Lease Words You Never Minded: Usufructs vs. Estates For Years

• Published date: 15 September 2022
• Subject Matter: Real Estate and Construction, Real Estate, Landlord & Tenant - Leases
• Law Firm: Womble Bond Dickinson
• Author: Mr Joseph Foltz and Seth Pierce Johnson

ARTICLE SUMMARY: Georgia law makes a distinction between the usufruct and an estate for years. Although this unique aspect of real estate law often receives little attention, the distinctions between the two concepts have a wide-reaching impact on real estate practice. For those that consider the distinctions purely academic or esoteric, it is important to note that the election between the two concepts can result in differing tax consequences, additional third-party lender requirements, and even unforeseen circumstances presented by an unexpected pandemic like COVID-19. In this article, the authors intend to demonstrate why practitioners and clients alike should pay more attention to the significant effects that result by distinguishing between a usufruct and an estate for years.

Introduction

In 1982, one of our authors published an article discussing the distinction between the usufruct and estate for years in the February edition of the Georgia State Bar Journal.¹ Since that time, there has been little attention given to one of the most unique aspects of real estate law in the state of Georgia.² As the 1982 article noted, the distinctions between the two concepts has a wide-reaching impact on practice that has not diminished in the last 38 years.³ Although this may seem hyperbolic for terms that elicit memories of devious 1L property professors or hours of bar exam preparation, this article intends to demonstrate why'by refreshing and updating the concepts discussed in 1982'practitioners should pay more attention to the significant effects that result by distinguishing between a usufruct and an estate for years.

Take for example the recent Georgia Court of Appeals ruling in Chatham County Board of Assessors v. Jay Lalaji, Inc., Airport Hotels.⁴ In 2006, Jay Lalaji, Inc., Airport Hotels entered a 50-year lease agreement with the Savannah Airport Commission to construct and operate a hotel on land owned by the Commission.⁵ At the time, the Chatham County Board of Assessors assigned the property an identification number and attempted to assess ad valorem taxes against Jay Lalaji, arguing that the lease created a taxable estate for years. If correct, Jay Lalaji would be assessed taxes for the property for the entire 50-year term of the lease.⁶

However, using the analysis set forth below in this article, Jay Lalaji pled that it was granted a non-taxable usufruct in the property, rather than a taxable estate for years, and should therefore not be assessed taxes during the lease term.⁷ The result? The Georgia Court of Appeals agreed, holding that Jay Lalaji only received a "circumscribed interest and limited use of the premises," saving Jay Lalaji from 50 years of ad valorem tax assessments on the leased premises.⁸

Although the distinction may seem formal, learning the difference between a usufruct and an estate for years under Georgia law will be the lease words you never minded learning when such a windfall could be possible for you and your clients.

Terminology

To remain consistent with the 1982 article and the definitions set forth in the Georgia Code, this article will use the terms "landlord" and "tenant" to refer to the parties to an agreement conveying a usufruct, whereas the terms "grantor," "grantee," "lessor," and "lessee" shall refer to the parties to an agreement conveying an estate for years.⁹

Understanding the Usufruct and the Estates for Years

Basic Differences

Under the Georgia Code, a landlord-tenant relationship is created when the owner of real estate grants "the right simply to possess and enjoy the use of such real estate for a fixed period of time or at the will of the grantor."¹⁰ This conveyance is known as a usufruct, because no estate passes from the landlord to the tenant. As referenced in Georgia case law, this conveyance is usually deemed a "mere usufruct" or "license to use" since the conveyance does not pass a real property interest to the tenant.¹¹

On the other hand, an estate for years passes as realty under the Georgia Code. An estate for years is limited to a fixed period or one that may be "fixed and certain," and may convey any number of years "within the rule against perpetuities."¹² Given that Georgia has implemented a Uniform Statutory Rule Against Perpetuities with a 360-year vesting period after creation,¹³ an estate for years can be any number of "fixed and certain" periods under the law.

To distill the basic distinction, consider the following explanation from the Georgia Court of Appeals:

"[A]n estate for years is essentially a lease by which one person acquires a right to use real estate for a finite period 'in as absolute a manner as may be done with a greater estate,' so long as neither the property nor the person entitled to the reversionary interest in it is injured by that use. A usufruct, by contrast, is created when the owner of real estate grants to another person the right to use and enjoy the property for a fixed time or at the will of the grantor, as in a landlord-tenant relationship, but no property interest arises in the grantee."¹⁴

Rights, Privileges, and Distinctions

Aside from the technical differences in the Georgia Code, there are several key distinctions to the characterization. Chief among these distinctions is the level of rights and privileges conveyed to the tenant or grantee. Usufructs maintain the landlord-tenant relationship, "with privileges granted to tenants holding less interest in real estate than estate for years."¹⁵ In other words, the usufruct grants the tenant the right to use and enjoy the property, but refrains from impairing or altering the substance of the property conveyed.¹⁶ The estate for years, however, places the grantee or lessee in "absolute control" of the estate, with "unqualified possession of the premises."¹⁷ In simpler terms, under Georgia law, the lessee of an estate for years is treated as the owner, whereas the tenant of a usufruct is not.

Under Georgia law, the lessee of an estate for years is treated as the owner, whereas the tenant of a usufruct is not. With this ownership distinction comes several consequences.

With this ownership distinction comes several consequences. First, consider the duty to repair. When a usufruct is conveyed, the landlord must repair the premises and shall be liable for all substantial improvements thereon.¹⁸ However, roles shift for the estate for years. If the lease conveys an estate for years, the grantee must make the repairs and pay the expenses necessary for the "preservation and protection of the property."¹⁹

The key expenses, for many grantees, are taxes and liens levied on the property. Generally, all real property, including the leasehold, is subject to taxation and shall be taxed under the Georgia Code.²⁰ A mere license or concession to operate or use a designated space is not considered a taxable interest.²¹ Due to the distinctions discussed above, an estate for years is a taxable estate.²² A usufruct, however, is a mere license to use.²³ As a result, because the fee estate in the property remains with the landlord and is undisturbed when a usufruct is conveyed, the tenant is not taxed for the use and enjoyment of the usufruct.²⁴ The same applies to a materialman's lien, for example, which may attach to an estate or property interest in realty, like an estate for years, but not to a usufruct.²⁵ The characterization has particular significance for third parties, such as taxing authorities.

Does My Agreement Convey a Usufruct, or an Estate for Years?

Given the different obligations and consequences associated with the statutory usufruct and the estate for years, the question arises, "How do Georgia Courts determine whether a particular agreement conveys a usufruct or an estate for years?"

Georgia case law makes clear that each case is evaluated by its own facts and circumstances.²⁶ Yet, Georgia Courts are consistent in their examination. When determining whether an agreement conveys a usufruct or an estate for years, the Courts administer a balancing test, weighing several factors to determine the parties' intent. This balancing test can be complicated, however, because agreements may have provisions indicative of an estate for years, while other...