Ruminations took a crack at answering this question a whole lot of blog postings ago, but we never felt fully comfortable with the way we tried to fashion an answer. Basically, we tried the “ejusdem generis” approach. [What are you talking about – you behind the keyboard? Our definition used a list of items followed by, “and thing like that.” That’s the essence of the “ejusdem generis” approach.]
Here’s a spoiler. Ruminations isn’t going to do much better today. If you make it to the end of this posting, you’ll also have figured that out.
The issue of what is “structural” surfaced in a December, 2013 7th Circuit United States Court of Appeals decision. The case is Aeroground Inc. v Centerpoint Properties Trust and the court’s decision can be read by clicking HERE. What happened was that a tenant’s heavy cargo handling forklift trucks “did a number” on the concrete slab floors of its leased warehouse. Think: $1,000,000.
The lease said that the tenant had to repair the warehouse floor, and that the landlord had to repair the foundation. The problem was that the concrete slab at the bottom of the warehouse space served both as a floor and as the building’s foundation. For those who yearn to know if the butler did it, we’ll satisfy your curiosity. The tenant was held responsible because the damage was found to be on the surface and that meant the damage was the slab’s function as a floor, not to its function as the building’s foundation. Presumably, had the expected use of heavy forklifts caused internal damage to the floors, meaning had there been damage to that part of the floor that provided the building with a foundation, the result would have been different.
To Ruminations, however, this seemingly logical, court-determined result is somewhat unsatisfying. Perhaps this would never had gone before the black-robed ones had the lease defined “floor” or “foundation.”
To get all of us on the same page, let’s understand what gives a court the right to reach outside of a lease to resolve disputes like this. A key reason, and the one in this instance, is an “ambiguity” – the lease was capable of more than one meaning and there was a need to decide which meaning was the winner. Because the lease defined neither “floor” nor “foundation,” the court reached for what sometimes seems like a court’s best friend – a “lifeline” in game show parlance – good old Merriam-Webster. Messrs. Merriam and Webster said that “foundation” means “an underlying base or support; especially the whole masonry substructure of a building.” [How many readers would have thought of a floor as “support” in that context?] The erstwhile lifeline friend (after all, this was a “million dollar” problem) also supplied the following answer: a “floor” is the “level base of a room; the part of the room on which you stand.”
So what was the concrete slab at the “bottom” of the warehouse space? According to the lower court, and with agreement from the appeals court, the concrete slab had a “dual nature as both floor and foundation. … It functioned as a floor because ‘[t]he slab [was] the surface upon which [the tenant’s] operations [were] conducted, including the movement of cargo loads.’” But, each court further agreed that “the slab also ha[d] a structural function: by connection to the building walls through dowel rods, it bears loads transferred from the walls.”
That’s all Ruminations wants to say about the Areoground case other than to recommend it to those readers who are curious about how parties are able to re-purpose a number of lease provisions in an effort to make or bolster their own position.
From time-to-time, we like to point out a “take-away” to be “taken-away.” Here’s a simple one. If you are going to write a lease, you’ve got to understand how a building works, not just the floor/foundation duality, but things like HVAC, roof construction, “and the like.”
Telling a story about heavy forklifts and damaged floors doesn’t really get us much closer to answering the title’s question, “What Is A Structural Component?”
In that regard, on May 9, the Internal Revenue Service published its own answer, though not in as popular a blog as this one. [By “popular,” we don’t mean Ruminations has a lot of fans: only that it is written for ordinary folks who have windows in their offices, unlike tax law fanatics.] The IRS’s proposed Regulation won’t be very helpful, other than to further illustrate the problem and the risk of not including your own definitions in a lease.
We’re going to slice and dice the IRS’s answer below. So, if you want to see the Proposed Regulation that serves as the foundation for the rest of today’s posting, click HERE, then go to PART I- INCOME TAXES. Though the Proposed Regulation deals with the definition of “Real Estate Investment Trust Real Property,” you don’t need to know anything at all about “REITs” to get the benefit of some pretty thorough thinking.
Let’s begin with a GIANT, GIANT warning. What follows will not translate well into a lease that wants to deal with “structural components.” That means you won’t be able to use the IRS definitions in your leases. Ruminations continues today, but only for the purpose of illustrating the problem lease crafters and negotiators face when allocating maintenance, repair, and replacement responsibilities for parts of a building.
To understand what might be considered a structural component according to the IRS, you’ve got to understand what constitutes a “structure” (but only ones that are in the nature of real property). As a shortcut, the IRS confirms that a building is a structure. That’s no surprise, nor is it a surprise that a building is real property. For most readers, that’s all one needs to know before moving on to what the IRS suggests is a “structural component.”
For the more curious, according to the IRS, the category of real property also includes “other inherently permanent structures.” And, MORE IMPORTANTLY as a concept, it includes only those that serve a “passive” function. A structure serves a “passive” function when it contains, supports, shelters, cover or protects, not when it serves to manufacture, create, produce, convert or transport. The latter list describes “active” functions.
With those explanations of (real property) “structure” and “passive function” in mind, we can now drill down to what the Proposed Regulation defines (for REIT purposes) as a “structural component.” If you treasure consistency in a single blog posting, you may want to sign off now.
First, the IRS ties in a “structural component” to the “of what” part: foundationally (a dual-use term as used in today’s blog posting), a structural component has to be a “constituent part of and integrated into an inherently permanent structure, [and] serve the inherently permanent structure in its passive function… .”
Probably knowing that tax preparers are not theoreticians, the IRS gives some examples. Keep in mind, to the IRS, the listed items are not structural components unless they are a “constituent part of and integrated into an inherently permanent structure, [and] serve the inherently permanent structure in its passive function… .” For example, among many other things, the listed items, while still in their boxes, are not structural components. Here is the IRS’s list: “wiring; plumbing systems; central heating and air conditioning systems; elevators or escalators; walls; floors; ceilings; permanent coverings of walls, floors, and ceilings; windows; doors; insulation; chimneys; fire suppression systems, such as sprinkler systems and fire alarms; fire escapes; central refrigeration systems; integrated security systems; and humidity control systems.”
If you stopped reading before you got to this point, you won’t even know that we’re writing this paragraph. If, as must be the case, you have reached this far, it’s time to explain why we have even looked at this Proposed Regulation. The reason is simple, it purports to define a building’s “structural components.” And, it does so in much greater detail, and with a great deal more of analysis, than do Messrs. Merriam and Webster. [For the IRS’s analysis, you may want to click the link we’ve furnished way, way above.] You see, for the IRS’s REIT regulation purposes, structural components include a lot of stuff that lease-people would never, ever consider. Be forewarned, however, most judges have ascended to the bench by way of tort or other litigation practices, and are like to rely on easily understood lists when it comes to real property matters. Also, litigants are known to throw everything against the wall to see what sticks, in this case things like wiring, doors, windows, and HVAC, just like the IRS “says.” Are those items what “we all” think are structural components? As Pete the Cat says, “Goodness no.” Ridiculous, you think? How about floors? Who you gonna believe: Merriam-Webster, or the United States Government’s Internal Revenue Service?
What was that take-away from earlier? Answer: “If you are going to write a lease, you’ve got to understand how a building works, not just the floor/foundation duality, but things like HVAC, roof construction, ‘and the like.’”
If you thought we got any smarter since when we last tackled the “What is a structural component” question, you’re wrong. But, we’re working on it. If any reader wants to help by suggesting something other than a list and the “ejusdem generis” approach, please share your thoughts by adding your comment below.