In 1962 Arizona, as lessor, and petitioner, as lessee, executed a 10-year grazing lease of certain tracts of land which had been granted to Arizona to be held in trust under the New Mexico-Arizona Enabling Act. In 1966 the United States filed a condemnation complaint in connection with a flood control dam and reservoir which included the leased tracts. In allocating the stipulated compensation payable by the United States for the tracts the District Court awarded Arizona a certain amount for its fee interest and petitioner one amount for the improvements and another amount for "its leasehold interest at the time of taking and its reasonable prospective leasehold interest." The Court of Appeals, while recognizing that petitioner was entitled to compensation for the improvements, and finding it unnecessary to determine petitioner's rights based upon the provisions of the lease or upon state law, held that under the Enabling Act Arizona, as trustee, had no power to grant a compensable leasehold interest and that petitioner therefore never acquired a property right for which it is entitled to compensation. Held:
BLACKMUN, J., delivered the opinion of the Court, in which BURGER, C. J., and STEWART, MARSHALL, POWELL, and REHNQUIST, JJ., joined. WHITE, J., filed a dissenting opinion, in which BRENNAN, J., joined, post, p. 311. STEVENS, J., took no part in the consideration or decision of the case.
J. Gordon Cook argued the cause and filed briefs for petitioner.
Peter C. Gulatto, Assistant Attorney General of Arizona, argued the cause for respondent. With him on the brief was Bruce E. Babbitt, Attorney General.
MR. JUSTICE BLACKMUN delivered the opinion of the Court.
This case presents an issue of federal condemnation law - as it relates to an outstanding lease of trust lands - that, we are told, affects substantial acreage in our South-western and Western States.
Under 24 1 of the New Mexico-Arizona Enabling Act, 36 Stat. 572 (1910), specified sections of every township in the then proposed State were granted to Arizona "for the support of common schools." By 28 2 [424 U.S. 295, 297] of the same Act, 36 Stat. 574, as amended by the Act of June 5, 1936, c. 517, 49 Stat. 1477, and by the Act of June 2, 1951, 65 Stat. 51, the lands transferred "shall [424 U.S. 295, 298] be by the said State held in trust, to be disposed of in whole or in part only in manner as herein provided and for the several objects specified . . . and . . . the . . . proceeds of any of said lands shall be subject to the same trusts as the lands producing the same." Arizona, by its Constitution, Art. 10, 1, 3 accepted the lands so granted and its trusteeship over them.
Among the lands constituting the grant to Arizona were two parcels herein referred to as Tract 304 and Tract 305, respectively. 4 On February 8, 1962, Arizona, as lessor, and petitioner Alamo Land and Cattle Company, Inc. (Alamo), as lessee, executed a grazing lease of [424 U.S. 295, 299] these tracts for the 10-year period ending February 7, 1972. App. 6-14. By Arizona statute, Ariz. Rev. Stat. Ann. 37-281D (1974), incorporated by general reference into the lease, App. 7, Alamo may not use the lands for any purpose other than grazing.
On May 31, 1966, while the two tracts were subject to the grazing lease and were utilized as part of Alamo's larger operating cattle ranch, the United States filed a complaint in condemnation in the United States District Court for the District of Arizona in connection with the establishment of a flood control dam and reservoir at a site on the Bill Williams River. The tracts in their entirety were among the properties that were the subject of the complaint in condemnation. The District Court duly entered the customary order for delivery of possession. 5
Thereafter, the United States and Arizona and, separately, the United States and Alamo, stipulated that "the full just compensation" payable by the United States "for the taking of said property, together with all improvements thereon and appurtenances thereunto belonging" was $48,220 for Tract 304 and $70,400 for Tract 305, and thus a total of $118,620 for the two. 1 Record 156, 162. 6
At a distribution hearing held to determine the proper allocation of the compensation amounts, the only parties claiming an interest in the awards for the two tracts were respondent Arizona, asserting title through the federal grants to it, and petitioner Alamo, asserting a compensable leasehold interest in the lands and a compensable [424 U.S. 295, 300] interest in the improvements thereon. The State conceded that Alamo was entitled to receive the value of the improvements, but contested Alamo's right, as lessee, to participate in the portion of the award allocated to land value. The District Court, with an unreported opinion, App. 1-5, awarded Arizona $57,970 for its fee interest, and awarded Alamo $3,600 for the improvements and $57,050 for "its leasehold interest at the time of taking, and its reasonable prospective leasehold interest." 1 Record 227-228. On appeal, the United States Court of Appeals for the Ninth Circuit, while recognizing that Alamo was entitled to compensation for the improvements, held that under the Enabling Act Arizona "had no power to grant a compensable property right to Alamo," and that "Alamo therefore never acquired a property right for which it is entitled to compensation." United States v. 2,562.92 Acres of Land, 495 F.2d 12, 14 (1974). The Court of Appeals thus reversed the judgment of the District Court insofar as it concerned the leasehold interests. It remanded the cause for the entry of a new judgment in accordance with its opinion. Id., at 15. Because the Ninth Circuit's decision appeared to implicate this Court's decision in Lassen v. Arizona ex rel. Arizona Highway Dept., 385 U.S. 458 (1967), and because it was claimed to be in conflict with Nebraska v. United States, 164 F.2d 866 (CA8 1947), cert. denied, 334 U.S. 815 (1948), we granted Alamo's petition for certiorari. 420 U.S. 971 (1975).
The Lassen case was an action instituted by the Arizona Highway Department to prohibit the application by the State Land Commissioner of rules governing the acquisition of rights-of-way and material sites in federally donated lands held by Arizona in trust pursuant to the provisions of the Enabling Act. What was involved, [424 U.S. 295, 301] therefore, was the acquisition of interests in trust lands by the State itself. The Supreme Court of Arizona held that it could be presumed conclusively that highways constructed across trust lands always enhanced the value of the remainder in amounts at least equal to the value of the areas taken and therefore refused to order the Highway Department to compensate the trust. State v. Lassen, 99 Ariz. 161, 407 P.2d 747 (1965). This Court unanimously reversed. In so doing, it observed that the more recent federal grants to newly admitted States, including Arizona, "make clear that the United States has a continuing interest in the administration of both the lands and the funds which derive from them." 385 U.S., at 460 .
The Court read 28 of the Enabling Act with particularity. It emphasized the Act's requirements that trust lands be sold or leased only to "`the highest and best bidder'"; that no lands be sold for less than their appraised value; that disposal of trust lands be "`only in manner as herein provided'"; that disposition in any other way "`shall be deemed a breach of trust'"; and that every sale or lease "`not made in substantial conformity with the provisions of this Act shall be null and void.'" 385 U.S., at 461 -462. The Court then examined the purposes of the Act and concluded that the grant "was plainly expected to produce a fund, accumulated by sale and use of the trust lands, with which the State could support the public institutions designated by the Act." Id., at 463. Sales and leases were intended. The "central problem" was "to devise constraints which would assure that the trust received in full fair compensation for trust lands." Ibid. The Court concluded, for reasons stated in the opinion, that the Act's procedural restrictions did not apply when the State itself sought trust lands for its highway program. [424 U.S. 295, 302]
The Court then turned to the standard of compensation Arizona must employ to recompense the trust for the interests the State acquired. It concluded that the terms and purposes of the grant did not permit Arizona to diminish the actual monetary compensation payable to the trust by the amount of any enhancement in the value of remaining trust lands. The Court emphasized that the Enabling Act "unequivocally demands both that the trust receive the full value of any lands transferred from it and that any funds received be employed only for the purposes for which the land was given." Id., at 466. It again stressed the requirements of the Act and noted that "these restrictions in combination indicate Congress' concern both that the grants provide the most substantial support possible to the beneficiaries and that only those beneficiaries profit from the trust." Id., at 467. All this was confirmed by the background and legislative history of the Enabling Act. Accordingly, it held that even where the State itself is the acquisitor, the Act's designated beneficiaries were to derive the full benefit of the grant. Thus, "Arizona must actually compensate the trust in money for the full appraised value of any material sites or rights-of-way which it obtains on or over trust lands." Id., at 469 7 (footnotes omitted). This standard, it was said, "most consistently reflects the essential purposes of the grant." Id., at 470.
Much of what was said in Lassen had also been said, several decades earlier, in Ervien v. United States, 251 U.S. 41 (1919), when the provisions of the same Enabling Act were under consideration in a federal case from New Mexico. The Court's concern for the integrity of the conditions imposed by the Act, therefore, has long been evident. [424 U.S. 295, 303]
But to say, as the Court did in Ervien and in Lassen, that the trust is to receive the full value of any lands transferred from it is not to say that the Act requires, in every Arizona case where a leasehold is outstanding at the time of the federal condemnation, that the trust is to receive the entire then value of the land and the possessor of the leasehold interest is to receive nothing whatsoever. What the Act requires - and we think that this is clear from Ervien and Lassen - is that the trust is to receive, at the time of its disposition of any interest in the land, the then full value of the particular interest which is being dispensed.
It has long been established that the holder of an unexpired leasehold interest in land is entitled, under the Fifth Amendment, 8 to just compensation for the value of that interest when it is taken upon condemnation by the United States. United States v. Petty Motor Co., 327 U.S. 372 (1946); A. W. Duckett & Co. v. United States, 266 U.S. 149 (1924). See United States v. General Motors Corp., 323 U.S. 373 (1945); Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470 (1973); 2 P. Nichols, Eminent Domain 5.23 (Rev. 3d ed. 1975); 4 id. 12.42 1.. It would therefore seem to follow that when a lease of trust land is made, the trust must receive from the lessee the then fair rental value of the possessory interest transferred by the lease, and that upon a subsequent condemnation by the United States, the trust must receive the then full value of the reversionary interest that is subject to the outstanding lease, plus, of course, the value of the rental rights under the lease. The trust should not be entitled, in addition to all this, to receive the compensable value, [424 U.S. 295, 304] if any, of the leasehold interest. That, if it exists and if the lease is valid, is the lessee's. See State ex rel. La Prade v. Carrow, 57 Ariz. 429, 433-434, 114 P.2d 891, 893 (1941).
Ordinarily, a leasehold interest has a compensable value whenever the capitalized then fair rental value for the remaining term of the lease, plus the value of any renewal right, exceeds the capitalized value of the rental the lease specifies. The Court has expressed it this way:
A difference between the rental specified in the lease and the fair rental value plus the renewal right could arise either because the lease rentals were set initially at less than fair rental value, or because during the term of the lease the value of the land, and consequently its fair rental value, increased. The New Mexico-Arizona Enabling [424 U.S. 295, 305] Act has a protective provision against the initial setting of lease rentals at less than fair rental value. This is specifically prohibited by 28. The prohibition is given bite by the further very drastic provision that a lease not made in substantial conformity with the Act "shall be null and void." Thus, if the lease of trust lands calls for a rental of substantially less than the land's then fair rental value, it is null and void and the holder of the claimed leasehold interest could not be entitled to compensation upon condemnation.
On the other hand, the fair rental value of the land may increase during the term of the lease. 9 If this takes place, the increase in fair rental value operates to create a compensable value in the leasehold interest. It is at this point, we feel, that the Court of Appeals erred when it held that the Act by its terms, and apart from the extent to which it incorporated Arizona law by reference barred Arizona from leasing trust land in any manner that might result in the lessee's becoming constitutionally entitled to just compensation for the value of its unexpired leasehold interest at the time of the federal condemnation. Instead, the Act is completely silent in this respect.
Arizona, however, suggests that this usually acceptable analysis may not be applied under the New Mexico-Arizona Enabling Act. It argues, as the Court of Appeals held, 495 F.2d, at 14, that under that Act the State, as trustee, has no power to grant a compensable property [424 U.S. 295, 306] interest to Alamo, as lessee. It bases this thesis on the Enabling Act's provision in 28 that no "mortgage or other encumbrance" of trust land shall be valid, and it claims that a lease is an encumbrance, citing, among other cases, Hecketsweiler v. Parrett, 185 Ore. 46, 52, 200 P.2d 971, 974 (1948) (agreement to sell real estate free and clear of encumbrances), and Hartman v. Drake, 166 Neb. 87, 91, 87 N. W. 2d 895, 898 (1958) (partition). One seemingly apparent and complete answer to this argument is that 28 goes on to authorize specifically a lease of trust land for grazing purposes for a term of 10 years or less, and further provides that a leasehold, before being offered, shall be appraised at "true value." See n. 2, supra. These provisions thus plainly contemplate the possibility of a lease of trust land and, in so doing, intimate that such a lease is not a prohibited "mortgage or other encumbrance." 10 Furthermore, Arizona statutes in other contexts specifically protect the lessee's interest. Ariz. Rev. Stat. Ann. 41-511.06, 37-291 (1974). See Ehle v. Tenney Trading Co., 56 Ariz. 241, 107 P.2d 210 (1940). To this the State responds that, while a lease is possible, it falls short of being a compensable interest when the property is sold because the Act prohibits the sale unless the trust receives the full appraised value of the land. The argument assumes that such compensation is to be measured by the entire land value despite the presence of the outstanding lease. That approach overlooks the actuality of a two-step disposition [424 U.S. 295, 307] position of interests in the land, the first at the time of the granting of the lease, and the second at the time of the condemnation. Full appraised value is to be determined and measured at the times of disposition of the respective interests, and if the State receives those values at those respective times, the demands of the Enabling Act are met. The State's argument would serve to convert and downgrade a 10-year grazing lease, fully recognized and permitted by the Act, into a lease terminable at will or into one automatically terminated whenever the State sells the property or it is condemned. The lessee is entitled to better treatment than this if neither the Enabling Act nor the lease contains any such provision. We have noted above that the Act or the lease, or both, could provide for that result. The Act, however, does not specifically so provide. Whether either the Act or the lease does so through incorporation of state law is an issue not addressed by the Court of Appeals, and it is to be considered on remand. We merely note that the fact that it is within Arizona's power to insert a condemnation clause in a lease it makes of trust land does not mean that the State may claim the same result when its lease contains no such clause.
Alamo suggests that the Court of Appeals' decision is at odds with the above-cited case of Nebraska v. United States, 164 F.2d 866 (CA8 1947), cert. denied, 334 U.S. 815 (1948). There, in the face of a totality claim like that made by Arizona here, the Eighth Circuit ruled that trust lands in Nebraska were to be treated as any other property and that condemnation proceeds were subject to allocation between the State as trustee and the holder of an outstanding agricultural lease. The Nebraska Enabling Act of April 19, 1864, c. 59, 13 Stat. 47, was an earlier edition of this type of statute, and was adopted [424 U.S. 295, 308] more than four decades before the New Mexico-Arizona Act. It did not contain the detailed restrictive provisions that appear in the 1910 Act and that were developed and utilized as passing years and experience demonstrated a need for them. Because of this, one may say, as Arizona does, that the Nebraska case is distinguishable from the present one. But the decision is not devoid of precedential value, for it is consistent with our analysis of the New Mexico-Arizona Act in its recognition of the possibility of a compensable leasehold interest in trust land upon federal condemnation, and it demonstrates that the existence of that interest is not incompatible with the trust land concept. See also United States v. 78.61 Acres of Land, 265 F. Supp. 564 (Neb. 1967), a post-Lassen case; United States v. 40,021.64 Acres of Land, 387 F. Supp. 839, 848-849 (NM 1975).
Finally, the Court of Appeals observed, but only in passing, 495 F.2d, at 14, that the lease recited that it was made subject to the laws of Arizona; that if the State "relinquished" the property to the United States, the lease "shall be null and void as it may pertain to the land so relinquished"; and that no provision of the lease "shall create any vested right in the lessee." The court also observed, ibid., that Ariz. Rev. Stat. Ann. 37-242 and 37-293 11 restrict a lessee's participation in the [424 U.S. 295, 309] proceeds of a sale of public land to the value of improvements. Having made these observations, however, the court thereupon concluded that it did not find it necessary [424 U.S. 295, 310] "to determine the rights of Alamo based upon these lease provisions or the state law." 495 F.2d, at 14.
The significance of the provisions referred to and of the cited statutes will now be for determination upon remand. We note only that the land in question was condemned and thus does not appear to have been technically "relinquished" by Arizona to the United States; that we are not at all sure that there is language of restriction in 37-242 and 37-293; and that Ariz. Rev. Stat. Ann. 37-288 and 37-290 respectively permit forfeiture for violation of the conditions of a lease or for nonpayment of rent, and cancellation of a lease if the leased land is reclassified to a higher use, and thus could explain the lease's provision against vesting in the technical sense that it is not subject to any contingency whatsoever. [424 U.S. 295, 311]
To repeat: we hold that nothing in the Enabling Act apart, possibly, from the extent it may incorporate Arizona law by reference, prevents the usual application of Fifth Amendment protection of the outstanding leasehold interest. We leave for determination on remand the following: (1) whether, under state law and the lease provisions, Alamo could not possess a compensable leasehold interest upon the federal condemnation; (2) if Alamo did possess such an interest, how it is properly to be evaluated and calculated (with the subsidiary questions of the relevance of possible lease renewals 12 and of possible value additions by reason of Alamo's development of adjoining properties, cf. United States v. Fuller, 409 U.S. 488 (1973)); and, (3) if that interest proves to be substantial, whether it is permissible to find from that fact a violation of the Enabling Act's requirement that a lease, when offered, "shall be appraised at [its] true value" and be given at not less than that value.
The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.
[ Footnote 2 ] "Sec. 28. That it is hereby declared that all lands hereby granted, including those which, having been heretofore granted to the said Territory, are hereby expressly transferred and confirmed [424 U.S. 295, 297] to the said State, shall be by the said State held in trust, to be disposed of in whole or in part only in manner as herein provided and for the several objects specified in the respective granting and confirmatory provisions, and that the natural products and money proceeds of any of said lands shall be subject to the same trusts as the lands producing the same.
[ Footnote 3 ] "All lands expressly transferred and confirmed to the State by the provisions of the Enabling Act approved June 20, 1910, including all lands granted to the State and all lands heretofore granted to the Territory of Arizona, and all lands otherwise acquired by the State, shall be by the State accepted and held in trust to be disposed of in whole or in part, only in manner as in the said Enabling Act and in this Constitution provided, and for the several objects specified in the respective granting and confirmatory provisions. The natural products and money proceeds of any of said lands shall be subject to the same trusts as the lands producing the same."
[ Footnote 4 ] Tract 304:
[ Footnote 5 ] No question is raised as to the propriety or effectiveness of the condemnation procedure.
[ Footnote 6 ] These figures were also the compensation estimated for the respective tracts in the declaration of taking and paid into court. 1 Record 15.
[ Footnote 8 ] "[N]or shall private property be taken for public use, without just compensation."
[ Footnote 9 ] The Arizona statutes governing grazing leases of trust lands recognize this possibility and provide for adjustment of rent at specified times to account for fluctuations in fair rental value. Ariz. Rev. Stat. Ann. 37-283, 37-285 (1974). Indeed, under 28 of the Enabling Act, at the termination of a lease, a re-evaluation would appear to be required before release or renewal.
[ Footnote 10 ] The Supreme Court of New Mexico long ago ruled that a grazing lease of state lands is not a "mortgage or . . . encumbrance," within the meaning of the identical prohibition, applicable to New Mexico, in 10 of the New Mexico-Arizona Enabling Act, 36 Stat. 563. American Mortgage Co. v. White, 34 N. M. 602, 605-606, 287 P. 702, 703 (1930). See United States v. 40,021.64 Acres of Land, 387 F. Supp. 839, 848-849 (NM 1975); State ex rel. State Highway Comm'n v. Chavez, 80 N. M. 394, 456 P.2d 868 (1969).
[ Footnote 11 ] 37-242:
[ Footnote 12 ] We note in regard to the possible value of renewal rights that leases of the kind in issue here are limited by statute to 10 years in duration, and that the Act requires that rentals be adjusted to reflect current fair rental value before any renewal. See n. 9, supra. Therefore, although we do not foreclose the relevance of possible renewals, the calculation of the lessee's interest cannot include the prospect of renewing the lease at less than fair rental value.
MR. JUSTICE WHITE, with whom MR. JUSTICE BRENNAN joins, dissenting.
The question in this case is whether, under 28 of the [424 U.S. 295, 312] New Mexico-Arizona Enabling Act, 36 Stat. 574, the State of Arizona had the power to grant to petitioner a compensable leasehold interest in the property in issue. The question is solely one of statutory construction. As I agree with the Court of Appeals for the Ninth Circuit that Congress intended that lessees of land covered by the Act should acquire a compensable interest in leased land only to the extent of "improvements . . . placed thereon by such lessee," United States v. 2,562.92 Acres of Land, 495 F.2d 12, 14 (1974), I dissent.
The Act states expressly, with respect to the lands involved here, that "no mortgage or other encumbrance of the said lands . . . shall be valid in favor of any person or for any purpose or under any circumstances whatsoever." A lease, if not terminable at will by the State or terminable automatically upon sale or condemnation, is clearly an "encumbrance." 7 G. Thompson, Real Property 3183, p. 277 (1962); 2 Bouvier's Law Dictionary 1530 (8th ed. 1914). A lease not so terminable is, therefore expressly prohibited by the Act. The majority opinion, however, finds implicit in the Act an exception to the express ban on encumbrances in the case of leases for terms of 10 years or less. It points to the fact that 10-year leases of school trust lands are expressly permitted by the Act and states that to treat a lease as an "encumbrance" under the circumstances would be to "downgrade a 10-year grazing lease, fully recognized and permitted by the Act, into a lease terminable at will or into one automatically terminated whenever the State sells the property or it is condemned." Ante, at 307. Treating the lease as an encumbrance would certainly have the effect which the majority says it would. The majority does not disclose, however, why such an effect is contrary to the intent of the Act. Apparently, it simply finds illogical [424 U.S. 295, 313] the notion that a lease could be terminable on sale or condemnation and still be a "10-year" lease, notwithstanding the fact that treating 10-year leases as being so terminable is the only way to square them with the Act's unqualified ban on encumbrances.
It is Congress' policy, however, and not our own which we must apply to the Act; and Congress' prior statutes governing leases by States of school trust lands granted to them by the United States strongly support the proposition that Congress viewed an express statutory provision permitting leases of such land for a term of years as entirely consistent with provisions making such leases terminable at will or by sale or condemnation. In 1888 Congress provided, with respect to school trust lands granted to Wyoming, that the lands could be leased for 5-year periods but that such leases could be annulled at will by the Secretary of the Interior. 25 Stat. 393. Of far more significance to this case was Congress' treatment of the lands granted to Oklahoma - the State to enter the Union most recently prior to the entry of Arizona and New Mexico - in the Oklahoma Enabling Act. C. 3335, 34 Stat. 267. In that Act, Congress expressly provided Oklahoma with the authority to lease school trust lands for 10-year periods while also clearly providing that upon sale of the lands during the period of the lease, the lessee would receive only the value of its improvements. That Act states with respect to sales of lands subject to a lease that "preference right to purchase at the highest bid [is] given to the lessee at the time of such sale," id., at 274 (emphasis added); and then provides:
Congress' reasons for so limiting the rights of leaseholders is easily discernible from the Act and its legislative history. Congress anticipated that the value of the school trust lands would increase over time and it intended that the schools, not leaseholders, benefit from this increase. Pursuing this end, the Act set a minimum sales price for school trust lands of $3 per acre, 36 Stat. 574, the House committee report explaining:
To make its purpose even clearer, Congress, in dealing with the very question of whether the lessee should share in the proceeds when lands subject to the lease are sold, provided: