Commonwealth Land Title Ins. Co. v. District of Columbia
Not yet published (2025)
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Rule of Law:
Parties to a real estate transaction in the District of Columbia cannot avoid recordation and taxation requirements for ground leases of 30 years or more by characterizing the creation of the lease as a retention of interest, and a tax return for a deed that merely references a ground lease without providing information about its terms does not trigger the statute of limitations for the separate tax liability of the ground lease.
Facts:
- On August 2, 2013, Lano/Armada Harbourside, LLC (Lano/Armada) sold five condominium units (the property) to Allegiance 2900 K Street LLC (Allegiance) for $39,000,000 via a "Bargain and Sale Deed" (the 2013 Deed).
- The 2013 Deed purported to convey all right, title, and interest to Allegiance, 'LESS AND EXCEPT (i) a leasehold interest... reserved to [Lano/Armada] solely under and subject to the terms... set forth in that certain Ground Lease of even date herewith... and (ii) all improvements and buildings... for the term of the Ground Lease.'
- On the same day, Allegiance, identified as "Ground Lessor," agreed to lease the property to Lano/Armada, identified as "Ground Lessee," through a separate document entitled "Ground Master Lease" (the Ground Lease).
- The Ground Lease defined the "Leasehold Estate," set its expiration date in August 2043 with options to extend until 2130 (a total term of 117 years), and specified rent payments for Lano/Armada.
- The Ground Lease explicitly prohibited its recordation in any public records and stated that it contained the entire understanding between the parties regarding the ground leasing, disavowing any prior agreements.
- In February 2019, Lano/Armada defaulted on a Deed of Trust related to its leasehold interest, which by then was owned by COMM 2013-CCRE12 K STREET NW, LLC (COMM 2013) through a series of assignments.
- COMM 2013 subsequently purchased the leasehold interest in the property at the foreclosure sale.
Procedural Posture:
- On August 5, 2013, Lano/Armada submitted the 2013 Deed alone for recordation, along with a tax return reporting $1,131,000 in transfer and recordation taxes based on the fee transfer, which Lano/Armada paid.
- The Ground Lease was not submitted for recordation at this time.
- On August 6, 2013, Cantor Commercial Real Estate Lending, L.P. (Cantor) submitted its 2013 Leasehold Interest Deed of Trust (granting Cantor a security interest in Lano/Armada’s leasehold) for recordation, along with a tax return reporting the transaction as a refinancing on which no taxes were owed, and it was accepted.
- In March 2019, Commonwealth Land Title Insurance Company (Commonwealth), COMM 2013’s insurer, submitted the Leasehold Deed of Foreclosure for recordation after COMM 2013 purchased the leasehold interest at a foreclosure sale.
- The Recorder of Deeds refused to accept the Leasehold Deed of Foreclosure for recordation, stating that the over-thirty-year Ground Lease had never been recorded or taxed.
- On September 30, 2019, Allegiance and COMM 2013 submitted a memorandum of the Ground Lease and a tax return for it; Commonwealth paid transfer and recordation taxes of $1,037,207.62 for the Ground Lease "under protest," at which point the Recorder of Deeds accepted both the memorandum of lease and the Leasehold Deed of Foreclosure for recordation.
- Commonwealth filed an administrative refund claim with the Office of Tax Revenue (OTR), seeking repayment of the taxes paid, but OTR denied this claim.
- Commonwealth then filed a Petition for Recordation Tax in Superior Court, again seeking repayment of the taxes.
- The parties eventually filed cross-motions for summary judgment.
- The Superior Court denied Commonwealth’s motion and granted summary judgment to the District, concluding that the Ground Lease involved a taxable transfer and the District’s effort to collect taxes was not time-barred.
- Commonwealth then filed a timely appeal to the District of Columbia Court of Appeals.
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Issue:
1. Does District of Columbia law allow parties to avoid recording and paying taxes on ground leases of thirty years or more by structuring the transaction as a retention of a leasehold interest rather than a transfer? 2. Does a tax return for a deed that mentions a ground lease, but provides no information about its terms, trigger the running of the statute of limitations for the collection of taxes on that ground lease?
Opinions:
Majority - Associate Judge Easterly
1. No, parties cannot avoid recordation and taxation requirements for ground leases of 30 years or more by structuring the transaction as a retention of a leasehold interest. Applying black letter principles of property law and examining the "reality of the transaction," the court determined that Lano/Armada did not retain a leasehold interest. A leasehold interest is created by a lease agreement, which inherently involves a transfer of the right to possession from a lessor to a lessee. At the time of the sale, Lano/Armada could not have a leasehold interest in its own property to retain. The 2013 Deed merely transferred fee simple title to Allegiance. The leasehold interest Lano/Armada acquired arose from the separate Ground Lease, which clearly set forth all essential terms of a lease (parties, property description, rent, duration) and included an integration clause confirming it as the sole instrument defining the leasehold. Thus, the court concluded that two separate transfers of interests in real property occurred: the sale of the fee simple interest and the subsequent transfer of a leasehold interest via the Ground Lease, both subject to separate recordation and taxation. The language in the 2013 Deed purporting to reserve a leasehold interest was merely an acknowledgment that the interest would be created by the Ground Lease, not a retention in itself. 2. No, a tax return for a deed that mentions a ground lease, but provides no information about its terms, does not trigger the running of the statute of limitations for the collection of taxes on that ground lease. Citing D.C. Office of Tax and Revenue v. Sunbelt Beverage, LLC, the court reaffirmed that to trigger the three-year statute of limitations, a tax return must be "intended as a return" and "self-identifies for the correct tax liability," providing "facts on which liability could be predicated." The tax return filed with the 2013 Deed only selected "Fee" as the interest conveyed and calculated taxes solely on the fee simple transfer. It contained no information about the Ground Lease's terms, such as its duration or rent, from which the Office of Tax Revenue (OTR) could have determined tax liability for the leasehold. A mere reference to a "Ground Lease" of unspecified time in the attached deed was insufficient to put OTR on notice of a separate, taxable transaction, particularly one for 30 years or more. This case differs from Sunbelt Beverage, where the taxpayer filed the wrong form but provided sufficient information for the intended tax liability. Here, the return for one taxable transaction provided no information for a separate, distinct taxable transaction. The court declined to rule on whether the parties made an "honest mistake," finding it inappropriate for summary judgment.
Analysis:
This decision significantly clarifies the District of Columbia's approach to taxing complex real estate transactions, particularly those involving long-term ground leases. By emphasizing the "reality of the transaction" over its formalistic presentation, the court ensures that parties cannot circumvent transfer and recordation taxes through creative structuring that purports to "retain" interests that are legally distinct transfers. This ruling forces a practical assessment of property rights conveyed and reconveyed. Furthermore, the court reinforces the high bar for triggering the statute of limitations, requiring taxpayers to explicitly and comprehensively disclose all distinct taxable events within their filings. This will likely encourage greater transparency and meticulousness in tax reporting for real estate deals, as any ambiguity or omission could lead to indefinite tax liability for unrecorded transfers, even for sophisticated parties.
