IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Saturday Family LP, :

Petitioner :

:

v. : No. 781 F.R. 2013

: Submitted: June 7, 2017

Commonwealth of Pennsylvania, :

Respondent :

Techspec Inc., :

Petitioner :

:

v. : No. 782 F.R. 2013

: Submitted: June 7, 2017

Commonwealth of Pennsylvania, :

Respondent :

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

OPINION BY JUDGE BROBSON FILED: August 14, 2017

Pursuant to Pennsylvania Rule of Appellate Procedure 1571(i), the 

Commonwealth of Pennsylvania (Commonwealth) filed exceptions to this Court’s 

three-judge panel opinion and order in Saturday Family LP v. Commonwealth of 

Pennsylvania, 148 A.3d 931 (Pa. Cmwlth. 2016) (Saturday Family I), dated 

October 17, 2016, in which the Court reversed an order of the Board of Finance 

and Revenue (Board), dated September 25, 2013 (mailed on September 27, 2013). 

In so doing, we concluded that the Commonwealth was bound by the clear terms of 
2

its own regulation and could not impose realty transfer tax on a ground lease with a 

less than thirty-year initial term but with a renewal option at fair market value 

(FMV) rent. Upon careful review, we overrule the Commonwealth’s exceptions.

Generally speaking,1a 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 Code2provides that “[i]n determining the term of a lease, it shall be presumed 

that a right or option to renew or extend a lease will be exercised if the rental 

charge to the lessee is fixed or if a method for calculating the rental charge is 

established.” (Emphasis added.) Under its rulemaking authority,3the Department 

of Revenue (Department) promulgated a regulation to aid, inter alia, in its 

enforcement of Section 1103-C.1 of the Code. With respect to leases and lease 

extensions, the Department’s regulation provides, in relevant part:

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. 

 

1 A more detailed discussion of the statutory framework is set forth in the panel’s 

decision in Saturday Family I.

2 Act of March 4, 1971, P.L. 6, added by the Act of July 2, 1986, P.L. 318, 72 P.S. 

§ 8103-C.1.

3

Section 1107-C of the Tax Code, Act of March 4, 1971, P.L. 6, added by the Act of 

May 5, 1981, P.L. 36, 72 P.S. § 8107-C.
3

61 Pa. Code § 91.193(b)(24)(v) (emphasis added).

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.” 

 

4

The Commonwealth notes in its brief in support of its exceptions that the Court in 

Saturday Family I omitted the 3 days from the initial term in its opinion. The Commonwealth,

however, does not indicate that this omission (or rounding in the interest of brevity) had any 

relevance to the panel’s analysis or even the Court’s consideration of the Commonwealth’s 

exceptions. Nonetheless, we now include the three days.
4

(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).” 

Although “72 P.S. § 8102-C.3” exists,5it does not contain a subsection (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. 

72 P.S. § 8102-C.3(24).” (Taxpayers’ Initial Br. at 3.) This statutory cite is an 

obvious error, apparent from a reading of Taxpayers’ argument section, where 

Taxpayers cite specifically to the Department’s regulation to support this 

proposition.6 We note that the Commonwealth does not profess to be deceived or 

otherwise prejudiced by the citation errors. Rather, it merely seeks to take 

advantage of them. Like the Commonwealth, however, the Court was clearly able 

to discern the legal basis for Taxpayers’ appeal notwithstanding some errant 

citations. Accordingly, this particular exception does not compel the Court to rule 

in the Commonwealth’s favor.

 

5

Section 1102-C.3 of the Tax Code, Act of March 4, 1971, P.L. 6, added by the Act of 

July 2, 1986, P.L. 318, as amended, 72 P.S. § 8102-C.3. This section of the Tax Code excludes 

certain enumerated transactions from imposition of the realty transfer tax.

6 We note that although there is no subsection (24) in Section 1102-C.3 of the Tax Code, 

the Department’s regulation specifically dealing with how to treat lease extensions for the

purpose of realty transfer tax is found at 61 Pa. Code § 91.193(b)(24)(v). This could explain the 

occasional citation errors by Taxpayers.
5

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—61 Pa. Code § 91.193(b)(24)(v). As it did in its 

brief on the merits, the Commonwealth contends that portions of the Ground Lease

detailing how the parties will arrive at FMV rent on renewal are equivalent to a 

“method for calculating the rental charge,” as described in Section 1103-C.1 of the 

Tax Code, or a “method for establishing the rental charge,” as described in the 

Department’s regulation, for the extension period. Because the Ground Lease 

includes such a “method” for calculating the rent for the extension period, the 

Commonwealth contends that the extension period must be included in the lease 

period, which would bring the lease period to greater than 30 years. Accordingly, 

the lease is subject to realty transfer tax.

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 61 Pa. Code § 91.193(b)(24)(v) (relating to lease extension); (b) should have 

relied on dictionary definitions of the term “method” and, had it done so, would 

have found that the procedures to arrive at FMV rent set forth in the Ground Lease 

constitute a “method” as that term is used in the statute and regulation; (c) erred in 

even concluding that the parties agreed to extend the lease at FMV rent because the 

parties are not free to negotiate; (d) inconsistently concluded that the Department’s 

regulation was clear while at the same time applying the Statutory Construction 
6

Act of 1972;

7

and (e) adopted a construction that defeats the purpose of the 

statutory provisions imposing the transfer tax.

The Commonwealth, here, presents largely the same issues and 

arguments that this Court addressed in our opinion in Saturday Family I. Having 

considered the Commonwealth’s contentions and Taxpayers’ responses, we 

confirm the panel’s construction of both Section 1103-C.1 of the Tax Code and 

Section 91.193(b)(24)(v) of the Department’s regulation for the reasons set forth in 

the panel’s opinion. In response to particular points raised by the Commonwealth, 

we offer some additional analysis.

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), affirmed, 910 A.2d 38 

(Pa. 2006).

 

7

1 Pa. C.S. §§ 1501-1991.
7

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 

 

8 We further construe the phrase “fair rental value at the time of the renewal or extension” 

in the Department’s regulation, 61 Pa. Code § 91.193(b)(24)(v), as synonymous with the phrase 

“fair market value rent . . . at the time of such extension” on page 18 of the Ground Lease. The 

Commonwealth does not contend otherwise.
8

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).) Accordingly, the Ground Lease expressly allows for 

negotiation—i.e., agreement. The only restriction on the parties’ ability to 

negotiate is that both parties must negotiate a FMV rent—meaning, one party 

cannot extract a higher (lessor) or lower (lessee) rent than the market, at the time of 

the lease extension, supports.

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.” 61 Pa. Code 

§ 91.193(b)(24)(v). The existence and enforcement of the FMV rent condition in 

the Department’s regulation is critical for two reasons. First, the condition ensures, 

consistent with the Department’s regulation, that the option to extend belongs to 

the lessee. Without the FMV condition, a lessor could demand an artificially high 

rent and effectively defeat a lessee’s option. Second, the condition ensures that the 

lease extension as closely as possible approximates a new lease with a new lessee

in the open market—i.e., the existing long-term lessee derives no price benefit or 

advantage in the extension. A price benefit or advantage conferred upon the 

original lessee at extension/renewal looks less like an arms-length 

extension/renewal and more like a benefit conferred by and baked into the original 

lease term, strongly suggesting that the extension/renewal period should be 

included in the original lease term for realty transfer tax purposes.

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 
9

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 
10

not on the actual negotiated price but on the “prevailing market price of the 

vehicle,” or FMV. 61 Pa. Code § 31.44(b).

In reality, parties sometimes cannot reach agreement on how much to 

pay for rent, let alone a FMV rent. Where, as here, there is a legal consequence to 

the FMV determination, parties should be free to include dispute resolution 

provisions within their agreement(s) in order to ensure that their respective rights 

and interests are protected. With respect to the Department’s regulation and the 

imposition of the realty transfer tax, the term of the lease extension/renewal can 

only be excluded from the original lease term if the extension/renewal is at the 

option of the lessee and is at a FMV rent at the time of extension/renewal. The 

Department contends that the dispute resolution provisions in the Ground Lease 

require inclusion of the extension/renewal period in the original lease term when 

they actually are written to ensure that the conditions for excluding the 

renewal/extension periods set forth in the Department’s regulation are satisfied. 

The processes set forth in Article 32 of the Ground Lease are entirely reasonable 

and consistent with how disputes over FMV are resolved in the real world. If the 

parties cannot agree, qualified real estate appraisers are retained. Any disputes that 

arise in the course of reaching a FMV rent are resolved either through arbitration 

or litigation.

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 
11

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 Section 91.193(b)(24)(v) of the Department’s regulations.

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 Section 91.193(b)(24)(v) of the Department’s regulations. We disagree. As 

the panel in Saturday Family I recognized, courts need not defer to an 

administrative agency’s interpretation of its own regulation where that 

interpretation “is clearly erroneous or inconsistent with the regulation.” Saturday 

Family I, 148 A.3d at 938 (quoting Pa. State Police, Bureau of Liquor Control 

Enforcement v. Benny Enterprises, Inc., 669 A.2d 1018, 1021 (Pa. Cmwlth. 1995), 

appeal denied, 681 A.2d 1344 (Pa. 1996)); see Popowsky, 853 A.2d at 1106. As 

noted above and by the panel in Saturday Family I, the Department’s regulation

and Section 1103-C.1 of the Tax Code, read together, are unambiguous and, 

therefore, subject to only one reasonable interpretation.
12

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 extension will be at true ‘fair 

rental value’ at the time of renewal or extension (free and open and without legally 

binding conditions).” As noted above, however, the requirement in the regulation 

that the renewal rent be at FMV is itself a legally binding condition that limits the 

parties’ ability to agree to a rental price for the renewal period. If the Department 

truly wanted free and open negotiations, the regulation would have simply 

provided: “Renewals or extensions at the option of the lessee at a price agreed to 

by the parties fair rental value at the time of the renewal or extension are not 

included in determining the term of a lease.”

Unfettered free and open negotiations would not serve the purpose of 

either the Tax Code9or 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 

 

9

72 P.S. §§ 7101-10004. 
13

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., 494 A.2d 41, 43 (Pa. Cmwlth. 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. 

 

 P. KEVIN BROBSON, Judge
IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Saturday Family LP, :

Petitioner :

:

v. : No. 781 F.R. 2013

:

Commonwealth of Pennsylvania, :

Respondent :

Techspec Inc., :

Petitioner :

:

v. : No. 782 F.R. 2013

:

Commonwealth of Pennsylvania, :

Respondent :

O R D E R

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 941 (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.

 

 P. KEVIN BROBSON, Judge