Statutory Obligation to Reappraise Sixteenth-Section Land Prevails Over Lease Terms

Oak Grove Marketplace, LLC v. Lamar County School District, 287 So. 3d 924 (Miss. 2020). Section 29-3-69 of the Mississippi Code requires that the rent in a sixteenth-section lease be adjusted every ten years. Oak Grove Marketplace, LLC (the “Lessee”) and the Lamar County Board of Education (the “Board”) entered into a lease of sixteenth-section land on August 5, 2002. The lease was on a form provided by the Secretary of State’s office. The lease was for forty years, with an annual rent payment due on August 5 of each year. The initial rent payment was $8,450. The lease provided that the Board had the right to reappraise the property during the sixty-day period before the tenth, twentieth and thirtieth anniversaries of the lease, being August 5, 2012, August 5, 2022, and August 5, 2032. The Board did not reappraise the property on August 5, 2012. The Board reappraised the property as of April 11, 2017. Based on the appraisal, the Board informed the Lessee that the rent would be increased to $32,250 beginning August 5, 2017. The Lessee objected, asserting that under the terms of the lease, the Board had missed its opportunity to reappraise property and adjust the rent on August 5, 2017, and that the rent could not be adjusted again until August 5, 2022. The Board argued that Section 29-3-69 required it to reappraise the property and adjust the rent regardless of what the lease said. The Lessee paid $8,450 and filed an action in the Chancery Court of Lamar County. The Lessee asked for a declaratory judgment that the lease did not permit a reappraisal until August 22, 2022. The chancery court held that although the Board missed the sixty-day window to reappraise under the lease, Board’s statutory obligation under Section 29-3-69 required it to reappraise and adjust the rent every ten years, and therefore denied the Lessee’s motion for declaratory judgment. On interlocutory appeal, the Mississippi Supreme Court, in an opinion by Justice Maxwell, affirmed. The Lessee argued that the lease must comply with sixteenth-section law because the Secretary of State’s office promulgated the form of lease, and the Secretary of State is the state official with the responsibility for sixteenth-section lands. The Supreme Court wrote that the courts, not state agencies, interpret the law, and that to the extent that the lease permitted the Board to go more than ten years between reappraisals and readjustments of rent, the lease was void. The Lessee argued that the lease was binding because when a state entity like the Board enters into a lease or other contract with a private party, the state entity had to abide by the terms of the contract. While a state entity can waive some rights, such as immunity, the trust duties of a school board cannot be waived. The Supreme Court affirmed the chancery court’s decision to allow the school board to adjust the rent outside the terms of the lease and remanded the case to the chancery court to consider the remaining issues.

Note 1: The Secretary of State’s forms of sixteenth-section lease can be downloaded from the Secretary of State’s website. There are probably hundreds of sixteenth-section leases in effect that use the Secretary of State’s form and that contain the language that the Supreme Court has found to be inconsistent with the statute.

Note 2: The Supreme Court, as it should, only answered the narrow question before it of whether the school board’s duty of to reappraise the property and adjust the rent every ten years could be limited by the terms of the lease. That still leaves open the question of what happens when a school board fails to do this. The possibilities are myriad. In this case, the Board took the position that the adjusted rent was due on the next date that the annual rent was due, August 17, 2017, and that the next appraisal and adjustment of rent would be ten years later, in 2027, rather than the next adjustment date in the lease of 2022. Does the Board have the right under the lease to reappraise and readjust the rent in 2022 rather than 2027? And what about the rent from 2012, the date that the Board should have reappraised and adjusted the rent, until 2017? Does the Board have any obligation to try to recover any additional rent to which it would have been entitled if it had reappraised the property in 2012 as contemplated by the lease? Is it even possible to get an appraisal today of what land was worth in 2012? The parties and the chancery court will have to work through these issues on remand. If this case involved a private lease, the landlord and tenant probably would negotiate a mutually agreeable number. The fact that this case involves a sixteenth-section lease limits the range of options to compromise.

Note 3: The Secretary of State’s Office has prepared and posted online a Policies & Procedures Manual that is a great source of information about sixteenth section leases and management. https://www.sos.ms.gov/content/documents/lands/Lands%20Handbook_2020.pdf This Manual addresses late adjustments and provides on page 767 that when the rent has not been adjusted, the board of education should get a new appraisal and adjust the rent, and then “should resume with the rental adjustment schedule found within the terms of the lease, and not otherwise alter the schedule. For instance, if the ten-year rent adjustment occurs during year thirteen (13) of the lease, the next rental adjustment should still occur during year twenty (20).” In this case the Board argued that by adjusting the rent outside the terms of the lease, it was attempting to comply with the Secretary of State’s policy. Under the facts of this case, wouldn’t the policy quoted above require that the property be reappraised and the rent adjusted in 2022?

Note 4: If the rent adjustment clause in a sixteenth-section lease is not enforceable, is there an argument that the entire lease is void? The Supreme Court addressed this question in footnote 6. The Supreme Court followed general contract law and, quoting from a 2002 case, wrote that “if a court strikes a portion of the agreement as void, the remainder of the contract is binding.”

Note 5: Drafting rent adjustment clauses in long-term ground leases that attempt to capture changes in the value of the land is notoriously tricky. Superimposing the body of sixteenth-section law on top of this makes this task even more challenging.

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