Opinion ID: 2349897
Heading Depth: 1
Heading Rank: 3

Heading: Reserve for Depreciation and Obsolescence

Text: During the operation of the Clapp Trust to date, no reserve for depreciation and obsolescence has been created from trust income and withheld from distribution of net income. The Clapp Memorial Block conforming to the instructions in the Will was built for occupancy by stores, offices and halls, and has been so used. The corpus of the trust is entirely real estate. There is no capital fund. In at least one instance, where a capital expenditure was considered necessary, it was provided for by agreement with the income beneficiaries. At the present time two administrative problems point up the necessity of judicial instruction. The elevator in the building is employee operated and both economics of operation and tenant satisfaction could be achieved by the installation of an automatic lift. This will require substantial outlay, without funds presently available, and without authority given in the trust instrument to create a reserve from income to meet this need. In connection with the lease referred to earlier in the opinion, and by reason of absence of a reserve fund, the lessees made substantial alterations and improvements the cost of which is to be amortized over the term of the lease in lieu of a portion of the rent, and we are given to understand that other tenants have been acquired under similar arrangements. To the 1966 landlord who must compete for tenants, a building with modern appurtenances is a distinct asset. Contractual arrangements with tenants, in which, in consideration of rental concessions, the tenant makes his own alterations and improvements is of questionable advantage in the long run. Not only do the tastes of prospective occupants vary, to the end that a building may assume a variety of changes, and equipment installations, which detracts from its character, but the tenant's amortization of his investment over a shorter period of time than the landlord would find it necessary to do, reduces the gross rental which might otherwise be obtained. Both of these considerations suggest, in the situation at hand, that good management urges modern equipment and a coordinated plan of maintenance and inprovement. Desirable as this approach may be, for the trustees to embark on such a program and charge the necessary outlay against trust income, by way of reserve for physical depreciation and obsolescence, authority express or implied, must be found within the trust instrument. 54 Am.Jur., Trusts § 289. In the extracts from the Clapp Will, hereinbefore quoted, an intent is demonstrated in that the testatrix directed that the trustees erect and maintain in the best of condition this memorial building. This coupled with the purpose for which the building was erected, her desire to operate the building for as long as the law would permit her trustees to do so, does not indicate a contemplation that the building would exhaust itself as an income producer or as a fitting memorial by lack of attention. There is nothing to support the usual theory that the settlor's primary concern was for the income beneficiaries vis a vis the remaindermen. It was Miss Clapp's intent to keep the building contemporary with current needs to the end that it would remain not only a fitting reminder to the citizens of Portland of her parents and grandparents, and our life long interest in its welfare, but to keep it especially adapted for occupancy by stores, offices and halls. This building did not fall into the trust from the estate of Miss Clapp; it was intentionally constructed as an income producer for the trust. The definition of net rents accepted in Thaxter, supra, 144 Me. at page 180, 67 A.2d 21 is, as duration, likewise dictum. Construing Miss Clapp's Will as we have done, does no violence to contemporary trust principles. The result is in accord with authority. See Note 60 Harvard Law Review (1946-47) 952; Bogert Trusts & Trustees, 2d Ed., § 829; Scott on Trusts, 2d Ed., § 239.4; Restatement of the Law, Trusts 2d, § 239, Illustration h. Buildings. It is held, therefore, that under the terms of the testamentary trust and the facts involved, the trustees are authorized, by implication, to create a fund reasonable in amount, from gross income, as a reserve for physical depreciation (deterioration) and physical obsolescence,under the supervision of the Probate Court. See Fidelity Union Trust Co. v. McGraw et al. (N.J. Chancery 1946) 138 N.J.Eq. 415, 48 A.2d 279 for definitions. The case is remanded to the single Justice for determination and allowance of reasonable costs and counsel fee to the defendants. So ordered.