Opinion ID: 1386091
Heading Depth: 3
Heading Rank: 1

Heading: Application of the Three-part Test

Text: (1a) Section 60's governing test contains three parts: A `change in ownership' means [1] a transfer of a present interest in real property, [2] including the beneficial use thereof, [3] the value of which is substantially equal to the value of the fee interest. To determine whether the transaction in the case at bar worked a change in ownership under Proposition 13, we begin with that test. Plaintiff contends the transaction failed to meet any of the three parts of the test. As will appear, however, the transaction met the definition of a change in ownership in all respects.
Plaintiff maintains that the transaction failed to meet the portion of the test requiring a transfer of a present interest. As will appear, plaintiff's view of the nature of the conveyance is incorrect. It is undisputed that plaintiff transferred the entire fee to Metropolitan Life. An estate in fee simple is a freehold estate. (Civ. Code, §§ 762, 765.) (2) A freehold estate is distinguished from other forms of estates in that it is of indeterminate duration ( Millsap v. Quinn (Mo. 1990) 785 S.W.2d 82, 84 [appointed officeholder qualification case]; Board of Transp. v. Turner (1978) 37 N.C. App. 14 [245 S.E.2d 223, 225] [the true test of a freehold is its indeterminate tenure]), and carries with it title to land (see Cohn v. Litwin (1941) 311 Ill. App. 55 [35 N.E.2d 410, 413]). But an estate for years  in this case, a nonperiodic tenancy under a lease  is not a freehold estate. (Civ. Code, § 765.) Indeed, under California law an estate for years is not real property at all but rather a chattel real  a form of personalty  even though the substance of the estate, being land, is real property. ( Id., §§ 761, 765; Dabney v. Edwards (1935) 5 Cal.2d 1, 11 [53 P.2d 962, 103 A.L.R. 822]; see also Weaver v. Superior Court (1949) 93 Cal. App.2d 729, 734 [209 P.2d 830] [The sale of a lease for a term of years is not the sale of real property.]; Parker v. Superior Court (1970) 9 Cal. App.3d 397, 400 [88 Cal. Rptr. 352, 67 A.L.R.3d 743] [although a leasehold is not real property, it is nevertheless an estate in land].) Notwithstanding the fact that a lease is a present possessory interest in land, there is no question that as a nonfreehold estate it is a different species of interest from a freehold estate in fee simple. Any other conclusion would be contrary to centuries of English and American common law and its codification, as modified, in our Civil Code. A leasehold is not an ownership interest, unlike the possession of land in fee simple even when encumbered by a mortgage, for in the latter situation the mortgagor acquires equity over time through periodic payments. It is for that reason that common parlance refers to the owner of a freehold estate, encumbered or unencumbered, but to the holder of a lease; the freeholder is seised of land, whereas the leaseholder is not. Thus plaintiff's contention that it did not convey a present interest in real property is simply incorrect and cannot forestall a conclusion that a transfer of a present interest in real property occurred. Plaintiff did not retain the same interest when it sold its fee and reserved an estate for years. (3)(See fn. 3.), (1b) The entire fee was transferred to Metropolitan Life; the simultaneous creation of a different interest in plaintiff will not defeat the first prong of section 60. [3]
The second prong of section 60 requires that to constitute a change in ownership there must be a transfer not only of bare legal title but also of the transferor's beneficial or equitable interest in the land. Plaintiff contends it conveyed no beneficial use of the entire parcel because it continues to enjoy the exclusive use of the portion under its control. We disagree. The owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof. (Evid. Code, § 662.) Here, plaintiff has presented no evidence that Metropolitan Life holds title to the property for plaintiff's benefit: there is no evidence showing a custodial or trust relationship, or that plaintiff sold the property for less than essentially the market price. Nor is plaintiff paying below-market rent under the lease; rather, the record reveals the contrary. There can therefore be no question that when Metropolitan Life purchased the property in fee simple absolute it acquired its beneficial use during the lease term. Metropolitan Life's decision to exercise its beneficial interest by exacting rent from plaintiff rather than acquiring physical control of the demised premises does not alter the character of the transaction. The fact that [Metropolitan Life] may not occupy the property during the lease period does not deprive it of its right to enjoy the value of its property represented by the rent. [Citations.] The sale and leaseback constituted a transfer of the beneficial use of the property within the meaning of section 60. ( Industrial Indemnity Co. v. City and County of San Francisco, supra, 218 Cal. App.3d 999, 1005.) Any other conclusion would ignore the commercial realities of the transaction: as counsel for amicus curiae City and County of San Francisco observed at oral argument, any other interpretation would mean, in the case of a large commercial building, that a change in ownership would rarely occur, for there would usually be tenants remaining in the building. It follows that the second prong of section 60's test was also met at the time of sale.
The third prong of section 60 requires that the value of the interest transferred be substantially equal to the value of the fee interest. The facts show this test was met. Because Metropolitan Life acquired the entire fee, not only did the value of the interest transferred substantially equal ... the value of the fee interest, it was of identical value because it was a transfer of the fee itself. (See Industrial Indemnity Co. v. City and County of San Francisco, supra, 218 Cal. App.3d 999, 1005.) The property sold essentially for the market price, and plaintiff is now paying rent at the market rate. There is no indication that the property would resell for less than the market price. Hence, notwithstanding the reservation of an encumbrance in the form of an estate for years, the value of the transfer equaled that of a conveyance of fee simple. (4) In enacting the third prong of section 60 the Legislature meant to insulate from Proposition 13's effect transfers in which only an estate of lesser value was conveyed. Two examples illustrate the Legislature's intent when it adopted the task force report's findings and enacted the statutory scheme before us. One example considers the conveyance of a lease for one year. It would not be rational to apply a constitutional provision for reassessment following a change in ownership when the owner of an apartment leases it to another for one year, thereby conveying an estate of lesser value than that retained. By contrast, the Legislature decided, following the task force's recommendation, that the creation of a 35-year lease would achieve a change in ownership (§ 61, subd. (c)(1)) because the length of the lease would give the lessee's interest some of the practical attributes of a conveyance of fee simple. A lease of such duration will constitute the main economic value of the land, even though the leaseholder does not own a freehold estate  lenders are, in the report drafters' view, willing to lend on the security of such an instrument. (See task force rep., supra, at pp. 39-41.) Another example is the conveyance of fee simple from parent to child subject to the reservation of a life estate. The Legislature desired to avoid creating a rule that would characterize such a conveyance as a change in ownership. Because this is a relatively common form of conveyance, the Legislature, again following the task force's recommendation, included it in its list of examples of exempt transfers. (§ 62, subd. (e).) But even if the Legislature had not done so, reassessment would be barred under the carefully drafted basic test of section 60, not only because the beneficial use would not have transferred, but also because the value of each divided interest in the estate would not approach that of a fee. A purchaser of the reserved estate would be buying a life estate per autre vie  a freehold estate, to be sure, but an estate of questionable value because subject to complete defeasance at an unknown time. Rare is the mortgagee willing to lend on the security of an estate so ephemeral. The value of the reversionary or remainder interest would also be reduced because the time of vesting would be uncertain and, depending on the care with which the original conveyance was drafted, the value of the ultimate estate might be less at the time of vesting because of intervening conveyances, creditors' demands, and the like. [4] By contrast, when the life estate ends and the remainder or reversion indefeasibly vests in the grantees the value of the estate is known and is identical to the value of the fee. It is at that point that a change in ownership has occurred, as the Legislature specifically provided in accord with the task force's recommendation. (§ 61, subd. (f).) (1c) As stated above, we find nothing in the nature of the transaction before us to suggest that Metropolitan Life is unable to sell its fee interest in the property to a purchaser for anything less than its full market value. There are no contingent interests that make the value of Metropolitan Life's interest uncertain or questionable. Nor is it likely that Metropolitan Life would have paid substantially the market price for the land if any such contingency had presented itself at the time of the conveyance. We find, therefore, that all prongs of section 60's test have been met, and that the transaction worked a change in ownership under Proposition 13.