The Basics When Reviewing a Real Estate Tax Provision

Real estate tax provisions usually provide that a tenant will pay either its proportionate share of all real estate taxes or the proportionate share of all such real estate taxes that are in excess of real estate taxes assessed against a property in a predetermined base tax year. There are several clauses, however, that rarely find their way into a landlord's initial draft of the lease that may be beneficial to a tenant. In addition, certain real estate tax provisions that are typically included in a landlord's standard lease form need to be carefully reviewed to make sure they are fair to both the landlord and the tenant.

Base Tax Year

Even if the letter of intent mirrors what is in the lease, it may still be proper for a tenant to at least question the base year dates in a lease. The basic concept is that the tenant should be in possession of the space without being liable for the payment of taxes for at least one year. In many leases, the base year occurs on a much earlier date. For example, if the base year in a lease is the fiscal year 2017-2018 and the tenant will not be taking possession until June of 2018, the base year would start approximately one year before the date that the tenant takes possession of the premises and would require the tenant to start paying taxes much sooner than the date the tenant intended that such taxes would be paid. It may be easy to overlook this issue, but when the tenant gets a tax bill that is due and payable even before it opens for business, it may be an unwelcome surprise.

Defining Real Estate Taxes

It is also important not to gloss over the definition of “real estate taxes” in the tax provision. First, a tenant should check if the tax block and lot accurately describe the building or the property that is being leased. To avoid uncertainty, do not rely on the street address alone to describe the property. Second, if you are leasing space in a condominium, in most cases, the tenant should only be paying for the taxes assessed against the condo unit, not the entire building. Third, although some leases exclude certain items from being included as a real estate tax, most do not go far enough in this endeavor. For example, if the landlord incurs fines, fees or penalties when it pays real estate taxes, the tenant should not be responsible for such payments unless the tenant is also delinquent in its payment of such taxes to the landlord. In addition, many tenants attempt to exclude special assessments or taxes resulting from the future expansion of the building or from any improvements exclusively made by and for the benefit of any other tenant in the premises. If a tenant does not exclude these items, they will be included as part of real estate taxes and the tenant will be paying some or all of these potentially objectionable charges.

Capping Real Estate Taxes

Depending on the bargaining position of the parties, a tenant may be able to negotiate a provision that caps the amount of real estate taxes that will be charged to a tenant in any given year. This provides a greater degree of certainty to a tenant that the costs of leasing its space will not soar out of control. These provisions are never in any landlord's “standard form of lease.” If a tenant does not specifically negotiate such a cap, it will not be included in the lease.

Paying Special Assessments In Installments

Most initial drafts of a lease prepared by a landlord provide that the tenant will pay either a percentage of assessments or a percentage of assessments charged to the landlord over a base year. A tenant may claim that this requirement is unfair because an assessment could be imposed at the end of the lease term. In such a case, the tenant — who may only be enjoying the benefit of the assessment for a short period of time — will be required to pay for 100% of the cost of the assessment even though the assessment may be benefiting future tenants (who will not be paying for any of the cost of such assessment) and the landlord for a far longer period of time. A fair solution to this problem is to insert a clause in the lease that states: