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New Ruling Affects Mississippi School Boards’ Rent Adjustments

February 20, 2020

Mississippi school boards should be aware of a recent court decision that could affect commercial leases and rent adjustments.

In a unanimous opinion in Oak Grove Marketplace, LLC v. Lamar County School District, et al., the Mississippi Supreme Court recently found Miss. Code Ann. § 29-3-69 imposes a “mutual, mandatory obligation” for parties to adjust rent “not less than once every ten years.” The Court held this appraisal cannot be waived or contracted away, even if both parties miss an adjustment window specifically set out in the lease.

The Court emphatically stated that even though a Mississippi school board adjusted the rent five years late, “the Board was not making an untimely attempt to exercise a right conferred in the lease. Rather, the Board was carrying out a statutory mandate and, in the process, trying to ensure the annual rent, based on current fair-market value, was constitutionally adequate.”

What does this mean for your district?

The Mississippi Supreme Court emphasized that this holding was strictly applicable to Sixteenth Section commercial leases. If the case had not involved Sixteenth Section lands, the Court noted a school district would have waived its ability to adjust the rent by missing the window.

Miss. Code Ann. § 29-3-69 is a “mutual, mandatory obligation” on both parties. Your district may wish to consider double-checking to see if any Sixteenth Section commercial leases have had the rent adjusted within 10 years of their execution, and if not, immediately have the property appraised and the rent adjusted to the present appraised value.

In the case of Sixteenth Section residential and farm-residential lease the board “may require a rent adjust clause” so long as the adjustments do not exceed the fair market value of the property “exclusive of improvements thereon” See Miss. Code Ann. § 29-3-69. Districts may wish to consider also checking their Sixteenth Section residential and farm residential leases to determine if they have a rent adjustment clause.

Case background

In Oak Grove Marketplace, LLC v. Lamar County School District, et al., Oak Grove executed a 40-year Sixteenth Section commercial lease on the Secretary of State’s commercial lease form that contained the following rent escalation clause:

Within a sixty (60) day period of the 10th, 20th, and 30th, anniversary dates of this lease, said anniversary dates being August 5, 2012, August 5, 2022, and August 5, 2032, respectively, [the Board] shall have the right to conduct reappraisal of the subject property for the purpose of re-determining reasonable ground rentals.

The rent escalation clause is included in the Sixteenth Section commercial lease to meet Miss. Code Ann. § 29-3-1 requirement imposed on the school board to fulfill its duty to ensure adequate compensation is received for Sixteenth Section lands and the requirement in § 29-3-69 “that the consideration for every lease of [Sixteenth Section lands] shall be adjusted not less than once every ten (10) years from the date of the lease to reflect the current fair market rental value of the lands, exclusive of any improvements thereon.”

The clause in question unambiguously states reappraisal is to happen within a very specific window of time. That did not occur. After hiring a full-time Sixteenth Section land manager, the District discovered the lease escalation provision was not invoked, subsequently had the property reappraised and sent a notice to Oak Grove that the rent would be increased according to the appraisal.

This reappraisal was five years after the expiration of rent escalation window in the lease. Oak Grove objected, arguing under the terms of the lease, the adjustment was unauthorized and untimely.

Our Education Law Team will continue to monitor and provide insights on updates in this area.