March 14, 1985
Mr. Eugene Jones
State's Attorney
Mellette County
White River, South Dakota 57579
OFFICIAL OPINION NO. 85-12
Lease purchase agreement
Dear Mr. Jones:
You have requested an official opinion from this office based upon the following factual situation:
FACTS:
The Mellette County Board of County Commissioners desire to obtain a motor grader. They have advertised and have received bids for 'furnishing Mellette County with one new articulated motor grader on a lease/purchase basis.' The low bidder has provided a contract to Mellette County headed CAT-Governmental Lease-Purchase Agreement along with a Rental and Concluding Payment Schedule wherein the county pays 'in accordance with the terms of the lease sixty months following the date of delivery of such unit.'
The lease purchase agreement, Section 2.5, provides:
Lessee reasonably believes that funds can be obtained sufficient to make all rental payments during the term of this Lease and hereby covenants that it will do all things lawfully within its power to obtain, maintain and properly request and pursue funds from which the rental payments may be made, including making provisions for such payments to the extent necessary in each budget submitted for the purpose of obtaining funding, using its bona fide best efforts to have such portion of the budget approved and exhausting all available administrative reviews and appeals in the event such portion of the budget is not approved. It is Lessee's intent to make rental payments for the full term of this Lease if funds are legally available therefor and in that regard Lessee represents that the use of the Units is essential to Lessee's proper, efficient and economic operation. In the event no funds or insufficient funds are appropriated and budgeted or are otherwise not available by any means whatsoever in any fiscal year for rental payments due under this Lease, then Lessee will immediately notify Lessor of such occurrence and this Lease shall terminate on the last day of the fiscal year for which appropriations were received without penalty or expense to Lessee of any kind whatsoever, except as to the portions of rental payments herein agreed upon for which funds shall have been appropriated and budgeted or are otherwise available. Subsequent to a termination of this Lease, Lessee shall have no obligation to make rental payments with respect to the remainder of the term of this Lease. In the event of such termination, Lessee agrees to return the Units to Lessor pursuant to Section 9 hereof, and Lessor shall have all legal and equitable rights and remedies to take possession of the Units. Notwithstanding the foregoing, Lessee agrees that it will not (a) cancel this Lease under the provisions of this Section 2.5 if any funds are appropriated to it, or by it, for the acquisition, retention or operation of the Units or other equipment performing functions similar to the Units for the fiscal year in which such termination occurs or the next succeeding fiscal year thereafter, and (b) give priority in the application of funds to any other functionally similar equipment during the term of this Lease. This Section 2.5 shall not be construed so as to permit Lessee to terminate this Lease in order to acquire any other equipment or to allocate funds directly or indirectly to perform essentially the same application for which the Units are intended. (Emphasis added.)
Based upon the above facts, you have asked the following question:
QUESTION:
Is this contract in violation of SDCL § 7-21-16?
SDCL § 7-21-16 provides:
It shall be unlawful for the officers of any county, unless specially and expressly authorized by law, to contract any debt or incur any pecuniary liability unless both the principal and annual interest thereof, in addition to other necessary disbursements, can be paid by the levy for the current year on the taxable property within the county at not exceeding the maximum rate prescribed by law; or in case such levy for the current year has been made, then by levy for the next subsequent year at not exceeding such maximum rate.
The meaning of SDCL § 7-21-16 is clearly stated in 1957-58 AGR 194 at page 195 as follows:
In the view of the above statute, any contract which would run longer than the current fiscal year, or in cases where the current levy has already been made, then the current year plus the next subsequent year, would not be proper.
I agree with this statement of the law by my predecessor.
In the instant case, although it has never been so interpreted by the courts, one can argue that the 'insufficiency of future appropriations' clause found in Section 2.5 of the contract transforms a five-year lease-purchase contract into a one-year lease contract with four annual renewals dependent upon future appropriations. Such an analysis arguably allows the instant contract to satisfy § 7-21-16.
However, Section 2.5 of the contract also prevents the county from leasing or purchasing any other 'similar' equipment during the five-year duration of the lease (see emphasized portion of 2.5). Because of this latter restriction, it is my opinion that the contract in question is not in substance a one year lease but rather a five-year lease-purchase.
Therefore, the answer to your question is yes.
Respectfully submitted,
Mark V. Meierhenry
Attorney General
