Case Title: Shields v. Department of Revenue

Citation: 513 P.2d 784

Docket Number: 

State: oregon

Court: Oregon Supreme Court

Date: 1973-09-10T00:00:00Z

Document:
513 P.2d 784 (1973)
W.H. SHIELDS et al., Respondents,
v.
DEPARTMENT OF REVENUE, State of Oregon, Appellant.

Supreme Court of Oregon, In Banc.
Argued and Submitted July 10, 1973.
Decided September 10, 1973.
*785 Alfred B. Thomas, Asst. Atty. Gen., Salem, argued the cause for appellant. With him on the briefs were Lee Johnson, Atty. Gen., and Theodore W. de Looze, Chief Tax Counsel, Salem.
Vernon D. Gleaves, Eugene, argued the cause for respondents. With him on the brief were Thomas M. Allen, and Butler, Husk & Gleaves, Eugene.
Before O'CONNELL, C.J., and McALLISTER[*], DENECKE, HOLMAN, TONGUE, HOWELL and BRYSON, JJ.
HOWELL, Justice.
This appeal by the defendant, Department of Revenue, is from an adverse decision of the Tax Court in which the method of valuation of improvements and their assessability to the plaintiffs were in issue. The land itself is not involved in this appeal as the parties have agreed upon its value.
Plaintiffs are co-partners and owners of a large regional shopping center in the city of Eugene. As of the assessment date, January 1, 1970, the plaintiffs had entered into approximately 50 leases with various tenants for business space in the shopping center. Most of the leases were "shell and allowance" leases whereby the plaintiffs constructed only the building shell and the tenant constructed the interior of the premises. Under this type of lease the plaintiffs, as landlords, paid the tenant a specific dollar allowance in partial reimbursement to the tenant for his expenses in completing the interior of the store. In the other leases the plaintiffs completed the entire structure and delivered it to the tenant, who then had only to install his trade fixtures. Our only concern is with the former type of lease.
Only two issues are presented: (1) Is the cost approach or the income approach to market value the proper method of valuation of plaintiffs' buildings, and (2) Are the tenants' improvements over and above the plaintiffs' allowances assessable to plaintiffs as owners, or to the tenants?
*786 In approaching the problem of valuation of plaintiffs' buildings, both parties agreed that no sales of comparable properties were available. The county assessor and the Department of Revenue relied on the income approach. The plaintiffs argued for the cost approach and contended that the income approach was improper under the circumstances because the shopping center was so new that its income and operating expenses had not yet become stabilized.
The Tax Court found that the income approach was "grossly premature" and should not have been used to determine market value. The Tax Court also found that the tenants' improvements should be assessed to the tenants. Defendant appeals.
Regarding the valuation issue, we agree with and adopt the following from the unpublished opinion of the Tax Court:
The second issue is whether the tenant's improvements in excess of the allowance granted by plaintiffs are assessable to plaintiffs as owners of the buildings, or to the tenants.
The authority to separately assess improvements on real property based on ownership of the improvement is found in ORS 308.115(2) which states:
The lease, which is more than 50 pages in length, makes various references, some of which are ambiguous, to the various rights and obligations of the tenant regarding the tenant's improvements.
Article 1 B, "Possession of Premises," states in pertinent part:
The above article defines different types of property, and these terms are used in that sense in other portions of the Lease. Tenant's Property is defined as signs, movable trade fixtures, and equipment. Such property belongs to the tenant and must be removed at the termination of the lease. Another category of property is floor coverings, lighting fixtures "and other similar removable items Tenant has affixed to the premises." Property in this category apparently belongs to the landlord but may be removed by the tenant. We conclude from the briefs that "Tenant's Property" and the other property referred to as floor coverings, etc., are not involved in this proceeding.
The dispute here is focused on property described in the lease as "Tenant's Work" and which is not mentioned in Article 1 B above relating to ownership and removal of Tenant's Property and lighting fixtures, etc. "Tenant's Work" described in Division 4 of Exhibit D to the lease constitutes those improvements made by the tenant over and above the allowance granted by the landlord for expenses incurred by the tenant in the "shell and allowance" lease. "Tenant's Work" includes such items as ceilings, plumbing, heating and air conditioning equipment, and electrical wiring.
Clause 6 of the lease relating to Tenant's Work states that such work "shall be deemed to be the personal property of Tenant irrespective that such work becomes affixed and/or attached to the demised premises." Plaintiffs contend that this clause should be read literally so as to conclusively vest ownership in the tenant during the term of the lease and therefore relieve plaintiffs of any obligation to pay taxes on this property. However, we believe that Clause 6 above must be read in conjunction with Article 8 A of the lease relating to personal property taxes. That article states:
In effect, Article 8 A above provides that the tenant is responsible for all taxes assessed against the Tenant's Property and all other personal property whether affixed to the realty or not, but excluding Tenant's Work to the extent of the amount paid by the landlord. Also, any taxes assessed against "said property" as real property are considered to be personal property assessments.
From Clause 6 which states that Tenant's Work is to be considered the personal property of the Tenant, and from Article 8 A which makes the tenant responsible for all taxes assessed against personal property, we conclude that, as between the plaintiffs *789 and the tenants, the tenants are ultimately responsible for all taxes assessed against the items included in Tenant's Work. However, this interpretation does not decide the issue of who owns Tenant's Work for purposes of assessment under ORS 308.115(2).
While the parties may agree between themselves that the various items involved in the category of Tenant's Work which are part of the realty may be considered to be personalty for tax purposes, that agreement will not control the State in the exercise of its taxing power. Warm Sprgs. Lbr. Co. v. Tax Com., 217 Or. 219, 225, 342 P.2d 143 (1959).
Real property for purposes of taxation includes all buildings, improvements, machinery, equipment or fixtures on the land. ORS 307.010. Generally, real property is assessed as a whole in the name of the owner. An exception is where the buildings, improvements, etc., are owned separately and apart from the land, in which case ORS 308.115(2) requires the assessor to assess and tax them separately.
As a general rule, in the absence of an agreement, any buildings or improvements erected by the tenant will become the property of the landlord at the termination of the lease. Title & Trust Co. v. Durkheimer Co., 155 Or. 427, 453, 63 P.2d 909, 64 P.2d 834 (1937); Gen. Petroleum Corp. v. Schefter, 141 Or. 349, 352, 16 P.2d 645 (1933); 3 Thompson on Real Property 531, 532, § 1140 (1959).
However, the parties may agree that any improvements erected by the tenant may remain the property of the tenant and be removable by him. Gen. Petroleum Corp. v. Schefter, supra; 51C C.J.S. 1019, Landlord & Tenant § 394(2) (1968); 3 Thompson, supra at 544, 546, § 1141.
In the instant case it is true that Clause 6 states that Tenant's Work shall be the personal property of the tenant. However, we construe Clause 6, read in light of Article 8 A, as relating to the obligation to pay personal property taxes, and not as a contractual provision determining ownership of what would otherwise be real property.
Even if we were to construe Clause 6 making the Tenant's Work the personal property of the tenant as an ownership clause,[1] that provision alone in the lease is not conclusive of ownership. A provision in a lease that the tenant is the owner of an improvement is not conclusive, at least for tax purposes, if other indicia of ownership are not present. National Cold Storage v. Boyland, 16 A.D.2d 267, 227 N.Y.S.2d 147 (1962). Here, the lease lacks the significant feature of right to removal. As we mentioned previously, Article 1 B allows only the tenant to remove Tenant's Property (signs, movable trade fixtures, and equipment). We would conclude that the failure to include Tenant's Work as a removable item belonging to the lessee was deliberate, because it is not reasonable that the landlord would desire the tenant to remove ceilings, equipment, and wiring which are examples of items classified as Tenant's Work.
Additionally, there are other clauses in the lease which would indicate that ownership of Tenant's Work is in the landlord. Article 7 provides that any structural changes or alterations, except for trade fixtures equipment and furnishings, become the property of the landlord. Article 10 requires the tenant to insure only Tenant's Property and its merchandise. Finally, Article 14 states that any sums paid as a result of condemnation will belong to the landlord with the sole exception of that sum which represents a taking of Tenant's Property.
Modified and remanded with directions to enter a decree in accordance herewith.
[*]  McAllister, J., did not participate in this decision.
[1]  In Annot., 154 A.L.R. 1309, 1314-15 (1945), it is suggested that if a clause in a lease agreement provides that the improvement is to remain as the tenant's property, then such an agreement should be controlling. However, we are persuaded that it should not be conclusive when no other indicia of ownership are present in the agreement.