The Leasing Hotline

TAX ASSESSMENT

Landlords are not entitled to a tax refund under the state tax code where the dispute concerned valuation rather than an obvious “double tax.” Woodbury Amsource, Inc. v. Salt Lake County, Utah Sup. Ct., June 27, 2003.

Prior to 1999, the Utah State Tax Commission taxed leasehold improvements as personal property of the lessee. It also provided that any value of leasehold improvements not taxed as personal property shall be included in the value of the real property on which the landlord paid real property taxes. In practice, the County Assessor's office would collect affidavits and taxes from tenants regarding the leasehold improvements under their control and the real property division would assess real property taxes independently of the leasehold improvements. In 1999, a group of property owners and landlords filed a complaint in district court claiming they were “double taxed” on tenant-owned improvements and sought property tax refunds. The landlords alleged that the county erroneously assessed a double tax on tenant-owned improvements to the landlords' property by imposing a personal property tax on the tenants for these leasehold improvements, while also imposing real property taxes on the landlords for the entire value of their property, including the value of the leasehold improvements. The trial court denied the landlords' claim, finding that it actually involved incorrect valuation rather than an illegal “double tax.” The issue on appeal was the validity of the landlords' position that the County Assessor's appraisal practices resulted in double taxation of leasehold improvements. In affirming the trial court, the Supreme Court of Utah held that in order for a taxpayer to receive a refund due to an illegal tax or double payment, the error must be “readily apparent” from county records. The court found that the landlords failed to point to any place in the record that indicates an erroneous or illegal assessment of their property. In addition, neither party alleged an error of fact or law that would be readily apparent from county records. The court concluded that the landlords' quarrel was with the appraisal methodology that the county assessors may, or may not, have used when assessing the value of their property. The Supreme Court of Utah stated it was not entitled to make a “blanket decision” regarding the valuation method because the statute under which the landlords brought their claim was not intended to serve that function.

LOST PROFITS

A tenant may be entitled to monetary damages for lost profits from a fire caused by the landlord's negligence; however, net profits, rather than gross profits, must be used to calculate actual loss sustained by the tenant and the damages claimed must be reasonable. Sostchin v. Doll Enterprises, Inc., Fla. Ct. App., 3rd Dist., June 25, 2003.

The tenant sold shoes on the landlord's property commencing in 1994. In 1998, the building from which the tenant operated its business was destroyed in a fire and the tenant lost its entire business. In the years between the commencement of the tenant's business and the fire, the tenant operated at a loss for the first 3 years. In 1997, the year before the fire, the tenant claimed a profit of $31,000 on its tax return. After the fire, the tenant reopened in a new location but closed its business in the summer of 2000. The tenant sued the landlord for damages, including “future lost profits.” The landlord's negligence was found to be the cause of the fire and the tenant was awarded $1.3 million in damages, including “future lost profits.” On appeal, the court affirmed the finding that the landlord's negligence was the cause of the fire. However, it disagreed with the tenant's accounting expert regarding the actual losses suffered by the tenant. It noted that the expert failed to utilize the tenant's net profits when calculating the tenant's losses. The expert also failed to consider officer compensation as part of its calculation. The appellate court remanded the issue of damages to the trial court, ordering that the tenant was required to provide reasonable proof regarding its actual losses sustained as a result of the fire.

ASSUMPTION OF DUTY

A proprietor/tenant that makes certain voluntary assumptions of duty may be liable in tort to a plaintiff injured in a common area even if the tenant is not responsible for the maintenance of the common area under the lease. Gauthier v. Super Hair, N.Y. Sup. Ct., App. Div., 4th Dept., June 13, 2003.

Rita Gauthier fell into a hole in the parking lot of premises owned by Yorkshire Realty. She had left the first floor of the building leased by Super Hair when she fell into the hole. She sued Yorkshire Realty and Super Hair for negligence. The trial court granted Super Hair's motion for summary judgment, dismissing the premises liability claim against it. Super Hair established its entitlement to judgment as a matter of law on that claim by proving that the driveway/parking lot was not part of the leased premises and that the maintenance of that common area was under the control of Yorkshire. Gauthier appealed. On appeal, the appellate court affirmed the dismissal of the portion of the plaintiff's claim regarding premises liability against Super Hair. However, the appellate court held that issues of fact existed as to whether Super Hair's proprietor exposed the plaintiff to increased risk when he directed the plaintiff out the door where the hole existed. He voluntarily assumed a duty to act with reasonable care and may be held liable for breach of that duty if the plaintiff relied on that undertaking and the act or failure to act placed the plaintiff in a more vulnerable position than if the obligation had not been undertaken.

BANKRUPTCY

A landlord cannot re-let premises to a new tenant if the current tenant's lease is in existence at the time it filed for bankruptcy. In re T.A.C. Group, Inc., d/b/a Frugal Fannie's Fashion Warehouse, U.S. Bkrtcy Ct, Dist. Mass., June 12, 2003.

The tenant and landlord entered into a commercial lease. The parties' lease provided the landlord could immediately terminate the lease if: “Tenant shall at any time during the continuance of this Lease remove, attempt to remove, or manifest, in the judgment of the Landlord, an intention to remove Tenant's goods or property out of or from the Demised Premises except in the ordinary course of business …” That section was the only provision in the lease giving the landlord immediate termination rights without an opportunity and time to cure defaults. The tenant's representative notified the landlord that it intended to retain a liquidating agent to conduct wind-down sales of all its inventory at its four different locations, as it intended to close all its stores and cease operating at the conclusion of the sales. Thereafter, the landlord's attorney sent the tenant a letter terminating the lease. The grounds for the immediate termination were the tenant's announcement of its intention to conduct “going out of business sales” at all of its locations, including the leased premises, which in the landlord's view constituted an intention to remove its goods or property from the leased premises outside the ordinary course of business. Subsequently, the tenant advertised a sale at its store. It did not indicate the sale was a “going out of business sale,” although the tenant concedes that it intended to close the store at the end of the sale. About two weeks after the landlord sent the letter purportedly terminating the lease, the tenant/debtor filed its voluntary Chapter 11 petition and continued to conduct its sale at the premises. The landlord moved to lift the automatic stay, claiming the lease had been terminated before the tenant filed its petition. The court held that the “termination” letter prepared by the landlord's attorney was not an effective pre-petition termination of the lease. It also held that the tenant's “sale” did not entitle the landlord to terminate the lease prior to the date of the Chapter 11 petition. Therefore, the lease existed at the time the tenant filed its Chapter 11 petition and the lease was assumable and assignable by the tenant under the Bankruptcy Code. The landlord was not entitled to a return of the premises to re-let them to a tenant of its choice.

TAX ASSESSMENT

Landlords are not entitled to a tax refund under the state tax code where the dispute concerned valuation rather than an obvious “double tax.” Woodbury Amsource, Inc. v. Salt Lake County, Utah Sup. Ct., June 27, 2003.

Prior to 1999, the Utah State Tax Commission taxed leasehold improvements as personal property of the lessee. It also provided that any value of leasehold improvements not taxed as personal property shall be included in the value of the real property on which the landlord paid real property taxes. In practice, the County Assessor's office would collect affidavits and taxes from tenants regarding the leasehold improvements under their control and the real property division would assess real property taxes independently of the leasehold improvements. In 1999, a group of property owners and landlords filed a complaint in district court claiming they were “double taxed” on tenant-owned improvements and sought property tax refunds. The landlords alleged that the county erroneously assessed a double tax on tenant-owned improvements to the landlords' property by imposing a personal property tax on the tenants for these leasehold improvements, while also imposing real property taxes on the landlords for the entire value of their property, including the value of the leasehold improvements. The trial court denied the landlords' claim, finding that it actually involved incorrect valuation rather than an illegal “double tax.” The issue on appeal was the validity of the landlords' position that the County Assessor's appraisal practices resulted in double taxation of leasehold improvements. In affirming the trial court, the Supreme Court of Utah held that in order for a taxpayer to receive a refund due to an illegal tax or double payment, the error must be “readily apparent” from county records. The court found that the landlords failed to point to any place in the record that indicates an erroneous or illegal assessment of their property. In addition, neither party alleged an error of fact or law that would be readily apparent from county records. The court concluded that the landlords' quarrel was with the appraisal methodology that the county assessors may, or may not, have used when assessing the value of their property. The Supreme Court of Utah stated it was not entitled to make a “blanket decision” regarding the valuation method because the statute under which the landlords brought their claim was not intended to serve that function.

LOST PROFITS

A tenant may be entitled to monetary damages for lost profits from a fire caused by the landlord's negligence; however, net profits, rather than gross profits, must be used to calculate actual loss sustained by the tenant and the damages claimed must be reasonable. Sostchin v. Doll Enterprises, Inc., Fla. Ct. App., 3rd Dist., June 25, 2003.

The tenant sold shoes on the landlord's property commencing in 1994. In 1998, the building from which the tenant operated its business was destroyed in a fire and the tenant lost its entire business. In the years between the commencement of the tenant's business and the fire, the tenant operated at a loss for the first 3 years. In 1997, the year before the fire, the tenant claimed a profit of $31,000 on its tax return. After the fire, the tenant reopened in a new location but closed its business in the summer of 2000. The tenant sued the landlord for damages, including “future lost profits.” The landlord's negligence was found to be the cause of the fire and the tenant was awarded $1.3 million in damages, including “future lost profits.” On appeal, the court affirmed the finding that the landlord's negligence was the cause of the fire. However, it disagreed with the tenant's accounting expert regarding the actual losses suffered by the tenant. It noted that the expert failed to utilize the tenant's net profits when calculating the tenant's losses. The expert also failed to consider officer compensation as part of its calculation. The appellate court remanded the issue of damages to the trial court, ordering that the tenant was required to provide reasonable proof regarding its actual losses sustained as a result of the fire.

ASSUMPTION OF DUTY

A proprietor/tenant that makes certain voluntary assumptions of duty may be liable in tort to a plaintiff injured in a common area even if the tenant is not responsible for the maintenance of the common area under the lease. Gauthier v. Super Hair, N.Y. Sup. Ct., App. Div., 4th Dept., June 13, 2003.

Rita Gauthier fell into a hole in the parking lot of premises owned by Yorkshire Realty. She had left the first floor of the building leased by Super Hair when she fell into the hole. She sued Yorkshire Realty and Super Hair for negligence. The trial court granted Super Hair's motion for summary judgment, dismissing the premises liability claim against it. Super Hair established its entitlement to judgment as a matter of law on that claim by proving that the driveway/parking lot was not part of the leased premises and that the maintenance of that common area was under the control of Yorkshire. Gauthier appealed. On appeal, the appellate court affirmed the dismissal of the portion of the plaintiff's claim regarding premises liability against Super Hair. However, the appellate court held that issues of fact existed as to whether Super Hair's proprietor exposed the plaintiff to increased risk when he directed the plaintiff out the door where the hole existed. He voluntarily assumed a duty to act with reasonable care and may be held liable for breach of that duty if the plaintiff relied on that undertaking and the act or failure to act placed the plaintiff in a more vulnerable position than if the obligation had not been undertaken.