When Does a Long-Term Lease Renewal Option Trigger Pennsylvania’s Realty Transfer Tax?

By: Norris McLaughlin, P.A.

Under 61 Pa. Code § 91.193 (b) (24) and the Department of Revenue, Pennsylvania’s realty transfer tax applies to long-term leases with a term of 30 years or more, including where a lease term under 30 years contains renewal options that tip the scales over 30 years and the rental charges for the renewal options are restricted from being renegotiated unconditionally by the lease parties.

When is a rental charge restricted from being renegotiated unconditionally, you ask?

Historically, it means that: (i) rent is set at a fixed amount for the renewal period, or (ii) a method for calculating the rental charges is established by the lease. Additionally, renewals are also excluded from lease terms where such renewals are set at fair rental value at the time of renewal.

Under past strict interpretation of the above, legal practitioners had a choice between either potentially unenforceable renewal options vaguely stated at “fair market value at the time of renewal,” or paying a transfer tax on the entire value of the lease in the present based on lease term options that may or may not be exercised at some point in the future.

The 2017 Pennsylvania Commonwealth Court case Saturday Family LP v. Commonwealth of Pennsylvania provides a new option.

In Saturday Family LP, taxpayers included lease renewals at fair market value at the time of renewal and provided for detailed, conclusive, and binding procedures in the event the parties were not able to agree on the fair market value at the time of such renewal. With the renewals included, the lease term extended beyond 30 years. All terms and conditions, excluding rent, remained in full force and effect, and automatically extended at the time notice of renewal took place under the lease. Despite the method for determining fair market value if the parties were unable to agree on a value at the time of renewal, the court held that such renewal periods should not be included in the lease term for realty transfer tax purposes.


To avoid tax consequences while still including enforceable renewal periods that would otherwise result in triggering the realty transfer tax, parties to a lease can now include the option to renew at fair market rental value at the time of renewal, along with provisions to determine fair market value where the parties cannot reach agreement as to fair market value at the time of renewal.

It’s unclear what the Supreme Court would decide if ruled on, or if regulations will at some point be rewritten to clarify the issue. As the Saturday Family LP case stands, a lease written to include renewals at fair market value at the time of such renewal are exempt from transfer tax, even where detailed and binding provisions are included to determine the value where the parties cannot reach an agreement. In order to avoid the consequences of a potentially unenforceable clause and simultaneously avoid triggering transfer taxes, parties can now draft appropriate procedures used to determine fair market value should the parties be unable to reach an agreement.

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