Paul Wenner & City of Phoenix(Df/ants) vs Dayton-Hudson
Ct. of App. AZ [1979]
Author: Sam Biers

Relevant Facts: Pl Dayton operates department stores within the City of Phoenix and enters into agreements with other retailers to maintain certain departments w/i PL’s stores, ex: shoes, salon, etc.  The agreement grants an exclusive right to operate a particular type of store w/i PL’s store.  The retailer pays a percentage of gross receipts with a monthly minimum payment designated.  The agreement has a definite term and are automatically renewed w/o notice of termination by retailer, or if retailer is in default then Pl may terminate.  Df levied a tax against Pl, who protested, in the amount of 1% if the amount paid by retailers calling their agreement a lease.

Legal Issue(s): Whether the agreement between Dayton (PL/ee) and other retailers is a lease or a license? ***If the agreement is a lease it is subject to the City’s tax.

Court’s Holding: License

Procedure: Admin. Hearing tax was proper and assessed tax on agreement as a lease. Trial Ct. Summary for Pl, Superior Ct. ruled the income received by PL from other retailer’s was not taxable as the agreement was a license, not a lease. Df appealed. Judgment Affirmed.

Law or Rule(s): Business activities within the City, hereby levied, privilege taxes, an amount equal to 1% of the gross proceeds of sale or gross income, upon every person engaging or continuing w/i the City in the following business: Leasing or renting for a consideration the use or occupancy of real property.

Court Rationale: The language of Section 5 is not controlling, but the whole agreement must be in accord with this intent to create a license agreement. Under the agreement the PL was obligated to furnish retailer w/ an agreeable amt of space in the store, but that space wasn’t specifically delineated w/i the agreement, and may be changed at PL direction.  The retailer was not granted any interest whatsoever in the real property.  The retailer only had access to PL store when said store was open to the public.  PL required retailer to use PL’s trademark and trade name in conducting their business. The retailer agreed to reimburse PL a percentage of the sales it generate as a result of using PL’s trade name and trademark. The mere presence of a non-assignment clause does not render the agreement as a lease. The non-assignment clause here is not a routine one, but a correct statement of the law putting a licensee on notice of his inability to assign the agreement, and that if he attempts to do so he will be in breach.   Kadota and the Restatement § 519 (b) supports the agreement as a license.  The agreement does not contain a clause as in OWL, licensee is entitled only to accrued debts and K damages, not lost rent. THE agreement used was carefully drawn, and created what the parties intended, a license.

Plaintiff’s Argument: [City of Phoenix] Looking beyond the words used and to the provisions of the agreement as a whole, (ex: non-assignment clause,) and the intent of the parties, creates the legal effect of a lease, and not a license.

Defendant’s Argument: [Dayton] Section 5 expressly states “This agreement shall be construed as a mere license, * * * it shall not be construed as a lease, sublease, or rental agreement.”

KADOTA FIG - “the rule of revocability of a license at pleasure is not w/o modifications and exceptions.”

CITY OF PARIS - non assignment clause + language (this lease, good, tenantable condition, space demised)

Restatement §519 (b) : The fact that a license is terminable at the will of the licensor does not mean that the licensor can terminate it w/o incurring liability for doing so. It means only that the interest in land which the license constitutes has disappeared.  The licensor may be bound by contract not to so exercise his will as to terminate the license, and when so bound will be liable in damages for breach of his K.

OWL DRUG - uses specific words, leasor - lessee, and the phrase rent for the premises, plus the clause: the use of said building hrein leased by reason of any breach of any of said rules or regulations by said lessee, his agents, servants, etc. = an agreement which is a lease.

AZ TAX v Staggs - in tax cases operative words will be read to gain their fair meaning, not to gather new objects of taxation by strained construction or implication.