MEMORANDUM

FROM: Shell, Fleming, Davis & Menge, P.A.

TO: All Pensacola Beach Residential Lessees represented by our firm.

SUBJECT: Lawsuit against Property Appraiser and Tax Collector of Escambia

County to contest real property taxes assessed against residential

lessees' improvements.

DATE: April 24, 2007

____________________________________________________________________________

Most of you probably know by now that our partner, M. J. Menge, died in early February. The litigation will continue with Danny L. Kepner as lead counsel, Tom Gilliam as second chair, and Dennis Tackett as our able paralegal. On occasion, we may seek counsel from T. A. Shell or Fletcher Fleming, who bring a combined total of 100 years of legal experience to the table. We are committed to following the path on which M.J. started this litigation, and will strive for victory for each of you with all of the resources we have.

As discussed in our report to you in December, we are moving forward with the appeal of the decision of Judge Geeker in the case involving the commercial lessees. Our brief in that case was filed two weeks ago. In our brief, we put forth arguments to counter the 2005 decision of the District Court of Appeal in the Navarre Beach case of Ward v. Brown on which Judge Geeker relied. If the appeal is successful, hopefully the appellate court will write an opinion that will help us when it comes time to argue your case before Circuit Judge Michael Jones.

It might be helpful to explain the arguments. First and foremost, we contend that the two cases decided in the late 1980's known as Bell v. Bryan are binding on the taxing authorities and prohibit the attempts to tax leasehold improvements as real property. While Ward v. Brown involved property at Navarre Beach, the Bell v. Bryan cases clearly dealt with leaseholds at Pensacola Beach. The contentions of the taxing authorities recently accepted by Judge Geeker were rejected by the appeal court twenty years ago and the rule of law, in our judgment, requires that the prior decisions be followed, instead of Ward v. Brown.

Our second central argument is that the appeal court's decision in Ward v. Brown, the Navarre Beach case, was grounded on the conclusion that the lease agreements there were perpetual in nature - - that the leases had no end. We assert that the lease agreements on Pensacola Beach, by contrast, are not perpetual in duration.

There are differences between the forms of lease agreements that have been used over the sixty years or so since leasing to individuals and businesses began on Pensacola Beach. The key provision obviously is the option or "election" to renew the lease which does not appear in all of the leases. Although there are other variations in the details, the three primary categories of leases (in terms of renewals) are as follows: (1) those with no renewal provision at all; (2) those that state that renewal might be available if the lessee and SRIA can agree on new lease provisions; and (3) those with the right of renewal on like terms, provisions and conditions, including the option for future renewals.

The first major category clearly does not contain any words to suggest the lease is perpetual or never-ending. The second category does not grant the lessee a right to renew - - just the right to talk with the lessor - - so these can hardly be categorized as perpetual, without end, etc.

The last category, which includes by far the greatest number of residential and commercial leases on Pensacola Beach, allows for the lessee to elect to renew the lease for a further term of 99 years, with similar lease provisions, including the right for further renewals. The other side argues that such an option, repeated over and over again, would result in a perpetual lease. However, these leases are different from those in Navarre discussed in Ward v. Brown because the renewals in that case were described as "automatic."

All the property we now know as Navarre Beach was included in a 1947 deed from the U.S. Government to Escambia County, because at that time, the entirety of Santa Rosa Island (except for federally preserved land at the east and west ends) was part of Escambia County. In 1991 the county boundary lines were redrawn so that Navarre Beach became part of Santa Rosa County. But long before then, in 1956, Escambia County, through SRIA, leased the entire Navarre Beach area to Santa Rosa County for 99 years at $100 per year. That county-to-county lease agreement stated that it would "automatically be renewed" as long as Santa Rosa County was in compliance with its provisions. All of the leases of Navarre Beach property to individuals and businesses followed thereafter, and each indicated that it was subject to that master lease from Escambia to Santa Rosa County.

The appeal court in Ward v. Brown interpreted these agreements with "automatic" renewals to create perpetual leases because they have no end. Prior court decisions have declared that a perpetual lease is the equivalent of ownership, and therefore the improvements on Navarre beach leaseholds were declared taxable as real estate by the appeal court in Ward v. Brown.

None of the residential or commercial leases on Pensacola Beach contain the word "automatic" or any other similar terminology. For those with the renewal options, such renewal must be requested by the lessee no later than six months before the end of the initial term (most are 99 years). If that option or election is not formally and timely made, presumably the right of renewal, under the terms of the original lease, is lost. The lessee would then be in the same position as the lessees in category (1) described above.

There are many Florida cases declaring that the courts strongly disfavor perpetual leases, leaning in favor of an interpretation that, for example, would allow one renewal, or possibly two, but not over and over again. This is the result we are contending for in this case, for those with 99 year renewal provisions. Words such as "forever", "in perpetuity", "infinity", "automatic" or something similar must be used, to have a court hold that a lease is perpetual. None of those words appear in your lease agreements.

In summary, on the perpetual lease arguments, we are countering the taxing authorities' contentions as to every form of lease agreement on Pensacola Beach.

Another distinction between Pensacola leases and those on Navarre Beach is that improvements here become the property of Escambia County as soon as constructed ("forthwith" is the word used in the leases). At Navarre Beach, most leases provide that Santa Rosa County will become the owner of leasehold improvements at the end of the lease term. While our opponents have argued that such a distinction makes no difference, when ownership is the issue, a court normally will pay close attention to what the parties themselves have said about it in their written agreement.

By way of information, in March, the attorneys who filed suit in 2004 on behalf of the lessees at Portofino Condominiums argued their motion for summary judgment before Circuit Judge Frank Bell. Unfortunately, he ruled against the Portofino lessees, which is obviously very disappointing. No doubt, there will be an appeal in that case, but we are not sure when it will be filed.

Following that decision, the Portofino attorneys asked the appeal court in our commercial case for permission to file a “friend of the court” brief. They furnished us with a copy of it, and we are pleased to report that that brief really serves to supplement the arguments in the brief we submitted back on April 9. More than likely, the appeal court will accept and consider that brief. We certainly hope that the three-judge panel assigned to our appeal will rule in favor of the lessees, and against the taxing authorities.

While we are confident that our legal analysis is correct, we must also acknowledge that Ward v. Brown, Judge Geeker's ruling in the commercial case, and now Judge Bell's ruling in the Portofino case, are all big hurdles we have to face in this battle. We cannot guarantee success, but can assure you of our diligent efforts on your behalf.