Opinion ID: 349243
Heading Depth: 2
Heading Rank: 2

Heading: the benefits of the transaction

Text: 29
30 In addition to assuming the risks and burdens incident to the ownership of property, Sunray also controls certain important benefits which traditionally are reserved to the owner in the event leased premises are condemned or seized by eminent domain. During the primary term, if all or any part of the leased premises becomes in the sole and absolute judgment of lessee undesirable for the lessee's business or for any use then existing, because of a taking by condemnation or eminent domain, the lessee has the right to make a rejectable offer to purchase the property. The Trust has thirty days after receipt of the written offer to accept or reject it and failure to act within the prescribed period constitutes an acceptance. Significantly, the lessee not only has the unilateral right to determine whether the taking is sufficient to make the premises undesirable for its further use, but the repurchase price fixed for the offer is equal to the sum of all present values 4 of the quarterly payments to become due after the proposed date of repurchase, plus a pre-determined premium. 5 If Sunray's offer to repurchase during the primary term is rejected by the Trust, then the condemnation award is payable both to Sunray and the Trust as their interests may appear at the time of the taking. During the extended term of the leases, Sunray also has the absolute right to share in any condemnation award as their interest may appear. Significantly, if a portion of the premises is taken by condemnation or eminent domain but the lessee elects to occupy the balance, there is no abatement of rent and the entire award for the taking belongs to the lessee. The lessee is also irrevocably empowered to negotiate the terms and price for any taking and to sell and convey the properties without the prior approval or joinder of the Trust. We view the retention of such broad powers by the lessee in the event of condemnation or government seizure of the land, especially the power to negotiate the price for the land, and the absence of rent abatement in the event of a partial taking and continued occupancy of the balance as inconsistent with the traditional role of a lessee. 31
32 Sunray also enjoys the unique right when, in the sole exercise of its business judgment, it decides that the use of a parcel of land is no longer profitable or necessary in conducting its business to make a rejectable offer to purchase it. 6 Again, the price is not dependent upon the fair market value of the land at the time but is fixed in an amount equal to the sum of the present values of all quarterly basic rent payments to become due in the future plus the applicable prepayment premium shown in Schedule C attached to the leases. 33
34 Sunray also had the extraordinary and absolute right, in lieu of making any rejectable offer or upon rejection of such an offer, to substitute other land having at least equal value for the leased premises. The value of the land to be substituted (was to) be determined by the lessee's book value therefor. This unilateral right of substitution thus enabled Sunray to reacquire legal title to any parcel of land whenever it made a rejectable offer. 7 35
36 We believe that the substance and reality of the rejectable offer provisions, particularly the rights of substitution, enabled Sunray during the taxable years in issue to retain ultimate control over the leased properties subject to repayment with interest of the advances made by the Trust. We cannot accept the Tax Court's conclusion that the rejectable offer provisions do not vest any equity interest in the lessee because the trust was under no obligation to accept such offers as might be made. The Tax Court, failed to analyze the lessee's rights of substitution, dismissing them with the observation that they were never exercised and were ultimately rescinded on August 9, 1972; we believe these rights of substitution rendered illusory the lessor's rights to reject an offer. 37 The limitations of time, distance, and subject matter also erode whatever substance may have existed in the lessor's rights to reject an offer. The Trust had only thirty days after the receipt of rejectable offers to reject them and the failure to act was deemed to be an acceptance. The offers left the Trust with virtually an impossible task of securing independent appraisals on comparative low unit value properties, securing competent advice, and reaching an intelligent, considered decision within a short time on multiple pieces of diverse properties geographically dispersed over many states. In fact, the Trust initially objected to the thirty-day limitation but ultimately accepted it and agreed to waive an appraisal requirement. Rejecting the offer would have required the Trust, having no employees with background or experience in real estate management, to undertake the heavy burden of managing small real estate parcels and properties scattered over 17 states. The acceptance of such a burden was viewed by trust officials as being inconsistent with the investment goals of this 2 1/2 billion dollar trust. Furthermore, since Sunray had to certify that the property would no longer be used for its then existing business purposes, the only time the parcels would be repurchased as a practical matter would be for resale. The extreme impracticality of rejecting a rejectable offer is evidenced by the Trust's acceptance of all 136 of Sunray's rejectable offers made during the first few years of the leases. The Trust never took possession of any property described in a rejectable offer. 38 Thus, Sunray, even though it was the titular lessee of the properties, had the exclusive means of realizing the benefits in appreciation in the market value of the properties by making a rejectable offer which had little likelihood of being rejected; if perchance it were rejected, Sunray had the absolute right to substitute other parcels of property. In addition, as we later discuss, Sunray had also the absolute option to repurchase the properties during the extended terms of the leases for an option price equal to the fair appraised value of the leased premises to the lessor. 39 In our view, the powers vested in the lessee in the event of condemnation or seizure of property pursuant to the power of eminent domain, including the right to negotiate the sale or settlement price, the right to make rejectable offers, and the extraordinary rights of substitution are significant benefits characteristic of the ownership of property rather than that of a leasehold.