There are a number of issues commonly addressed in leases that are negotiated ?somewhat in ignorance,? and often ?with arrogance.? Strong words, we know, but we think a substantial number of readers will agree. Three such issue-areas are insurance, eminent domain, and property taxes.
Ruminations has said a lot about insurance issues (and promises more). We?ve touched on some aspects of eminent domain issues (and we promise more). We haven?t said much about property taxes. Today, we?ll say a little ? specifically about whether and how a tenant should be able to get a tax appeal prosecuted. This thought came to us when we read a New Jersey Tax Court decision touching on this topic: Target Corp. v. Township of Toms River. Click on that title to see the court?s opinion.
It appears the property in question was a ?power center? with six tenants, of which Target took up 38% of the leasable space. Another player was Lowe?s whose building took up another 42% of the leasable space. On the other side of these tenants was the landlord. The taxing authority didn?t care about the cat fight between the two tenants and their landlord.
Before this posting is finished, we?ll talk about how the ?lease? itself plays into the tax appeal process. First, we?re going to point out a few things that may come as a surprise to lease negotiation professionals ? in particular, what the law has to say about landlords and tenants, namely: (a) who has the right to file an appeal; and (b) who can control a tax appeal.
Our discussion is rooted in New Jersey law, but we have it on good authority that most, but not all, states see these issues in pretty much the same way as does New Jersey. That means you must know how a particular jurisdiction deals with tax appeal rights, but you might not be hearing about it for the first time once you?ve made it to the end of today?s posting.
We won?t hold anyone in suspense. It is the law, not the lease, which allows a tenant to file and prosecute a tax appeal. Mind you, not every tenant can appeal, but the dividing line is far from clear. At one end of the spectrum is a tenant who controls the entire tax lot and has the lease obligation to pay all of the property taxes. At the other end is an ?ice cream stand in a suburban mall.?
Are there criteria, you ask? Here?s what the New Jersey Supreme Court sets out:
(1) the provisions of the lease itself, its duration, the burden of the tax surcharge on the tenant, and the possibility that the issue can soon be resolved by renegotiation; (2) the tenant?s relationship to the property, whether it is the lead tenant in a shopping center or only one slightly affected by the assessment; (3) whether the tenant will adequately represent the interests of the landlord and other tenants, or whether the tenant has interests adverse to either group; (4) the tenant?s ability to mount and prosecute an effective appeal; (5) the landlord?s overall relationship with the taxing authority, and whether this is one of multiple properties as to which the landlord may wish to exercise the right of appeal.
We find it curious that the court reached this conclusion based on the its belief that allowing a tenant to prosecute a tax appeal ?reflects the reality of present commercial practice,? whereas in eminent domain cases, there aren?t a lot of jurisdictions that even give a tenant standing to argue anything before the condemnation court. But, that?s for another day.
Now, the tenant?s tax appeal, when allowed, has to be made in the name of its landlord. So, when a tenant files an appeal for the property where its leased premises are located, it needs to give its landlord ?notice.? In New Jersey, there is a court rule that says this. It would seem that the rule is to protect the property owner?s due process rights.
This takes us to our second question ? who has the right to control the tax appeal, tenant or landlord?
Again, there isn?t a single answer. It?s a balancing test again. Fortunately, case law saves us a lot of typing at this point because it lists the very same factors we typed above for figuring out if the tenant, in the first place, has standing to file the appeal.
What does this ?knowledge? teach those of us who craft leases? For one, a lease ought to speak about the right to file a property tax appeal. If the tenant will not be allowed to file one even though the law would permit a filing, the lease should say: ?Tenant may not file or participate in any real property tax appeals for any tax lot in the Shopping Center.? That would cover an appeal by the tenant alone or together with others. After all, that ?ice cream stand? could join together with a bunch of other tenants, collectively representing a substantial percentage of the leasable space at the property (or on one of several tax lots at the property). We haven?t seen a lot of leases that come right out and say this. Most are totally silent, and silence does not deprive the tenant of the right to mount its own appeal.
On the other hand, if a tenant has negotiated for the right to file an appeal, the lease should be clear that the tenant can file in its landlord?s name. It should also say that if the ?law? wouldn?t allow such an appeal, the tenant can act as attorney-in-fact for its landlord. Further, the lease for such a tenant should make it clear that the tenant, not its landlord, has the right to control the appeal.
How did Target make out in the case noted above? We think: ?pretty well,? but not because the court allowed it to prosecute the tax appeal. To us, its landlord, who the court ?favored? in this instance, seemed to have gotten a ?very nice? result. Whether the landlord would have lost control had Lowe?s and Target (a combined 80%) gotten together at the outset, is far less certain. Our guess ? the two combined might very well have wrested control from the landlord. We are much surer that had the leases covered these questions, both tenant and landlord would have saved a lot of litigation costs.
Oh, by the way, this is Ruminations? 100th blog posting.
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