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05/02/88 Stanley Stevens, v. Edward J. Rosewell

May 2, 1988





523 N.E.2d 1098, 170 Ill. App. 3d 58, 120 Ill. Dec. 187 1988.IL.645

Appeal from the Circuit Court of Cook County; the Hon. Earl S. Arkiss, Judge, presiding.


JUSTICE QUINLAN delivered the opinion of the court. O'CONNOR and MANNING, JJ., concur.


In l986, McDonald's Corporation (McDonald's) and Stanley Stevens (Stevens) filed a declaratory judgment suit in the circuit court of Cook County against the Cook County treasurer, the Cook County clerk, and the Cook County assessor (defendants). Plaintiff sought to enjoin defendants from collecting back real estate taxes on a McDonald's restaurant, operated by Stevens and located on the campus of Moraine Valley Community College . Plaintiff also sought a determination of the rights of the parties pursuant to the agreement between MVCC and McDonald's which was the basis for the assertion of tax liability by the Cook County defendants.

MVCC is a public community college in District 254, located in Palos Hills, Illinois. In December l982, MVCC entered into a "service agreement" with McDonald's whereby McDonald's would provide the food service on campus, in MVCC's "College Center," in exchange for the payment of money to MVCC.

The MVCC property in District 254 is tax-exempt property under the relevant Illinois statute. (Ill. Rev. Stat. 1985, ch. 120, par. 500.18.) The defendants alleged that the agreement herein between MVCC (or District 254) and McDonald's constituted a lease of a portion of MVCC's property to McDonald's, which conveyed an interest in property to McDonald's and, accordingly, subjected McDonald's and its franchisee to tax liability for the use of the property. (See Ill. Rev. Stat. l985, ch. 120, par. 500.18.) The plaintiff, on the other hand, contended that the agreement merely created a license, i.e., a bare right to use a portion of the property, not a lease and, consequently, the use of the property by McDonald's was not taxable inasmuch as there was no conveyance of any interest in the property. Both sides filed motions for summary judgment, and the circuit court ruled that the original agreement was a license, and accordingly, no taxable interest was created by the agreement. The court then granted summary judgment to the plaintiff and enjoined the defendants from assessing real estate taxes upon the property. Defendants now appeal the ruling in favor of Stevens. McDonald's is no longer a party to this proceeding.

The agreement in issue here between MVCC and McDonald's was entitled "service agreement" and was to continue for a period of five years with three successive five-year options. Article I of the agreement stated that the agreement was not a lease, but a license and service agreement. Specifically, it stated, "McDonald's is hereby given the exclusive right, license and concession to provide, operate, and maintain food service facilities on the campus of the College." Under the agreement, rent of $30,000 per year plus an additional 6% of gross sales in excess of $500,000 was to be paid to MVCC. In addition, the agreement provided that McDonald's was to operate the restaurant in the College Center, in a designated area on the first floor, and was to be responsible for development of the kitchen area, including installation and maintenance of equipment in that area. MVCC was responsible for those areas outside the kitchen area, except for general maintenance of the dining area, which was also McDonald's responsibility. McDonald's was allowed to develop other facilities on the campus, subject to MVCC's consent, and a provision was made for the division of any "permanent leasehold improvements." Additionally, McDonald's was to be open when school was in session and McDonald's was to use its best efforts to employ college students.

The agreement limited the type and number of signs McDonald's could post, but provided that McDonald's employees would have a right of ingress and egress onto the college, subject to school regulations. The agreement also prohibited assignment by McDonald's, but it did allow McDonald's to contract with one of its licensees or franchisees with MVCC approval. Finally, the agreement authorized MVCC to inspect McDonald's sales records for the facility at reasonable times.

At the hearing on the motion for summary judgment, the plaintiff submitted the deposition of John Noga, McDonald's Chicago-area real estate manager, in support of his motion for summary judgment, to establish the intent of the parties in entering into the agreement. Noga testified in his deposition that the agreement was intended to be a license and was set up as a license, instead of a lease agreement, for two reasons; first, to provide flexibility concerning where campus food could be served, and second, to avoid real estate taxes. He also stated in his testimony that McDonald's generally did not enter into this type of agreement.

Noga also testified in his deposition that after McDonald's entered into the service agreement with MVCC, it subsequently entered into another agreement with Stanley Stevens. In the agreement with Stevens, McDonald's granted Stevens the right to use the McDonald's system at MVCC and all other rights granted to McDonald's under the MVCC-McDonald's agreement, in exchange for an annual fee. Noga said that McDonald's itself never actually operated the restaurant at MVCC at all; only Stevens operated the restaurant pursuant to its agreement with McDonald's. Additionally, Stevens testified in his deposition that the McDonald's at MVCC was open whenever school was in session, and asserted that MVCC did control the first-floor kitchen facility pursuant to the agreement. He also stated, however, that at present the first-floor facility was the only facility McDonald's had developed at MVCC.

In this appeal the Cook County defendants contend, as they did in the trial court, that the food service agreement is not a license agreement, but rather is a lease agreement, which subjected Stevens, as the operator of the McDonald's franchise, to real estate taxes. Defendants also assert that the service agreement fulfills all the essential requirements of a lease, since the agreement is for a definite period, there is an area with specific fixed boundaries provided within the property, and, finally, the agreement sets a fixed rental price and manner of payment. Furthermore, the defendants contend that under Illinois law, a license cannot be assigned, but here, McDonald's did assign the agreement to Stevens. Thus, the defendants conclude that all these facts establish that the parties did in fact create a lease agreement, not a license, regardless of what they may have intended or said they intended to do in the agreement. Additionally, the defendants note that under Illinois law, since the burden of proof rests on plaintiff Stevens to show that this property is tax exempt, any questionable matters must be resolved in favor of taxation. See In re County Collector (1976), 41 Ill. App. 3d 633, 354 N.E.2d 507.

Conversely, the plaintiff argues that the food service agreement is a license which merely grants McDonald's the exclusive right to provide food on MVCC's property, wherever MVCC directs that that service should be provided. Such an agreement, the plaintiff argues, is not a lease and is properly a tax-exempt transaction. The plaintiff further contends that it is clear that the parties did not intend to create a leasehold interest in real estate by the agreement. Additionally, the plaintiff asserts that this agreement did not convey exclusive possession or control to any particular piece of real estate and, in actuality, MVCC retained control of even the kitchen and dining area. The "assignment" to the operator of the premises, Stevens argues, did not alter the fact that this is a license agreement, since the agreement itself contemplated operation of the facility by a franchisee. The plaintiff further notes that here he is limited to running a McDonald's on the premises and that McDonald's food operations are frequently run by franchisees and he must run the McDonald's as if it were ...

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