Texas Attorney General Opinion: GA-0634 Page: 5 of 11
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The Honorable Kip Averitt - Page 5
unencumbered by the lease. And no statutory definition of general application aids us in making that
determination. The only Texas decision we find addressing this issue is in the context of a private
equipment lease containing an option to purchase.
In a 2007 unpublished memorandum opinion, the Amarillo Court of Appeals considered the
fair market valuation of equipment leased under an operating agreement and sold to the lessee. See
Brogan, Ltd. v. Brogan, No. 07-05-0290-CV, 2007 WL 2962996, *6 (Tex. App.-Amarillo Oct. 11,
2007, pet. denied) (mem. op.). Under the operating agreement, the value of the equipment included
the equipment's value at the end of the lease term plus the lease payments representing payment of
principal and interest. Id. Because the sale had occurred before the end of the lease term, the
equipment was valued, in accordance with the operating agreement, by adding the "remaining lease
payments discounted by the interest remaining to be paid, and the fair market value of the equipment
at the end of the lease period." Id. The court determined that the valuation was consistent with
Texas law, as well as the governing partnership agreement, because the valuation comported with
the broad definition Texas courts give to the phrase "fair market value," namely, "the price a piece
of property would bring on the open market if the seller and buyer were not compelled to enter into
the transaction." Id. (citing City ofHarlingen, 48 S.W.3d at 187). More significantly, as relevant
here, the Brogan court, citing the Fifth Circuit Court of Appeals's 2001 decision in Petula Associates
v. Dolco Packaging Corp., stated: "Moreover, the value of a lease is considered under Texas law
in a determination of fair market value when the property is sold from lessor to lessee." Id.; see also
Petula Assocs. v. Dolco Packaging Corp., 240 F.3d 499, 503-04 (5th Cir. 2001). Even though no
Texas court had considered this precise issue, the Brogan court did not provide further analysis.
In Petula, the Fifth Circuit Court of Appeals considered a commercial building lease giving
the lessee the option to purchase the premises at fair market value. Petula, 240 F.3d at 501 (reciting
factual background). The lessee's appraiser valued the property as if it were not subject to the lease
and arrived at the figure of $2.75 million; the lessor's appraiser valued it subject to the lease and
arrived at a $5.15 million value. Id. (The leased fee was more valuable than the unleased fee
because the lease provided for increasing the rents over the life of the lease. See id. at 503.) The
district court, among other things, had ordered another appraiser to be appointed to value the
property as unleased. Id. at 501-02. The lessor appealed to the Fifth Circuit Court of Appeals.
The Petula court concluded that the leased property must be valued subject to the lease. Id.
at 503-04. The court noted that the Texas courts had consistently defined "fair market value"
broadly as the price a piece of property would receive on the open market if the seller and buyer were
not required to enter into the transaction. Id. at 503 (citing Windham, 837 S.W.2d at 77).
Consequently, the Petula court stated that when the phrase is used in a contract governed by Texas
law, "it may be presumed that the parties intended the term to be understood according to this
meaning, absent a clear indication to the contrary." Id. (citing RESTATEMENT (SECOND) OF
CONTRACTS 202(3)(a) (1981)). The court then concluded that "[i]f Texas's definition of 'fair
market value' is applied, the value of the lease should be considered." Id. The Petula court offered
as an example an Arizona case-TCC Enterprises v. Estate ofErny-that applied the definition of
fair market value, characterized by the Petula court as identical to the Texas definition, to conclude
that the lease must be considered because a buyer in the open market would purchase the property(GA-0634)
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Texas. Attorney-General's Office. Texas Attorney General Opinion: GA-0634, text, June 5, 2008; (https://texashistory.unt.edu/ark:/67531/metapth275530/m1/5/?q=%222008~%22: accessed August 15, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu.; crediting UNT Libraries Government Documents Department.