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Obligation of Town to Honor Renewal Provision in a Lease

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Reviewed Date: May 25, 2017

Original Author: 
Huffer, Dennis
Date of Material: 
Nov 2, 2007

Contracts--Laws and regulations

Obligation of Town to Honor Renewal Provision in a Lease

MTAS was asked whether the Town is obligated to honor a renewal provision in a lease.

Knowledgebase-Obligation of Town to Honor Renewal Provision in a Lease


FROM: Dennis Huffer

RE: Lease

DATE: November 2, 2007

You asked whether the Town is obligated to honor a renewal provision in a lease. The lease is to the Saddle Club, a nonprofit corporation, which uses the property for a riding trail. It is my understanding that the riding trail primarily benefits the members of the saddle club. The consideration for the lease is one dollar ($1.00) per year. The pertinent lease provision states:

Lessor hereby grants to the lessee an absolute right and option to renew this lease under terms and conditions as set forth herein for a like term upon written notification being received at least thirty (30) days prior to the termination of the original lease term.

The original lease term, which was ten (10) years, expires in February, 2008. The Town has already received a request to renew the lease.

In my opinion, there are several good arguments the Town could use to refuse to renew the lease: (1) The consideration is so lacking that it could be an abuse of discretion and a failure on the Town’s part to do its fiduciary duty relative to public property. (2) Because of this possible failure to do its fiduciary duties and certain significant omissions in the Town’s charter, the Town is without authority to make such a lease. (3) Using Town property for the benefit of a private corporation runs afoul of the constitutional requirement that the Town can advance only public purposes and may not give its credit to a private enterprise.

Municipalities hold title to property in trust for the public. Prescott v. Town of Lennox, 100 Tenn. 591, 47 S.W. 181 (1898); Warren v. Bradley, 284 S.W. 2d 698 (Tenn. App. 1955). According to McQuillin:

Any power conferred on a municipality must be exercised for a public use or purpose as distinguished from a private purpose.

* * *
A municipal corporation is a public institution created to promote public, as distinguished from private, objects. All its powers, property, and offices constitute a public trust to be administered by its authorities. 2A McQuillin Mun. Corp. § 10:34 (3rd ed.).

As trustees for the public, Town officials have duties similar to those of private trustees. They must administer the trust solely for the benefit of the beneficiaries -- the public in this case -- and must exercise reasonable care, skill, and caution. See Tennessee Code Annotated, §§ 35-15-803 and 804. It could be argued that a lease for only one dollar per year would violate the Town officials’ fiduciary duty to the public. It would also seem that the public purpose served by a riding trail would be tenuous at best.

Several Tennessee cases indicate how a municipality might abuse its discretion or overstep its authority in making leases with private parties. In State ex rel. Association for the Preservation of Tennessee Antiquities v. City of Jackson, 573 S.W.2d 750 (Tenn. 1978), the plaintiffs questioned the authority of Jackson to make a lease of the Casey Jones Museum to a private for- profit corporation. The base rental was $1,500 per year, and plaintiffs did not question the lease as uneconomical. Their main contention seemed to be that the city was without authority to make the lease because this was governmental rather than proprietary property. The Court upheld the city’s authority to make the lease based mainly on the city’s charter powers, and indicated that the distinction between governmental and proprietary property was inconsequential. The tenant also was required to continue to operate the museum just as the municipality had, and I think the Court tacitly recognized that the operation of a historical museum served a public purpose. The Court based its decision that the city had authority to make the lease on this language from the city’s charter, which gives the city the authority:

To acquire or receive and hold, maintain, improve, sell, lease, mortgage, pledge, or otherwise dispose of any property, real or personal, and any estate or interest therein, within or without the City or State. Id., at 755.

There was also language in the charter providing that the charter powers must be construed “to permit the City to exercise freely any one or more such powers as to any one or more such objects for any one or more such purposes.” Id. In upholding the city’s authority to make the lease, the Court said:

[W]e are of the opinion that appellants have failed to demonstrate that the subject of the lease is contrary to the public interest, that it represents a misuse of the discretion and authority of the Board of Commissioners, or that it is in any other way Ultra vires or beyond the legitimate charter powers of the City. Id.

This language is significant for two (2) reasons in your situation: (1) the reverse finding that a lease was contrary to the public interest, is a misuse of power or an abuse of discretion, or is ultra vires (beyond the Town’s authority) would lead to invalidation of the lease and (2) your charter does not contain language similar to that from the Jackson charter.

Most municipal charters contain a general contracting clause in the general powers of the municipality (i.e., the power to contract and be contracted with) and in the enumerated powers the authority to acquire, sell, lease, and otherwise deal with property. Curiously, these clauses do not appear in your charter, Chapter No. 33, Private Acts of 1985, as amended. In the general powers section of the charter in Section 1, the general contracting clause simply is not there. In the enumerated powers in Section 4, subsection (e) gives the Town the authority to acquire land, but not to dispose of it. Leasing is not mentioned. The only contract powers the Town is delegated are the power to contract for public utilities and public services (Section 4(f)) and to make interlocal agreements (Section 42). The combination of the omission of the general contracting clause and the limited power to deal with property make it appear that there is a purposeful limitation here.

The absence of any provision authorizing the leasing of property by the Town means that, unlike in the Jackson case, a court would have to look farther than the charter. There are general laws allowing the leasing of property, but none of these appears to apply. T.C.A. § 12-2-301 and the following sections dealing with leases to and from not-for-profit corporations appear to be substantially obsolete and had as their purpose the acquisition by municipalities of structures and projects. The Town lease also does not comply with the requirements of that law. T.C.A. § 7-51-901 and the following sections authorize long-term leases of capital improvement property. “Capital improvement property,” however, is limited to property “needed for a governmental purpose.” I gather that this property was leased to the Saddle Club because it was not needed for a governmental purpose. So I doubt that this law applies either.

Section 4(s) of the charter is a catch-all powers section that gives the Town all other powers granted by general laws or “necessary or desirable to promote the safety, health, peace, security, good order, comfort, convenience, morals, and general welfare of the Town and its inhabitants .. .” This is probably a statement of legislative intent to give a broad construction of the powers granted to the Town by the General Assembly. But Dillon’s Rule still applies in Tennessee, although its application has been somewhat limited, and because of the glaring absence of any authority expressly granted in the charter to lease property, I doubt that this statement would overcome the strict construction of municipal powers mandated by that rule. If this language overcame Dillon’s Rule, there would need to be no enumeration of powers in a charter. Section 4(s) or a similar provision would be all that was needed.

Dillon’s Rule is a rule of statutory construction used by courts to interpret the scope of local government authority delegated by the General Assembly. It mandates a “strict and narrow construction of local government authority.” Southern Constructors v. Loudon County Board of Education, 58 S.W. 3d 706 at 710 (Tenn. 2001). Doubts are resolved against the municipality. Id. At 711. Under Dillon’s Rule municipalities may exercise only those powers (1) expressly granted, (2) necessarily implied from the expressed powers, and (3) those that are essential for the municipality to exercise, although they are not expressly granted or implied from expressed powers. The Loudon County Board of Education case held that an intent expressed by the General Assembly that powers be broadly construed, such as that in Section 4(s) of the Town’s charter, will overcome Dillon’s Rule. The problem here, however, is that there appears to have been a purposeful limitation on the Town’s ability to contract and deal with property. The ability to acquire property does not in my opinion imply the power to lease the property to someone and it is not essential for the municipality to lease property, especially for the consideration in the subject lease. Neither, I would argue, does such a lease promote the public health, safety, welfare, or convenience as required by section 4(s) of the charter.

In Warren v. Bradley, 284 S.W.2d 698 (Tenn. App. 1955), the court was faced with the rental of a portion of the Town of Morristown’s sewer system. The court held that the right of a Town to contract as granted in its charter is not unlimited. The court held:

[I]t is universally recognized that municipal corporations can exercise no powers which are not in express terms, or by reasonable intendment, conferred upon them, and hence have no power to rent municipal property to private persons, in the absence of a charter provision or statutory enactment empowering them to do so either in express terms or by necessary implication. Id., at 702.

Similarly, in Henry v. Grainger County, 290 S.W.2d 2 (Tenn. 1926), the Court held a county could not properly lease for private purposes space in the register’s office of the courthouse without expressed or implied authority.

In West Tennessee ACLU v. City of Memphis, 323 F. Supp. 234 (D.C. Tenn. 1971), the Mayor of Memphis initiated a program in which unused space in city hall would be made available by him without charge to any organization the Mayor thought worthwhile and in the community’s interest. Under this program, the Mayor made space available to “Memphians for Patriotism,” a group chartered to assist prisoners of war and Vietnam veterans. The Court found that there was no authority for the Mayor to do this:

[B]efore the City of Memphis can allow a non-governmental organization to use space in a municipal building such as City Hall, there must be statutory or charter authority, expressly or impliedly, giving it the right to do so. Id., at 237.

The lack of expressed or implied authority in the Town’s charter to lease property to private parties looms large in the light of these lease cases decided exclusively on the charter and statutory authority delegated to the subject municipalities.

Of even further significance, one of the arguments in the Memphis case was that the patriotic organization performed a public purpose and that therefore no specific authorization was required. The court rejected this contention, noting relative to the definition of “public purpose” that:

… the courts generally construe it to mean such an activity as will serve as a benefit to the community as a body and which, at the same time, is directly related to the functions of government. Id.

The court found that “Memphians for Patriotism” was:

… essentially a private welfare corporation organized for specific reasons which have no direct or necessary relation to the functions of the government of the City of Memphis. Id., at 237, 238.

In my opinion the same can be said with even more force about the saddle club. The primary benefits of the lease appear to flow to the members of the club, who might or might not be residents and taxpayers of your Town, rather than the public at large. It is unlikely that a court would view the lease as serving a municipal or public purpose.

The lease by the Town for virtually no consideration raises another question of constitutional dimension: Does a lease for consideration that is grossly inadequate amount to a giving of the credit of the Town to a private corporation in violation of Article II, Section 29 of the Tennessee Constitution? Art. II, Sec. 29 provides in part:

… the credit of no County, City or Town shall be given or loaned to or in aid of any person, company, association or corporation, except upon an election to be first held by the qualified voters of such county, city or town, and the assent of three-fourths of the votes cast at said election.

The argument here would be that the Town is forgoing consideration for the lease, and the revenues the Town is not collecting amount to a gift to the saddle club. Perhaps the most analogous case to the Town’s situation is Azbill v. Lexington Manufacturing Co., 221 S.W.2d 522 (Tenn. 1949). In this case the Town of Lexington owned a tract of land it leased to the manufacturing company for apparently adequate rentals. The municipality, however, obligated itself to build a factory on the land. The manufacturing company would pay the Town back without interest. A group of Lexington taxpayers contested this arrangement. Held the Court:

… the town of Lexington is without authority to expend the tax money in the construction of this factory, or to give its credit to this private corporation without first having been authorized to submit and then submitting the matter to and procuring the approval of the voters as required by Article 2, Section 29 of our Constitution. Its agreement to construct and pay for this factory is, therefore, invalid and unenforceable. Id., at 525.

Your Town apparently has not agreed to build anything for the saddle club, but the lack of consideration for the lease could still be viewed as an illegal giving of credit. In McConnell v. City of Lebanon, 314 S.W.2d 12 (Tenn. 1958), the Court notes that “the public taxes or, which is the same thing, the public credit can not be donated or applied to anything but a public use or corporate purpose ….” Id., at 17. Then, in discussing the Azbill case, the Court says the transaction attempted in that case could not be done even if 100% of the voters approved, and makes this salient observation:

… if they could vote a gift to one individual or corporation, they could likewise vote a gift to each citizen or corporation in the city or county, which, of course, was never contemplated by the constitutional provision and could wreck the economy of any city or county or State. McConnell, at 17.

If the Town were to come up short of revenue, contributed to in part by the gift to the saddle club, the Town would have to increase taxes to raise the necessary funds. This appears to be a giving of taxes or credit to a private corporation in violation of the public purpose doctrine and the election requirement of the state constitution.

Arizona, like most other states, has a constitutional provision similar to our Art. II, Sec. 29. The purpose of these constitutional provisions is to quell the use of public funds for construction of railroads and similar businesses that took place primarily before 1880. These were quasi-public enterprises, but really private businesses. The Arizona provision reads in part:

Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation … . A. R. S. Const. Art. 9, § 7.

This provision prohibits aid to these quasi-public businesses period, without the option of voter approval. The Arizona provision is more specific in preventing donations or subsidies to these businesses, but the purpose is the same as the Tennessee provision.

In a case almost identical to the Town’s situation, City of Tempe v. Pilot Properties, 527 P.2d 515 (Ariz. App. 1974), the City of Tempe made a lease of city property to Baseball Facilities, Inc., for the Milwaukee Brewers training camp. The lease was for 99 years and the consideration was $1.00 per year. In remanding the case, the court held:

… if the consideration received by the city for the BFI lease is ‘so inequitable and unreasonable that it amounts to an abuse of discretion,’ a gift or donation by way of a subsidy has been bestowed on BFI which is prohibited by the Arizona Constitution. Id., at 522.

The entire lease must be looked at to determine whether there is a subsidy, but in looking at the Town’s lease, I see no significant consideration that would not exist even if the rental amount were adequate. It should be noted that cases from other states are not controlling in Tennessee, but they are persuasive. It is likely that a court would conclude that the Town’s lease is an illegal giving of credit under the Tennessee Constitution or that the lease is not for a public purpose, or both.

The Mayor has also expressed concern that the renewal clause in Section 13 of the lease in effect might create a perpetual lease. Under the clause, each renewal of the lease would also have the renewal clause in it, thus creating the perpetuity. Although perpetual renewals of leases are not favored, they are also not forbidden. A perpetuity will not be deduced, however, from an ordinary renewal clause. See, for example, Pults v. City of Springdale, 745 S.W.2d 144 (Ark. App. 1988). Tennessee follows this rule that a perpetual lease must be clearly and unambiguously provided for in the lease and will not be based upon interpretation of lease language. In Mecklenburg Real Estate Co. v. Kyoleum Co., 218 S.W. 821 (Tenn. 1920), the Court, interpreting a renewal clause in a lease between private parties that could have created a perpetuity, quoted approvingly from Tiffany on Landlord and Tenant:

A clause or provision clearly applicable only to the original lease is not carried forward into a new lease for an additional term.

* * *
‘If a covenant to renew the lease necessarily included a renewal of all the covenants in it, it would be tantamount to a covenant for perpetual renewal, and so extraordinary a covenant ought not to depend on inference merely. * * * I do not mean to say such covenants are not valid; but I contend only that they must be clearly and certainly made, and are not to be deduced by construction from a covenant to “renew the lease,” without saying more. Mecklenburg, at 822.

There is no language in the Town’s lease indicating it is forever or perpetual or that perpetual renewals would be allowed. The renewal language appears to apply only to the original lease. It gives the lessee the right to renew the lease “for a like term.” Under the rule in the Mecklenburg case, this language would not be carried forward into the renewal lease. Thus, assuming the lease is legally made in the first instance, the Town would be obligated to grant only one renewal.

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