Request By:
Mr. Paul Reliford, Superintendent
Fairview Independent Schools
2127 Main Street
Ashland, Kentucky 41101
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Robert L. Chenoweth, Assistant Attorney General
You have asked the Office of the Attorney General for advice relative to the sale of surplus school property. You explained in your letter that for some several years the Fairview Independent Schools have leased this surplus property, an old elementary school building, to Ashland Business College. You enclosed a copy of the lease agreement and have asked this office to review it.
Concerning the sale of this property you indicated Ashland Business College desires to purchase it but wishes to make a down payment and have the remaining principal subject to a seller's mortgage or vendor's lien held by the Fairview Independent Schools. In the alternative to the above method of purchasing, a lease/ purchase arrangement has been discussed. You have asked this office to advise you on the legality of these possible methods of selling school property.
Each local board of education has the power to "purchase, receive, hold and sell property." KRS 160.160. Pursuant to KRS 156.160(12), the State Board of Elementary and Secondary Education is to adopt rules and regulations concerning the "disposal of real and personal property owned by local boards of education." The regulation adopted is found at 702 KAR 4:090 which provides as follows:
"School property proposed for disposal shall be surplus to the need for the educational program as approved by the latest facilities survey or by an amendment thereto. Request for approval shall be submitted in writing to the Superintendent of Public Instruction. Disposal may be implemented upon approval."
There are no other specific statutory or regulatory provisions concerning the sale of real property owned by a school district. In OAG 76-291, copy attached, this office concluded that once approval to sell school property as surplus has been given, a local board is at liberty to dispose of the property in such manner as it sees fit subject to the condition that it is obligated under the Kentucky Constitution, Sections 184-186, to consummate a sale for not less than the fair market value of the land. The issues of selling school property in the manner you have presented was not nor has it been discussed by this office.
It is the opinion of this office that a school district may not sell surplus school property on credit. That is, we conclude that a local school district may not sell property and retain a vendor's lien for any unpaid principal. We believe the disposition of school property must be odne in a manner most beneficial to the school district and the public. It is expected and must be demanded from a local school board that good judgment will be exercised and sound business principles followed. In light of the nature of the property and the fact that it is "vested in the commonwealth for the benefit of the district board of education" (KRS 162.010), we believe that in the sale of school property nothing less than a cash transaction would be satisfactory. Moreover, and most importantly, we are of the opinion that for a school district to enter into a sale arrangement requiring the holding of a seller's mortgage would be in contravention of Section 179 of the Kentucky Constitution. Section 179 reads as follows:
"The general assembly shall not authorize any county or subdivision thereof, city, town, or incorporated district, to become a stockholder in any company, association or corporation, or to obtain or appropriate money for, or to loan its credit to, any corporation, association or individual, except for the purpose of constructing or maintaining bridges, turnpike roads, or gravel roads: Provided, If any municipal corporation shall offer to the Commonwealth any property or money for locating or building a capital, and the Commonwealth accepts such offer, the corporation may comply with the offer."
We believe for a school district to hold a vendor's lien on the sale of school property is an extending of its credit to the purchaser prohibited by this section of the constitution.
The alternative method of selling presented by you was a lease/ purchase arrangement. We understand you to be referring to something other than a lease with an option to purchase provision. If this assumption is correct, there are so many variances that can be made in lease/ purchase contracts that we cannot blanketly say whether such an arrangement is satisfactory. We do believe an arrangement of this type can be an acceptable method of selling surplus school property. We suggest if such an arrangement is desirable, the school board should consult with its attorney regarding this matter.
Turning now to the present lease between the Fairview Independent School District as lessor and Ashland Business College as lessee of the surplus school property in question, several paragraphs of which need to be discussed. The "FIRST" paragraph provides that the term of the lease is July 1, 1973 until June 30, 1978, subject to renewal or sooner termination as provided elsewhere in the agreement. Early termination is provided for in the "ELEVENTH" paragraph upon the condition of the "Lessee's failure to pay any rent or other sums when due, or upon his (Ashland Business College) violation of any other term or condition" of the lease. Time is to be given before termination to correct any such default. There is no other provision for termination by the school board during the original five-year term of the lease.
The "TWELFTH" and "THIRTEENTH" paragraphs read as follows:
"TWELFTH: It is agreed that this Lease shall expire and terminate without further notice from either party to the other on June 30, 1978, subject, however, in any event to the right of prior termination as provided by Paragraph Eleventh hereof, and subject to the rights as to renewal provided by Paragraph Thirteenth.
THIRTEENTH: The Lessee is hereby granted by the Lessor an option to renew this Lease at the end of the term thereof for a period of an additional five (5) years upon the same terms and conditions provided above. It shall be a condition of the renewal that if the Lessee desires to renew the Lease, he shall notify the Lessor not later than thirty (30) days prior to the termination of this Lease as provided in Paragraph Twelfth. The failure to give said notice of renewal shall cause the date set forth in Paragraph Twelfth to be unconditionally the expiration date of the Lease. "
It is clear that Ashland Business College is to be able to lease this property "upon the same terms and conditions" for an additional five years after June 30, 1978.
The above referred to paragraphs of the lease in question unfortunately are characteristic of what a school board should not be bound to in a lease agreement. First of all, a school board should not, under most circumstances, bind itself in such an agreement for a period exceeding one year. Under the lease in question the school board has tied up school property, albeit surplus school property, for what amounts to a total of ten years with no provision for termination except on default of the lessee. The lessee has the right to renew the lease for five additional years after expiration of the original five-year term.
Concerning the term of a lease entered into by a school district on real property owned by it, we advise the school districts to enter into a lease agreement providing for an extension of the term of the lease from year to year, for periods of one year, for a specified number of total years. Cf. KRS 162.140. We also bring to your attention in this regard that there is some significance to be attached to using the term "extension" or phrase "right to extend" versus "renewal" or "right to renew. " Technically, "renewal" of a lease requires the execution of a new lease, a new formal agreement, whereas a provision that the lessee may "extend" the term is considered to be satisfied by the lessee holding over, accompanied by the payment and acceptance of rent. See
Carter v. Frakes, 303 Ky. 244, 197 S.W.2d 436 (1946) and
Lexington Flying Service v. Anderson's Extr., Ky., 239 S.W.2d 945 (1951). If execution of a new lease agreement is desired after the original term, it is important that this intention is manifested in the language of the lease.
Looking further at the lease in question there is no convenant stated in the lease that the school board would not convey the property during the original term or the renewed term, so without question the board can still sell the property even though leased. Also there is no option to purchase provision by the lessee so the school board is at liberty to sell to anyone. However, there also does not exist any provision in the lease for a right to terminate the lease by the school board upon the selling of the property. Unless such a right of the lessor is specifically provided for it will not be deemed to exist. See
Yontz v. McDowell, 197 Ky. 770, 247 S.W. 948 (1923). Thus, in absence of any provision in the lease that the lessor's sale would affect the lessee's rights, such sale would not terminate the lease and the property would have to be sold subject to the lease agreement.
This result is in fact even provided for in the "FOURTEENTH" paragraph of the lease which provides that "both the Lessor and Lessee, their successors and assigns, shall be bound by this Lease according to the terms hereof." The term "successor" usually denotes a person who succeeds to the rights of a former owner of property as by purchasing. Black's Law Dictionary.
In summary, as to the lease agreement, it is concluded that the lessee, Ashland Business College, has a right under the terms of the lease to renew the lease for an additional five years and that the board of education has no right to terminate the lease upon the selling of the property.