           IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Saturday Family LP,                   :
                        Petitioner    :
                                      :
            v.                        :   No. 781 F.R. 2013
                                      :   Submitted: June 7, 2017
Commonwealth of Pennsylvania,         :
                     Respondent       :

Techspec Inc.,                        :
                        Petitioner    :
                                      :
            v.                        :   No. 782 F.R. 2013
                                      :   Submitted: June 7, 2017
Commonwealth of Pennsylvania,         :
                     Respondent       :


BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge
        HONORABLE ROBERT SIMPSON, Judge
        HONORABLE P. KEVIN BROBSON, Judge
        HONORABLE PATRICIA A. McCULLOUGH, Judge
        HONORABLE ANNE E. COVEY, Judge
        HONORABLE MICHAEL H. WOJCIK, Judge
        HONORABLE JOSEPH M. COSGROVE, Judge


OPINION BY JUDGE BROBSON                         FILED: August 14, 2017

            Pursuant to Pennsylvania Rule of Appellate Procedure 1571(i), the
Commonwealth of Pennsylvania (Commonwealth) filed exceptions to this Court’s
three-judge panel opinion and order in Saturday Family LP v. Commonwealth of
Pennsylvania, 148 A.3d 931 (Pa. Cmwlth. 2016) (Saturday Family I), dated
October 17, 2016, in which the Court reversed an order of the Board of Finance
and Revenue (Board), dated September 25, 2013 (mailed on September 27, 2013).
In so doing, we concluded that the Commonwealth was bound by the clear terms of
its own regulation and could not impose realty transfer tax on a ground lease with a
less than thirty-year initial term but with a renewal option at fair market value
(FMV) rent. Upon careful review, we overrule the Commonwealth’s exceptions.
              Generally speaking,1 a lease for real property for a term of thirty years
or more is subject to Pennsylvania’s realty transfer tax. Section 1103-C.1 of the
Tax Code2 provides that “[i]n determining the term of a lease, it shall be presumed
that a right or option to renew or extend a lease will be exercised if the rental
charge to the lessee is fixed or if a method for calculating the rental charge is
established.” (Emphasis added.) Under its rulemaking authority,3 the Department
of Revenue (Department) promulgated a regulation to aid, inter alia, in its
enforcement of Section 1103-C.1 of the Code. With respect to leases and lease
extensions, the Department’s regulation provides, in relevant part:
                     In determining the term of a lease under this
              paragraph, it shall be presumed that a right or option to
              renew or extend a lease will be exercised if the lessor and
              lessee cannot renegotiate the rental charges for the
              renewal or extension period unconditionally. A lessor
              and lessee cannot renegotiate a rental charge
              unconditionally if it is fixed at a set amount for the period
              or a method for establishing the rental charges is
              established. Renewals or extensions at the option of the
              lessee at fair rental value at the time of the renewal or
              extension are not included in determining the term of a
              lease.

       1
          A more detailed discussion of the statutory framework is set forth in the panel’s
decision in Saturday Family I.
       2
        Act of March 4, 1971, P.L. 6, added by the Act of July 2, 1986, P.L. 318, 72 P.S.
§ 8103-C.1.
       3
        Section 1107-C of the Tax Code, Act of March 4, 1971, P.L. 6, added by the Act of
May 5, 1981, P.L. 36, 72 P.S. § 8107-C.



                                            2
61 Pa. Code § 91.193(b)(24)(v) (emphasis added).
               In Saturday Family I, the Court examined the terms of the ground
lease between Petitioners Saturday Family LP, as landlord, and Techspec Inc., as
tenant, (collectively Taxpayers) for the lease of property located at 718 Y Street,
Derry       Township,   Westmoreland       County,     Pennsylvania      (Ground     Lease).
Specifically, the Ground Lease provides for an initial term of 29 years and 11
months (and 3 days).4 The Ground Lease provides the tenant with the option to
renew the term for up to 6 periods of 5 years each for FMV rent as determined by
the parties at the time of the extension based on rents for similar parcels in
Westmoreland County and, if they are unable to agree, by appraisal. Applying
both the governing statute and the Department’s regulation, the Court held that
because the Ground Lease expressly provided the lessee with the option to renew
the Ground Lease at expiration for an additional 5-year term at FMV rent at the
time of renewal, the term of the extension should not be included in the lease term.
Accordingly, the Ground Lease, which was for a term of less than 30 years, is not
subject to the realty transfer tax.
               The Commonwealth takes exception in a brief that largely tracks the
arguments set forth in its original merits brief.             In its first exception, the
Commonwealth initially challenges not this Court’s decision but an alleged failure
by Taxpayers “to claim a valid exemption from [r]ealty [t]ransfer [t]axes.”


        4
         The Commonwealth notes in its brief in support of its exceptions that the Court in
Saturday Family I omitted the 3 days from the initial term in its opinion. The Commonwealth,
however, does not indicate that this omission (or rounding in the interest of brevity) had any
relevance to the panel’s analysis or even the Court’s consideration of the Commonwealth’s
exceptions. Nonetheless, we now include the three days.



                                              3
(Cmwlth. Br. on Exceptions at 14.) The Commonwealth relies on instances in the
record and in Taxpayers’ initial brief to the Court where Taxpayers refer to a
nonexistent provision in the Tax Code, specifically “72 P.S. § 8102-C.3(24).”
Although “72 P.S. § 8102-C.3” exists,5 it does not contain a subsection (24).
              We acknowledge those citation errors but do not view them as fatal.
Taxpayers have consistently argued that because the Ground Lease has a renewal
option at FMV rent, the renewal period should not be included for realty transfer
tax purposes. In their initial brief, for example, Taxpayers include the following in
their Statement of the Case: “Renewal options at fair market value are not counted
toward     the    30-year     lease    term     test    for   [t]ransfer     [t]ax   purposes.
72 P.S. § 8102-C.3(24).” (Taxpayers’ Initial Br. at 3.) This statutory cite is an
obvious error, apparent from a reading of Taxpayers’ argument section, where
Taxpayers cite specifically to the Department’s regulation to support this
proposition.6 We note that the Commonwealth does not profess to be deceived or
otherwise prejudiced by the citation errors.             Rather, it merely seeks to take
advantage of them. Like the Commonwealth, however, the Court was clearly able
to discern the legal basis for Taxpayers’ appeal notwithstanding some errant
citations. Accordingly, this particular exception does not compel the Court to rule
in the Commonwealth’s favor.

       5
          Section 1102-C.3 of the Tax Code, Act of March 4, 1971, P.L. 6, added by the Act of
July 2, 1986, P.L. 318, as amended, 72 P.S. § 8102-C.3. This section of the Tax Code excludes
certain enumerated transactions from imposition of the realty transfer tax.
       6
        We note that although there is no subsection (24) in Section 1102-C.3 of the Tax Code,
the Department’s regulation specifically dealing with how to treat lease extensions for the
purpose of realty transfer tax is found at 61 Pa. Code § 91.193(b)(24)(v). This could explain the
occasional citation errors by Taxpayers.



                                               4
              The balance of the Commonwealth’s first exception is directed largely
to this Court’s construction of Section 1103-C.1 of the Tax Code and the
Department’s related regulation—61 Pa. Code § 91.193(b)(24)(v). As it did in its
brief on the merits, the Commonwealth contends that portions of the Ground Lease
detailing how the parties will arrive at FMV rent on renewal are equivalent to a
“method for calculating the rental charge,” as described in Section 1103-C.1 of the
Tax Code, or a “method for establishing the rental charge,” as described in the
Department’s regulation, for the extension period. Because the Ground Lease
includes such a “method” for calculating the rent for the extension period, the
Commonwealth contends that the extension period must be included in the lease
period, which would bring the lease period to greater than 30 years. Accordingly,
the lease is subject to realty transfer tax.
              Because the panel in Saturday Family I did not reach the same
conclusion, the Commonwealth contends that the panel (a) failed to consider the
language in Section 1103-C.1 of the Tax Code, focusing only on the final sentence
in 61 Pa. Code § 91.193(b)(24)(v) (relating to lease extension); (b) should have
relied on dictionary definitions of the term “method” and, had it done so, would
have found that the procedures to arrive at FMV rent set forth in the Ground Lease
constitute a “method” as that term is used in the statute and regulation; (c) erred in
even concluding that the parties agreed to extend the lease at FMV rent because the
parties are not free to negotiate; (d) inconsistently concluded that the Department’s
regulation was clear while at the same time applying the Statutory Construction




                                               5
Act of 1972;7 and (e) adopted a construction that defeats the purpose of the
statutory provisions imposing the transfer tax.
               The Commonwealth, here, presents largely the same issues and
arguments that this Court addressed in our opinion in Saturday Family I. Having
considered the Commonwealth’s contentions and Taxpayers’ responses, we
confirm the panel’s construction of both Section 1103-C.1 of the Tax Code and
Section 91.193(b)(24)(v) of the Department’s regulation for the reasons set forth in
the panel’s opinion. In response to particular points raised by the Commonwealth,
we offer some additional analysis.
               First, the panel in Saturday Family I fully considered all relevant
provisions of the Tax Code and the Department’s regulation in applying the clear
language set forth in the Department’s regulation.            Saturday Family I,
148 A.3d at 934-35. In reality, the language of the Department’s regulation largely
tracks Section 1103-C.1 of the Tax Code, with the exception of the added language
in the regulation dealing with extensions at FMV rent. The Court’s interpretation
in Saturday Family I is not inconsistent with the language in the Tax Code, unless
of course the Department is suggesting that its own regulation, particularly the
FMV language, is inconsistent with the Tax Code. The Department, however,
does not make such an argument. The Department, therefore, is bound to follow
both the statute and its regulation.      Popowsky v. Pa. Pub. Util. Comm’n,
853 A.2d 1097, 1106-07 (Pa. Cmwlth. 2004) (en banc), affirmed, 910 A.2d 38
(Pa. 2006).



      7
          1 Pa. C.S. §§ 1501-1991.



                                          6
               The truth is that this case would not be here (or at least not in this
context) but for the Department’s decision to include in its regulation the language
dealing with renewals/extensions at the option of the lessee at fair rental value at
the time of renewal/extension. That language is not in Section 1103-C.1 of the Tax
Code. Nonetheless, as noted above, we do not have before us a legal challenge to
the validity of the Department’s regulation.              The Department insists that the
panel’s decision deprives Section 1103-C.1 “of all meaning” and, therefore, is
absurd. We disagree. Like the panel, we agree that the lease does not fix a future
rental price; rather, the rental price will only be determined at the time of lease
renewal and then at FMV. We do not interpret the language of the Ground Lease
as establishing a “method” for calculating the rental charge for the extension
period, regardless of how that term is defined. Rather, we, like the panel in
Saturday Family I, interpret the Ground Lease as firmly establishing, consistent
with the Department’s regulation, that the lease may be extended at the option of
the lessee for additional periods at a FMV rent.8 FMV is not a “method”—it is a
future, unknown, objective amount. Thus, the Court’s construction is entirely
consistent with the language in Section 1103-C.1 of the Tax Code.
               Third, as for the remaining portions of Article 32 of the Ground
Lease, we disagree that any provisions in the agreement preclude the parties from
freely negotiating the FMV rent at the time of extension. Indeed, paragraph C of
Article 32 clearly provides that FMV rent for the extension period will be

       8
         We further construe the phrase “fair rental value at the time of the renewal or extension”
in the Department’s regulation, 61 Pa. Code § 91.193(b)(24)(v), as synonymous with the phrase
“fair market value rent . . . at the time of such extension” on page 18 of the Ground Lease. The
Commonwealth does not contend otherwise.



                                                7
determined by the lessor and lessee “based on rents for similar parcels of land in
Westmoreland County (or if Tenant and Landlord are unable to agree, determined
by appraisal as set forth herein).” (Ground Lease, Stipulation of Parties at Ex. “A,”
p. 18) (emphasis added).) Accordingly, the Ground Lease expressly allows for
negotiation—i.e., agreement.      The only restriction on the parties’ ability to
negotiate is that both parties must negotiate a FMV rent—meaning, one party
cannot extract a higher (lessor) or lower (lessee) rent than the market, at the time of
the lease extension, supports.
             The regulation provides that the extended period will not be counted
so long as the lease extension is (1) “at the option of the lessee” and (2) is “at fair
rental value at the time of the renewal or extension.”                   61 Pa. Code
§ 91.193(b)(24)(v). The existence and enforcement of the FMV rent condition in
the Department’s regulation is critical for two reasons. First, the condition ensures,
consistent with the Department’s regulation, that the option to extend belongs to
the lessee. Without the FMV condition, a lessor could demand an artificially high
rent and effectively defeat a lessee’s option. Second, the condition ensures that the
lease extension as closely as possible approximates a new lease with a new lessee
in the open market—i.e., the existing long-term lessee derives no price benefit or
advantage in the extension. A price benefit or advantage conferred upon the
original   lessee   at   extension/renewal     looks   less   like      an   arms-length
extension/renewal and more like a benefit conferred by and baked into the original
lease term, strongly suggesting that the extension/renewal period should be
included in the original lease term for realty transfer tax purposes.
             The Department’s argument assumes that a FMV rent is only that rent
with which both parties agree at the time of renewal—i.e., a rent that “they can


                                           8
renegotiate . . . unconditionally at the time of the extension.” (Commonwealth
Exceptions Br. at 43 (emphasis in original).)        The Department’s regulation,
however, providing that the rental at renewal/extension must be at FMV in order to
exclude the additional lease period from the calculation of the term of the lease for
realty transfer tax purposes, itself places a condition on the parties’ negotiations.
To avoid the tax consequence, the parties are restrained in their negotiations of the
renewal rate. They are not free to set any agreed-to renewal rate. According to the
Department’s regulation, the rate must be a FMV rate if the parties wish to exclude
the renewal/extension period from the original lease term for realty transfer tax
purposes. If a father offers to sell his 2016 Mercedes C350 sedan to his son for $1
and his son agrees to purchase it at that price, their agreement alone does not
represent a FMV for that vehicle. Likewise, if the parties to a 29-year, 11-month
(and 3-day) lease agree to a 5-year extension at a rental rate of $12, that alone does
not represent a FMV rate.
             FMV is defined as “[t]he amount at which property would change
hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of the relevant
facts.” Black’s Law Dictionary 597 (6th ed. 1990) (emphasis added). In other
words, it is a market value—the value of the asset on the market. Usually, the
actual price that parties negotiate would be a FMV price. Id. This is not always
the case, however, as the Department is well aware. In its regulations dealing with
the imposition of sales tax on vehicles, for example, the Department recognizes
that the actual sales price negotiated between the parties may not represent the
actual FMV of the vehicle. If that is the case, the Department will impose sales tax




                                          9
not on the actual negotiated price but on the “prevailing market price of the
vehicle,” or FMV. 61 Pa. Code § 31.44(b).
                 In reality, parties sometimes cannot reach agreement on how much to
pay for rent, let alone a FMV rent. Where, as here, there is a legal consequence to
the FMV determination, parties should be free to include dispute resolution
provisions within their agreement(s) in order to ensure that their respective rights
and interests are protected. With respect to the Department’s regulation and the
imposition of the realty transfer tax, the term of the lease extension/renewal can
only be excluded from the original lease term if the extension/renewal is at the
option of the lessee and is at a FMV rent at the time of extension/renewal. The
Department contends that the dispute resolution provisions in the Ground Lease
require inclusion of the extension/renewal period in the original lease term when
they actually are written to ensure that the conditions for excluding the
renewal/extension periods set forth in the Department’s regulation are satisfied.
The processes set forth in Article 32 of the Ground Lease are entirely reasonable
and consistent with how disputes over FMV are resolved in the real world. If the
parties cannot agree, qualified real estate appraisers are retained. Any disputes that
arise in the course of reaching a FMV rent are resolved either through arbitration
or litigation.
                 If the Ground Lease did not include any of the provisions on which
the Department fixates, a dispute could still arise at lease renewal over the rent for
the renewal period. Taxpayers are permitted to resolve that dispute somewhere, if
only to enforce their respective contractual rights.        The dispute resolution
provisions set forth in the Ground Lease are detailed, but from a practical and legal
perspective our analysis would be no different if the Ground Lease provided only


                                           10
that “disputes over fair rental value shall be resolved in the courts of common
pleas.”   We would construe such contractual language, as we do the actual
language in the Ground Lease, as providing for a method of dispute resolution, and
not a “method for calculating the rental charge” under Section 1103-C.1 of the Tax
Code and Section 91.193(b)(24)(v) of the Department’s regulations.
             Fourth, like the panel, we agree that the language in the Department’s
regulation is clear and unambiguous. The panel’s decision in Saturday Family I,
which we adopt and buttress herein, adheres to the clear and unambiguous
language of the statute and the Department’s regulation. Upon review of the
panel’s decision, we do not see any instance where the Court applied statutory
construction principles in derogation of the same.
             We now turn our attention to the Department’s second exception,
wherein the Department argues that the panel in Saturday Family I erred by not
deferring to the Department’s interpretation of Section 1103-C.1 of the Tax Code
and Section 91.193(b)(24)(v) of the Department’s regulations. We disagree. As
the panel in Saturday Family I recognized, courts need not defer to an
administrative agency’s interpretation of its own regulation where that
interpretation “is clearly erroneous or inconsistent with the regulation.” Saturday
Family I, 148 A.3d at 938 (quoting Pa. State Police, Bureau of Liquor Control
Enforcement v. Benny Enterprises, Inc., 669 A.2d 1018, 1021 (Pa. Cmwlth. 1995),
appeal denied, 681 A.2d 1344 (Pa. 1996)); see Popowsky, 853 A.2d at 1106. As
noted above and by the panel in Saturday Family I, the Department’s regulation
and Section 1103-C.1 of the Tax Code, read together, are unambiguous and,
therefore, subject to only one reasonable interpretation.




                                         11
               The Department’s interpretation is simply unreasonable. At page 43
of its brief in support of its exceptions, the Department contends that in order for a
renewal period to be excluded from the term of the lease for transfer tax purposes,
the lease must provide “only that the renewal or extension will be at true ‘fair
rental value’ at the time of renewal or extension (free and open and without legally
binding conditions).” As noted above, however, the requirement in the regulation
that the renewal rent be at FMV is itself a legally binding condition that limits the
parties’ ability to agree to a rental price for the renewal period. If the Department
truly wanted free and open negotiations, the regulation would have simply
provided: “Renewals or extensions at the option of the lessee at a price agreed to
by the parties fair rental value at the time of the renewal or extension are not
included in determining the term of a lease.”
               Unfettered free and open negotiations would not serve the purpose of
either the Tax Code9 or the regulation, as explained above, because it could lead to
mischief.     Instead, the only reasonable interpretation of the language in the
regulation is that in order to exclude any renewal/extension term from the original
term of a lease, for purposes of avoiding realty transfer tax, any rental for the
extension/renewal period must be at FMV and not, as the Department proffers, any
price that the parties “freely and openly agree to without legally binding
conditions.”     Such a condition ensures that the rent at renewal as closely as
possible approximates what the lessor could have demanded on the open market
had it simply executed a new lease with a new tenant.             The Department’s



      9
          72 P.S. §§ 7101-10004.



                                         12
interpretation, then, is not reasonable and, instead, is inconsistent with the
regulation. It, therefore, is not entitled to deference.
             In addressing this matter, we note also that in addition to construing
the Department’s regulation and the Tax Code, the Court has also reviewed and
interpreted the terms of the Ground Lease itself, particularly the terms identified by
the Department in its exceptions.       The Department clearly disagrees with the
Court’s interpretation and characterization of those terms as dispute resolution
provisions. In response, we note that “[t]he function of contract interpretation and
construction is a question of law peculiarly within the province of this Court.”
Dep’t of Transp. v. Mosites Constr. Co., 494 A.2d 41, 43 (Pa. Cmwlth. 1985).
             Accordingly, we overrule the Commonwealth’s exceptions to the
Court’s opinion and order in Saturday Family I, thereby confirming the Court’s
order of October 17, 2016.




                                  P. KEVIN BROBSON, Judge




                                           13
           IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Saturday Family LP,                   :
                       Petitioner     :
                                      :
            v.                        :   No. 781 F.R. 2013
                                      :
Commonwealth of Pennsylvania,         :
                     Respondent       :

Techspec Inc.,                        :
                       Petitioner     :
                                      :
            v.                        :   No. 782 F.R. 2013
                                      :
Commonwealth of Pennsylvania,         :
                     Respondent       :


                                    ORDER


            AND NOW, this 14th day of August, 2017, the exceptions filed by
Respondent Commonwealth of Pennsylvania to this Court’s opinion and order in
Saturday Family LP v. Commonwealth of Pennsylvania, 148 A.3d 941 (Pa.
Cmwlth. 2016), are hereby OVERRULED. The order of the Board of Finance and
Revenue in the above-captioned matter, dated September 25, 2013 (mailed on
September 27, 2013), is REVERSED.


                             P. KEVIN BROBSON, Judge
