable guaranty.
On that basis the Court held the guaranties in this case to be enforceable. They named Lynchar by a trade name as the principal debtor. The law allows an entity to enter binding legal contracts using a trade name. The obligee could introduce parol evidence to counter arguments by the guarantors that “T&W Oil” was not the company’s trade name or that Lynchar had not in fact entered in to the agreements. Parol evidence would not thereby extend the liabilities of the guarantors. The terms of the guaranties, knowingly agreed by the guarantors, established the liability.
Interestingly, the Court then proceeded beyond the facts of this case and opined that the result would be the same even if “T&W Oil, Inc.” was not a trade name of Lynchar but was instead a misnomer of one (“T&W Oil, Co.” or “T&W Oil Company, Inc.”). Even further, an undertaking by Lynchar under a completely fictional name would still be the obligation of Lynchar and would satisfy the statute of frauds. Again, parol evidence would be admissible to resolve any ambiguity or clerical defect.
“And, oh, by the way,” the Court concluded, “we overrule Playnation.”
Practice Pointers. Lynchar gives some cover for sloppy drafting. The effort to avoid needing it, however, is not extensive. A drafter may readily confirm the existence and legal name of an entity (except certain partnerships, which may require deeper due diligence) by referring to the online corporate database of the pertinent jurisdiction; in the United States, typically the records of the secretary of state of the applicable state. Each party to an agreement should be an individual or a registered entity, in each case identified by the correct legal name. A trade name, if desired, may be added following the signifier “doing business as,” or “dba” for short.
The case also illustrates a consideration under Rule 3.1 of the Georgia Bar Rules of Professional Conduct: a lawyer may advance a claim contrary to existing law (in Lynchar, contrary to Playnation), if it “can be supported by good faith argument for an extension, modification or reversal of existing law.” Given the right arguments, the Supreme Court may even revisit an earlier case in which it denied certiorari.
- Kyle M. Baker
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