Request By:
Mr. William A. Wylie
Director
Departmental Audits
Auditor of Public Accounts
Capitol Annex
Frankfort, Kentucky 40601
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You enclosed, with your letter, a copy of a lease dated April 5, 1976, between the Kentucky Society of Professional Engineers and the Kentucky State Board of Registration for Professional Engineers and Land Surveyors.
The term of the lease is for a term of 30 years and required prepayment of 35 years' rents. The said State Board paid $135,000 to the subject Society of Professional Engineers on May 3, 1978, in accordance with the terms of the lease.
You ask: Can a state agency legally prepay 35 year's rental?
Among the powers of the State Board of Registration for Professional Engineers is the authority to " provide suitable office quarters at its own expense. " (Emphasis added). KRS 322.290(1)(c). The lease spells out the fact that it will include a portion of an office building which is presently being used for the State Board's offices.
Under KRS Chapter 322 the professional engineers and surveyors are licensed by the board, and the receipts therefrom may be spent by the board under any of its authorized powers. We assume the Board made the pre-payment of $135,000 from its license receipts.
The lease provides that upon the expiration of the term of 35 years, the Board may lease the premises for an additional 15 years at the rate of $4,000 per year payable in equal monthly installments. As we said, the lease expressly required the Board to pay $135,000 in advance as the total consideration and rental for the 35 year lease term. This is a rate of $3,857.14 per year. The lease was approved by the Commissioner of the Finance Department and the Governor. The lease makes it clear that the pre-payment was deemed necessary in order to help finance the construction of the subject leased building. In addition, there are specific provisions relating to termination prior to and after 15 years.
While this $135,000 did not come out of the state treasury, it was at least constructively state money since it was received by the Board as a state agency for proper statutory expenditure. Section 3 of the Kentucky Constitution requires that no state money can be spent except in consideration of public services, that is, the furnishing to the state either goods or services for public use. Here the question is: Did the board engage in an equitable quid pro quo contract? In other words, what did the Board receive for its $135,000?
The Board received a lease for a term of 35 years. Now the question is: What kind of property did it get? In the creation of a term of years, a cardinal principle is that the term must be certain, i.e., there must be a beginning and end. The subject lease meets that test, thus the lease is for a term of years. 49 Am.Jur.2d, Landlord & Tenant, § 66, p. 107.
The lease is an interest in real property. KRS 382.010. However, it has been said that "A lease for a term of years creates an estate in the grantee; and such estate has been said to be property or a valuable property interest. Except insofar as the common law rules may have been modified by statute, terms for years, however long, are chattels real, falling within the classification of personal property. " 51C C.J.S., Landlord & Tenant, § 26, p.p. 61-62. See Dyer v. Owens, 204 Ky. 59, 263 S.W. 663 (1924) 664, holding that a lease for years is not real, but personal, property. Estates less than a freehold [life or fee simple] are chattels. Cannon v. Carr, 292 Ky. 793, 168 S.W.2d 21 (1943) 23. See the later case of Kentucky Tax Commission v. Jefferson Motel, inc., Ky., 387 S.W.2d 293 (1965) 295, in which Judge Palmore wrote, concerning a 20 year lease of motel property from the Louisville & Jefferson County Air Board to a motel corporation, that the improvements are part of the real estate and are tangible property, but the leasehold interest, being a contract right, theoretically is intangible personal property, often called a "chattel real".
We are not aware of any law which would prohibit the express provision for immediate accrual (prepayment) of the total rental for the 35 year period. We think the Board's participating, in effect, with the funding of the construction of the building is in harmony with the Board's basic function of issuing, suspending, and revoking licenses relating to the authorized practice of engineering and land surveying. After all, the Board exists only for the professional engineers and land surveyors.
In this lease the Board got 954 square feet of office space, some 60 square feet of storage space on the first floor and approximately 504 square feet of storage space in the basement. Further, it received the right of joint occupancy with the Society of Professional Engineers of approximately 675 square feet for a conference room, approximately 234 square feet as a mailroom, some 214 square feet of designated office, all restroom facilities, approximately 182 square feet designated library, and other joint space for a lobby, kitchen, and a mechanical room.
Maintenance, repair, and operational costs [including insurance premiums] were set up on a pro rata basis as between the lessor and lessee [lessee pays 55% and lessor pays 45%].
In the event the lease is terminated by the tenant voluntarily or involuntarily within 15 years of its commencement, the landlord would retain as liquidated damages the prepaid rental covering the first 15 years of the lease term, and all of the remaining rental for the last 20 years of the term would be returned on an annual basis to the tenant at the annual rate of $3,857.14. If so terminated by the tenant after 15 years of the term has expired, the landlord must refund on an annual basis all of the remaining unearned rental payments to the tenant at the annual rate of $3,857.14. of $3,857.14.
In the event the leased premises are destroyed or damaged by fire or other casualty, the landlord must, wth due diligence, and at its own expense, make repairs to said building, restoring the building to its former condition. If the premises are destroyed or damaged as to be unusable by the tenant, the landlord must provide the tenant with suitable and comparable quarters until the landlord can restore the premises as aforesaid [not to exceed one year from date of destruction or damage].
It is our opinion that under the whole circumstances surrounding the lease, the expenditure of the $135,000 was valid and constitutional. The state agency purchased an interest in real estate, a term of years. They got what they bargained for. Overall, the terms of the lease appear to be valid and equitable.