DIRT Development for Monday, October 13, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri
dirt@umkc.edu
STATE AND LOCAL TAXATION; LEASES: A tenant with a long term lease who bears the burden of paying the entire tax obligation assessed against a property may have the right to control the tax appeal process and receive any resulting benefits if the lease doesn't specify otherwise and doing so actually represents the property interests to a greater degree than would be the case if the landlord controlled the tax appeal process.
Aperion Enterprises, Inc. v. Borough of Fair Lawn, 25 N.J. Tax 70 (2009); July 24, 2009.
A landlord and its commercial tenant entered into a long-term "triple net" lease. The lease covered the entire property and contained one freestanding building occupied by the tenant. Pursuant to the terms of the lease, the tenant was obligated to pay the real estate taxes directly to the municipal tax collector for the entire property. The landlord, without its tenant's knowledge, filed tax appeals for a four-year period. The tenant sought to be joined as a party to the tax appeals. Both the landlord and tenant claimed that they were entitled to control the appeal, including the right to accept or reject any settlement offers made by the municipality. In addition, both the landlord and tenant claimed entitlement to any tax refunds if the tax assessments were reduced.
The Tax Court applied the factors set forth in Village Supermarkets, Inc. v. Twp. of West Orange, 106 N.J. 628 (1987) in determining that the tenant, rather than the landlord, was entitled to control the appeal process. In analyzing whether a landlord or tenant should control the tax appeal process, a court must consider the following factors: (a) the provisions of the lease, such as its duration, the burden of the tax surcharge on the tenant, and the possibility that the issue can be resolved by renegotiation; (b) the tenant's relationship to the property such as whether it is the lease tenant in a shopping center or one only slightly affected by the tax assessment; (c) whether the tenant will adequately represent the interests of the landlord and other tenants, i.e., whether the tenant has interests adverse to either group; (d) the tenant's ability to mount and prosecute an effective appeal; and (e) the landlord's overall relationship with the taxing authority, such as whether
the subject property is one or multiple properties for which the landlord may wish to pursue a tax appeal.
Here, the Tax Court found that the lease was silent as which party had the authority to pursue the appeal, but noted that tenant had a long term lease and bore the burden of paying the entire tax obligation assessed against the property. It also found that, as the sole tenant of the property and under a long term lease, the tenant was responsible for the entire tax burden and the landlord had almost no real interest in the assessment. The tenant was paying the taxes directly so the landlord really did not have any stake in whether the taxes were lowered or not. The Tax Court also found that the tenant had competent legal counsel and had the motivation to mount a successful tax appeal because it would receive reimbursement for overcharges if it succeeded. In addition, the landlord did not establish any special relationship with the municipal tax assessor nor did it show that it had other properties within the municipality for which it was contemplating a tax appeal.
Therefore, the tenant, not the landlord, was entitled to control the appeal process. However, the landlord was still entitled to notice of the proceedings as the record owner of the property.
In determining who was entitled to receive any reimbursement, the Tax Court found that since the lease required the tenant to pay the real property taxes directly to the tax collector in addition to paying its base rent, the tenant was entitled to any refund. If the landlord received the tax refund it would be receiving a windfall for which it was not entitled. Further, nothing in the lease stated that the landlord was entitled to refunds. Basically, the Tax Court refused to rewrite the lease for the landlord, noting that if the landlord wanted that benefit it should have drafted the lease to provide specifically that it would receive any tax refunds.
Editor’s Comment: Clearly the basic question is whether the remaining term of the lease is such that any considerations of the landlord’s interest are moot. Here the court determined that this was the case. Perhaps it should not be the case as the lease term continues. One more point that parties might consider when drafting the lease originally. “Value added.”
The Reporter for this item was Ira Meislik of the New Jersey Bar.
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