Opinion
For Opinion on Hearing, see 45 Cal.Rptr. 140, 403 P.2d 396.
Lerer & Moltzen, San Francisco, for appellants.
Randell Larson, Ransom S. Cook, Severson, Zang, Werson, Berke & Larson, San Francisco, for respondent.
SULLIVAN, Presiding Justice.
In this action for declaratory relief, the sole question for our determination is whether the landlord or the tenant should bear the liability for property taxes assessed for certain improvements constructed by the tenant on the demised premises. As we shall explain, we have concluded that the liability should be borne by the landlord. We therefore affirm the judgment.
The facts are not in dispute. By written lease dated April 6, 1960, plaintiffs leased to defendant certain unimproved real property in Palo Alto for a term ending on June 30, 1963, subject to two successive options granted defendant to extend the term for any period of time not exceeding three years on each option. Thus the lease had a possible duration of approximately nine years. The annual rent was $6,000 payable in equal monthly installments.
Two provisions of the lease deal with installations, improvements and alterations to be made by defendant-tenant:
Article 7 entitled 'Fixtures and Personal Property' provides: 'Any trade fixtures, equipment and other property installed in or attached to the demised premises by and at the expense of the Tenant shall remain the property of the Tenant, and the Landlord agrees that the Tenant shall have the right at any time, and from time to time, to remove any and all of its trade fixtures, equipment and other property which it may have stored or installed in the demised premises, including but not limiting the same to counters, shelving, showcases, mirrors, slides and air-conditioning, cooling and other movable machinery. The Landlord agrees not to mortgage or pledge the Tenant's trade fixtures, equipment and other property.'
Article 11 entitled 'Tenant's Right to Construct Improvements and Make Alterations' provides: 'The Landlord agrees the Tenant may at its own expense from time to time during the term hereof, construct on the demised premises such buildings and other improvements (including but not limited to fencing, paving and landscaping) and make such alterations, additions and changes therein as it finds necessary or convenient for its purposes. The Landlord agrees the Tenant may from time to time during the term hereof, remove any building or other improvements erected by it; however, any such buildings or improvements which shall not have been removed by the Tenant at the end of the term of this lease, shall be delivered to the Landlord in such condition as the same shall be at that time and the Tenant shall have neither the right nor the obligation to remove the same from the demised premises or restore the premises to the condition in which they were originally. The Tenant agrees that any such work shall be done in a first-class workmanlike manner and subject, however, to all applicable Federal, State and Municipal laws and regulations and in compliance therewith.'
However the lease contains no provision determining as between landlord and tenant who is charged with the liability for the payment of property taxes.
Defendant constructed, pursuant to article 11 of the lease, certain improvements on the property to the end of using the site for the sale of plants and other nursery items. These improvements consisted of a steel building and a lath house each of which was bolted to a concrete base, a cyclone fence, and certain light standards and signs. The total cost of the improvements, including the masonry, iron and steel, carpentry and woodwork, plumbing, heating, painting and other pertinent items was $49,794.55. In addition, defendant installed certain trade fixtures on the premises pursuant to article 7 of the lease.
Both the County of Santa Clara and the City of Palo Alto assessed to defendant-tenant property taxes for the trade fixtures and personal property. Such taxes were It is plaintiffs' position that since the tenant owns the improvements and may remove them at will, he must bear the taxes charged against them. It is defendant's position, on the other hand, that the improvements are permanent in character and will become the property of the landlord who should bear the tax liability on them, having failed to provide for release from it by appropriate language in the lease. However, no California case directly answers the problem presented to us.
It is well settled that in the absence of an agreement between the landlord and the tenant, the duty to pay all taxes which during the term of the lease become chargeable against the demised premises is, as a general rule, imposed by law upon the landlord. (Los Angeles Land & Water Co. v. Consumers Rock & Gravel Co. (1935) 3 Cal.2d 77, 79, 43 P.2d 281; Pacific Palisades Ass'n. v. Menninger (1933) 219 Cal. 257, 265, 26 P.2d 303; Ellis v. Title Ins. & Trust Co. (1964) 227 A.C.A. 217, 218, 38 Cal.Rptr. 605; Tilden v. County of Orange (1949) 89 Cal.App.2d 586, 588, 201 P.2d 86; Hammond Lumber Co. v. Los Angeles (1936) 12 Cal.App.2d 277, 279, 55 P.2d 891; 32 Am.Jur., Landlord and Tenant, § 287, p. 268; 51 C.J.S. Landlord and Tenant § 359, pp. 1050-1051). If the landlord desires to relieve himself of this liability, it is necessary that he so provide in the lease. (32 Am.Jur., Landlord and Tenant, § 287, p. 268; see Los Angeles Land & Water Co. v. Consumers Rock & Gravel Co., supra).
Decisions of courts in other states have declared exceptions to the general rule imposing liability on the landlord. The essence of the rationale of these decisions is set forth in annotation on the subject in 86 A.L.R.2d 670 from which both parties draw support. There it is stated: 'In the absence of a stipulation to the contrary, the lessee will ordinarily be held to bear that portion of any increase in taxes against the leased property resulting from improvements which are to remain his own property or which will be of no substantial benefit to the lessor. * * * As between lessor and lessee, the lessor will generally be held liable for the increased tax burden resulting from the lessee's improvements if such improvements are to become the property of the lessor and were not erected for the sole benefit of the lessee.' (86 A.L.R.2d 682, 685.) Generally speaking, the cases collected in support of these principles turn on the question as to who will become the owner of the improvements--landlord or tenant.
The annotation is entitled 'Liability as between lessor and lessee, where lease does not specify, for taxes and assessments.' Actually plaintiffs eschew the annotation in 86 A.L.R.2d 670 for an earlier and superseded annotation on the subject in 73 A.L.R. 824. But the five cases relied on by plaintiffs and discussed infra all appear in the later annotation; only one of them La Paul v. Heywood, infra, appears in the earlier annotation.
Thus in La Paul v. Heywood (1911), 113 Minn. 376, 129 N.W. 763, 32 L.R.A., N.S., 368, the lessee held under a ten-year lease, with an option to renew for an additional ten years, by the terms of which he was obligated to erect on the premises a two-story building which he had the right to remove at the termination of the lease. The court, on an appeal from an order sustaining a demurrer to the complaint, held that the lessor could bring an action to recover taxes paid by the lessor on the building erected by the lessee, stating: 'Where a lease is silent as to the payment of taxes, improvements which are removable by the tenant at the end of the term are taxable to him, and not to the landlord. [Citations.]' (P. 764.) Smith v. Sugar Creek Coal Co. (1931), 110 W.Va. 553, 158 S.E. 903 involved a 25-year coal mining lease containing an extension privilege in case the coal was not entirely mined during the initial term. The lease provided 'that at the expiration of this lease 'all the improvements of every kind and character placed by the lessee or its assigns upon said leased premises shall become and remain the property of the lessors.'' (P. 904.) However there was no provision in regard to the payment of taxes on the improvements. During the first six years of the term, the lessee or its assignee had paid the taxes on them. The court held that the lessee should continue to bear the liability for taxes basing its decision on the fact that the character of the improvements was such that at the end of the lease they would be of slight or no value and that it was undisputed that they would never benefit the lessor.
In Callahan v. Broadway Nat. Bank of Chelesea (1934), 286 Mass. 473, 190 N.E. 792, the bank, under a 15-year lease, installed a vault and other fixtures on the demised premises. The lease provided that title to the fixtures installed by the lessee should remain its property during the term of the lease and 'that said lessee may at any time during said term, or upon the termination thereof, remove any vault or vaults * * * and all other fixtures, furnishings and equipment installed by it.' (P. 793.) Holding the lessee responsible for the taxes on the vault and other fixtures, the court stated that '[e]very implication, in the absence of express agreement, is against the idea that as between themselves a lessor should be required to pay taxes on property of the lessee.' (P. 793.)
In Wycoff v. Gavriloff Motors, Inc. (1961), 362 Mich. 582, 107 N.W.2d 820, 86 A.L.R.2d 663, the lessee, holding under a 20-year lease with an option to purchase the property at any time for a fixed sum, erected on the demised premises, with the lessor's consent, a small sales office and a large building to be used in furtherance of a garage and automobile sales business. The lease provided: '[A]ll alterations or additions shall be upon the sole charge and responsibility of the lessee and the lessee shall protect said building and premises from any lien or charges whatsoever, by reason of said alterations or improvements.' (P. 821.) However the lease made no provision as to the ownership of any improvements placed on the property by the lessee or as to the lessee's right to remove them. Holding that under the circumstances of the case the lessee must bear the increased tax levy resulting from the lessee's improvements, the court affirmed a judgment allowing recovery of the same by the lessor. However the court pointed out that it was far from clear that the intent of the parties to impose such liability on the lessee could be, as it was by the trial court, inferred from the above quoted provision of the lease and that it was necessary to examine the problem in the light of general legal principles. The court said: 'Provisions as to the length of term of the lease; whether the lease itself is renewable; whether the lessee has an option to purchase; whether any improvements are to be considered realty and attach to the land and are nonremovable by the tenant at the expiration of the lease; whether the lessee is compensated for any improvements; whether the rental basis is fixed for the term of the lease; are all matters which must be considered to properly determine liability.' (P. 822.) Since under Michigan law the buildings in question being removable by the lessee at the end of the term remained in effect the personal property of the lessee, the court held that 'it should be the lessee who is responsible for the increased tax levy attributable to the improvements.' (P. 825.)
It is therefore noteworthy that in La Paul, Callahan and Wycoff, all of which are relied upon by plaintiffs herein, the tenant was held responsible for the taxes on the improvements, in the absence of a provision to the contrary, because the improvements were to remain the property of the tenant. In Smith, also relied upon by plaintiffs, Phinney v. Foster
Witschger v. Kamages Kentucky Farm & Cattle Co. v. WilliamsPlaintiffs also rely on Roach v. Matanuska Valley Farmers Cooperating Assn. (U.S.D.C.Alaska 1949), 87 F.Supp. 641, 12 Alaska 512, (aff'd 188 F.2d 162, 13 Alaska 290). There the guardian of an insane person with court approval let certain property of the ward located in Anchorage, Alaska. At first he entered into a ten-year lease which contained a provision that the lessee might erect a new building on the property and 'that 'any improvement of a permanent nature or any structures erected on said property shall became a part thereof and the property of the first party' [lessor].' (P. 643; emphasis added.) Shortly thereafter, he entered into a 15-year lease with the same lessee which contained a provision that the latter could remove existing buildings and erect a new building and that "the said building so constructed shall be and become the property of the first party [lessor] at the expiration of this lease'.' (P. 644; emphasis added.) As a result of World War II property valuations in Anchorage rose so that the taxes against the premises, with the new building, exceeded the annual rent received under the lease. Nothing that the second lease contained the language "at the expiration of this lease" not found in the earlier lease and holding that in view of all of the circumstances under which it was made, the lease should be construed against the lessee, the court determined that the only reasonable conclusion which could be drawn from the language of the second lease was that until the date of the expiration of the lease, the building was the property of the lessee who was liable for the taxes against it. Roach therefore held that even though the landlord as owner of the land was certain to become the owner of the improvements, the tenant's temporary or intermediate ownership was a sufficient basis upon which to impose on the latter the duty to pay taxes against the building. It seems to us that the court in Roach was impelled to predicate the tenant's tax liability on an intermediate ownership of the improvements in order to give effect to an overriding consideration, namely that if liability for the taxes on the improvements were placed on the landlord, an insane person under disability, the taxes would become confiscatory. Whatever just result was reached by the court in Roach, we apprehend in the decision much of an ad hoc quality and we are not persuaded to follow the rule there applied that the tenant's mere intermediate ownership of improvements may be the basis of his liability for taxes.
We briefly examine the converse of these situations. As stated earlier, we have found no California case squarely deciding the question at hand. Some light is shed on it by the decision of this court in City of Oakland v. Albers Bros. Milling Co. (1919) 43 Cal.App. 191, 184 P. 868. There the city let certain waterfront lands to the milling company under a written lease providing that the lessee was to construct improvements consisting of a dock and warehouse which 'when so constructed shall become and remain the property of the lessor [city].' (P. 192, 184 P. p. 868.) This court held that the improvements were the property of the lessor and were not taxable to the tenant.
In Beck v. F. W. Woolworth Co. (U.S.D.C., Iowa 1953) 111 F.Supp. 824, the plaintiffs leased to defendant for a 30-year term a city lot improved with a building which had become quite old. The lease contained a provision for the construction of alterations
In Marano v. Corbisiero (1960), 27 Misc.2d 830, 211 N.Y.S.2d 108, an action to reform a lease, plaintiff let certain premises to defendant under a written lease providing that defendant had the right 'to alter the present premises, or build upon any vacant space on said property at his own cost and expense.' (P. 109.) Defendant erected a building at an approximate cost of $270,000, including furnishings and equipment. The lease provided that at the end of the term (which had a possible duration of 20 years) the lessor was to become the owner of the With the foregoing principles in mind we proceed to the central issue in the instant case. Does the present lease fall within the general rule or within the exception to it? A determination of this issue turns on the ultimate ownership and benefit of the improvements. Are they under the lease to remain the property of the tenant and to be of no substantial benefit to the landlord? Or are they to become the property of the landlord, having not been constructed for the sole benefit of the tenant?
The trial court found that the assessment and levy of taxes by both the county and the city on the improvements in controversy 'were made under the provisions of Section 660 of the Civil Code and under the provisions of Sections 104 and 105 of the Revenue and Taxation Code of the State of California.' As a conclusion of law it was also determined by the court that such taxes 'were properly assessed to the plaintiffs' under the aforementioned statutes. It appears therefore that the court in effect found that all of the pertinent improvements represented by the tenant's expenditure of $47,794.55 had been affixed to the realty. Plaintiffs do not challenge the finding that the improvements were fixtures nor make any contention that they did not become part of the realty. The instant record discloses, and plaintiffs do not dispute, that the improvements are substantial, valuable and permanent in nature. (Cf. Beck v. F. W. Woolworth Co., supra, 111 F.Supp. 824, 828, 833.)
Civil Code § 660 provides: 'A thing is deemed to be affixed to land when it is attached to it by roots, as in the case of trees, vines, or shrubs; or imbedded in it, as in the case of walls; or permanently resting upon it, as in the case of buildings; or permanently attached to what is thus permanent, as by means of cement, plaster, nails, bolts, or screws; except that for the purposes of sale, emblements, industrial growing crops and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale, shall be treated as goods and be governed by the provisions of the title of this code regulating the sales of goods.'
At the trial plaintiffs' counsel stated to the court: 'It is perfectly obvious to me that the buildings are bolted down; that there is concrete or asphalt on the soil there, and in all candidness I certainly must admit it will be one difficult task to get some of those things off. You can't unscramble an egg, but it is our point that they have to pay for the egg.'
'Fixtures are those things which are so attached to realty as to be considered in law a part thereof.' (Earle v. Kelly (1913) 21 Cal.App. 480, 483, 132 P. 262, 263.) As was said in City of Beverly Hills v. Albright (1960) 184 Cal.App.2d 562, 568, 7 Cal.Rptr. 706, 710: 'Subject to certain factors relating to permanency such as physical annexation, adaptation to use with the real property, and intention to annex the same to realty, fixtures installed by a tenant are considered real property and become the property of the landlord upon termination of the tenancy (Section 660, Civil Code; City of Los Angeles v. Klinker, 219 Cal. 198, 25 P.2d 826, 9 A.L.R. 148; People v. Church, 57 Cal.App.2d Supp. 1032, 136 P.2d Grupp v. Margolis
Rinaldi v. Goller Dauch v. Ginsburg Cone v. Western Trust & Savings Bank Camp v. MatichArticle 11, set forth earlier, neither expressly reserves ownership of the improvements in the tenant nor expressly provides that upon their construction they shall become the property of the landlord. (See for example Realty Dock & Improvement Corp. v. Anderson (1917) 174 Cal. 672, 164 P. 4; Wilmerton v. Morton (1946) 74 Cal.App.2d 891, 169 P.2d 992.) There is nothing in the provision from which one can infer an intent upon the part of the tenant to transfer ownership of the improvements to the landlord at the time they were placed on the property. Since, under article 11 (see fn. 2, ante), there was therefore an agreement permitting the tenant to remove the improvements during the lease, there could not be, at the time they were placed on the property, any transfer of ownership to the landlord under Civil Code section 1013 and the general principles of accession. (See Horowitz, op. cit., pp. 40-46.) Plaintiffs therefore did not then acquire title to the improvements either by agreement or operation of law. But those improvements in place at the termination of the tenancy would become the property of plaintiffs at that time. (See City of Beverly Hills v. Albright, supra, 184 Cal.App.2d 562, 568, 7 Cal.Rptr. 706.) In the interim the defendant-tenant was the owner of the improvements.
In summary, the instant case presents the following salient factors: (1) The subject lease is for a moderate term only and cannot under any circumstances be construed as granting the tenant perpetual use of the property; (2) the improvements in controversy are, as we have said, substantial, valuable and permanent in nature; (3) in respect to improvements erected by the tenant, the lease contains neither an express reservation of title in the tenant nor an express transfer of title to the landlord; (4) in respect to such improvements, the tenant has a restricted but not absolute right of removal in that he has a right of removal during the term but has neither the right nor obligation to remove improvements in place at the end of the term; and (5) as explained above, even though the improvements are part of the realty, they are the property of the tenant during the term but to become the property of the landlord at the end of the term, if then in place.
No contention has been made that defendant-tenant should be regarded as the owner of the improvements on the basis of the rule equating ownership with perpetual use or occupancy. (See 1 American Law of Property, § 3.76, p. 343; Beck v. F. W. Woolworth, supra, 111 F.Supp. 824, 828.)
On the basis of the above factors we think the trial court was warranted in concluding that the improvements in controversy were not to remain the property of the tenant. Plaintiffs offered no evidence and do not now contend that the improvements In addition, the parties herein are presumed to have known that all taxes on the real property, including improvements affixed to and becoming part of the realty, are assessed to the landlord and that the duty to pay all taxes against the demised premises is imposed by law on the landlord. Under the provisions of the lease before us, plaintiffs bargained away their right to prevent any alterations, additions and changes to the premises by the tenant and their right to prevent the removal by the tenant during the term of any improvements erected by it on the property. As part of such bargain they were apparently content to receive only such improvements as had not been removed by the end of the term and chose not to require defendant to pay the taxes chargeable against any improvements. If plaintiffs had desired to relieve themselves of this tax liability and shift it to defendant they could very easily have so provided in the lease.
The judgment is affirmed.
MOLINARI and BRAY, JJ., concur.
Retired Presiding Justice of the District Court of Appeal of the State of California, First Appellate District, Division One, sitting pro tempore under assignment by the Chairman of the Judicial Council.
Beck v. F. W. Woolworth Co. 11 F.Supp. at pp. 826-827
'The Tenant shall have the right to make such alterations, improvements and changes in such parts of the building as are occupied by it, and as it finds necessary for its purpose, at its own expense, including the right to raze the building upon said premises and reconstruct in its place and stead a new building of at least equivalent value, not less than two stories in height, and not less in area than the existing building upon said premises, * * *. All alterations so made shall be construed as an improvement to, and become a part of said real estate belonging to the Landlord upon termination or cancellation of said lease, and the Tenant shall neither have the right nor obligation to remove the same nor to change such structure or restore said premises to the condition in which they originally were, excepting only as is hereinafter expressly provided for.' (Emphasis added.)
Lawrence v. Woolworth
(Article 11 of instant lease)
'The Landlord agrees the Tenant may at its own expense from time to time during the term hereof, construct on the demised premises such buildings and other improvements (including but not limited to fencing, paving and landscaping) and make such alterations, additions and changes therein as it finds necessary or convenient for its purposes. The Landlord agrees the Tenant may from time to time during the term hereof, remove any building or other improvements erected by it; however, any such buildings or improvements which shall not have been removed by the Tenant at the end of the term of this lease, shall be delivered to the Landlord in such condition as the same shall be at that time and the Tenant shall have neither the right nor the obligation to remove the same from the demised premises or restore the premises to the condition in which they were originally. The Tenant agrees that any such work shall be done in a first-class workmanlike manner and subject, however, to all applicable Federal, State and Municipal laws and regulations and in compliance therewith.' (Emphasis added.)
Revenue and Taxation Code § 104 provides: "Real estate' or 'real property' includes: (a) The possession of, claim to, ownership of, or right to the possession of land. (b) All mines, minerals, and quarries in the land, all standing timber whether or not belonging to the owner of the land, and all rights and privileges appertaining thereto. (c) Improvements.'
Revenue and Taxation Code § 105 provides: "Improvements' includes: (a) All buildings, structures, fixtures, and fences erected on or affixed to the land, except telephone and telegraph lines. (b) All fruit, nut bearing, or ornamental trees and vines, not of natural growth, and not exempt from taxation, except date palms under eight years of age.'