An Industrial Development Board leased property to a company before Alabama's 1992 Tax Incentive Reform Act, but the company forgot to give the written notice needed to renew the lease. Does missing that notice make the property taxable, or does the pre-1992 tax exemption continue?

Plain-English summary

This ruling applies the same Tax Incentive Reform Act of 1992 grandfather clause as Revenue Ruling 92-001, but to a lease-renewal slip-up.

Company A leased real property and improvements from the Industrial Development Board (IDB) of the City of Marion, Perry County, under a November 1, 1976 lease. Section 9.2 of the lease let Company A renew for an additional term by giving written notice on or about November 1, 1991, which would extend the lease to October 31, 2006. Company A inadvertently failed to send that written notice — but both sides kept operating under the lease as if it were renewed. After May 21, 1992 (the effective date of the Tax Incentive Reform Act), the missed notice came to light, and the IDB then gave Company A a written statement expressly waiving the written-notice requirement.

Why it mattered for tax: the Act (§ 40-9B-1 et seq.) made IDB "private use property" subject to ad valorem tax as if the private user held title (§ 40-9B-7(a)(1)) — property that had been exempt before. The Act's grandfather clause, § 40-9B-7(c), preserves the exemption for property a private user was entitled to use under a lease entered into before May 21, 1992. Company A's lease predated the Act, but it was set to expire around November 1, 1991 unless renewed. Ad Valorem Tax Regulation 810-4-3-.02(8) spells out the consequence: when a pre-Act lease expires, the property becomes taxable on a new lease; but if the old lease has a separately stated, clearly limited option to renew and that option is "properly exercised," the property stays exempt for the renewal period so long as the renewal matches the option's terms.

So the whole case turned on whether a renewal option can be "properly exercised" without the required written notice. The Department said yes, relying on McIntyre v. Coker (Ala. 1963): a written-notice requirement can be waived by the parties, or a waiver can be implied when the lessee stays in possession and keeps paying rent that the lessor accepts without protest. Here both applied — Company A stayed in possession and paid rent the IDB accepted, and the IDB expressly waived the notice. The Department held that the parties' actions and their waiver agreement "effected a valid renewal of the lease," so the property keeps its tax-exempt status under § 40-9B-7(c) and Regulation 810-4-3-.02(8).

What this means for you

A missed renewal formality is not automatically fatal to an IDB exemption

If your property's ad valorem exemption depends on a pre-May-21-1992 lease being renewed, a technical failure to give written renewal notice may be curable. Where the parties continue performing (possession + rent accepted) and/or the lessor waives the notice requirement, Alabama can treat the option as properly exercised so the exemption continues under Regulation 810-4-3-.02(8).

But get the renewal cleaned up — precisely and in writing

The regulation protects a renewal only if the option is separately stated, for a clearly defined and limited period, and the renewal conforms precisely to the option's terms. Don't rely on informal conduct alone: obtain the lessor's written waiver (as the IDB did here) and document that the renewal tracks the original option, so the exemption isn't put at risk.

The May 21, 1992 line still controls

This is the same dividing line as in Revenue Ruling 92-001: a lease/agreement before that date is grandfathered; a genuinely new lease (or an expired one not validly renewed) is taxable "private use property" unless separately abated. If your only lease is post-1992, you need an abatement, not the grandfather clause.

One taxpayer, one set of facts

Under § 40-2A-5 this ruling is not precedent and binds the Department only as to Company A. Treat it as guidance on how Alabama reads "properly exercised" and the waiver doctrine, not as a rule you can bank on for your own lease.

Common questions

Q: We forgot to send written notice to renew our IDB lease. Did we lose the property-tax exemption?
A: Not necessarily. Under this ruling, if the option is still "properly exercised" — including by the lessor waiving the written-notice requirement, or by an implied waiver from continued possession and accepted rent (McIntyre v. Coker) — the renewal is valid and the pre-1992 exemption continues under § 40-9B-7(c) and Regulation 810-4-3-.02(8).

Q: What makes a renewal "properly exercised" for this exemption?
A: Regulation 810-4-3-.02(8) requires the old lease to contain a separately stated option to renew for a clearly defined, limited period, and the renewal must conform precisely to the option's terms. A properly exercised option keeps the property exempt for the renewal period.

Q: Does this help a lease signed after May 21, 1992?
A: No. The grandfather clause (§ 40-9B-7(c)) only protects property used under a lease or agreement entered into before May 21, 1992. A new post-Act lease makes the property taxable unless it qualifies for a separate abatement.

Q: Can I cite this ruling for my situation?
A: No — Ala. Code § 40-2A-5 makes revenue rulings non-precedential and this one is limited to Company A's facts.

Citations and references

Statutes and regulations:

• Ala. Code 1975 § 40-9B-1 et seq. — Tax Incentive Reform Act of 1992 (Act 92-599), effective May 21, 1992
• Ala. Code 1975 § 40-9B-7(a)(1) — public-authority "private use property" subject to ad valorem tax as if the private user held title
• Ala. Code 1975 § 40-9B-7(c) — grandfather clause for property leased before May 21, 1992
• Alabama Ad Valorem Tax Regulation 810-4-3-.02(8) — property stays exempt for a renewal period if the lease's renewal option is properly exercised
• Ala. Code 1975 § 40-2A-5 — revenue rulings are not to be used or cited as precedent

Cases cited:

• McIntyre v. Coker, 150 So. 2d 220 (Ala. 1963) — a written-notice requirement to renew can be waived expressly or by implication (possession plus accepted rent)

Source

• Landing page: Alabama Department of Revenue -- Revenue Rulings
• Original PDF: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/2017_05_RR-93-013.pdf

Original ruling text

State of Alabama
Department of Revenue

Montgomery, Alabama 36132 GEORGE E. MINGLEDORFF II!

Assisiartt COMT's sioner

GEORGE E. MINGLEDORFF Ill LEWIS A. EASTERLY

Qe issn ceryActing! perretan

THIS DOCUMENT MAY NOT BE USED OR CITED AS PRECEDENT. CODE OF
ALABAMA 1975, 840-2A-5(a)

ALABAMA DEPARTMENT OF REVENUE
REVENUE RULING 93-0153

TO: Company A

FROM: Commissioner of Revenue
Alabama Department of Revenue

DATE: January 14, 1994
RE: Revenue Ruling 93-015
SUBJECT: The proper exercise of an option to renew a lease term

for purposes of complying with Ad Valorem Tax
Regulation 810-4-3-02(8).

FACTS

Company A and the Industrial Development Board of the City
of Marion, Perry County, Alabama, entered into a lease agreement
on November 1, 1976; covering certain real property and the
improvements located thereon. Section 9.2 of the lease
agreement confers on Company A (Lessee) the option to renew the
lease for an additional term. The option to renew was to be
exercised in writing by Company A on or about November 1, 1991,
thereby extending the original lease term through October 31,
2006.

Company A failed to exercise the option to renew on or
before November 1, 1991, due to its inadvertence, however, the
Industrial Development Board (Lessor) and Company A continued to
operate under the terms of the lease. Sometime after May 21,
1992, which was the effective date of the Tax Incentive Reform
Act of 1992, the failure of Company A to submit a written notice
to the Industrial Development Board exercising the option to
renew was discovered. The Industrial Development Board then
issued a written statement to Company A expressly waiving the
requirement of a written notice to renew.

ISSUE

Whether the failure to exercise the option to renew, in
accordance with the terms of 89.2 of the lease agreement,
renders the property taxable pursuant to The Tax Incentive
Reform Act of 1992.

LAW AND ANALYSIS

The Tax Incentive Reform Act of 1992, §40-9B-1 et seq.,
Code of Alabama 1975, became effective May 21, 1992. Section
GO0-9B-7(a) C1) states:

Notwithstanding any other provision of law,
if a public authority or county or municipal
government has title to or aepossessory
right in private use property, then:

(1) The property shall be subject
to ad valorem taxes as if the
private user held title to the
property.

This statute taxes property that prior to its passage would have
been tax-exempt. However, §40-9B-7(c), commonly referred to as
the grandfather clause, allows property to remain exempt
mn , .if a private user was entitled to use the _ property
pursuant to a lease or other agreement entered into before
May 21, 1992. .. -™

The lease agreement between Company A and the Industrial
Development Board was in effect prior to May 21, 1992, however,
it was to have expired on or about November 1, 1991, unless
renewed in accordance with §9.2. Ad valorem tax regulation
810-4-3-02(8) states:

When any lease or agreement entered into
prior to the effective date of Act 92-599
{The Tax Incentive Reform Act of 1992]
(May 21, 1992) expires, the property covered
by the lease or agreement will become
taxable upon execution of a new lease. If
the old lease contains a separately stated
option to renew for a clearly defined and
limited period of time, and the option is
properly exercised, the property shall
remain exempt for the renewal period as long
as the renewal period conforms precisely to
the terms of the option. (Emphasis
supplied.)

The above-quoted regulation requires that an option be properly
exercised in order for the property to remain tax exempt.

The Alabama Supreme Court addressed for the first time in
McIntyre v. Coker, 150 So.2d 220 (Ala. 1963), the question of
whether the exercise of an option to renew a lease was valid in
the absence of a written notice to the lessor. The lessor
alleged that the option to renew was not properly exercised in
that the leases provided for written notice to be given the
lessor at least thirty days prior to the expiration of the
primary term and that no such notice was given. However, the
lessee remained in possession and continued to make monthly
rental payments, which the lessor accepted without protest, for
a period of three years.

The court held that the written notice requirement could be
waived by the parties or, as in the case before it, a waiver of
the written notice would be implied due to the lessee's payment

of rents and remaining in possession of the property. Id. at

224. Company A could argue either or both of the above
     exceptions. It remained in possession of the property and

continued to pay rent, which the Industrial Development Board
accepted without protest. According to McIntyre, this would
be an implied waiver of the written notice requirement. In
addition, the parties expressly agreed to waive the written
notice requirement. Therefore, Company A's option to renew was
properly exercised.

HOLDING

The parties actions as well as their agreement to waive the
written notice requirement effected a valid renewal of the
lease. This renewal entitles the subject property to continued
tax-exempt status pursuant to §840-9B-7(c) and ad valorem tax
regulation 810-4-3-02(8).

George . III
Acting Commissioner’ of Revenue

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