Begins with the Lease.

WHILE SOME MAY THINK a tenant’s obligation to pay taxes is a simple pass-through from the landlord, this characterization is often inaccurate. Landlords frequently collect more in taxes than they, in fact pay; and sometimes, landlords collect less.

Courts and juries, when considering what amount of taxes a landlord is entitled to charge a tenant, look not to some notion of fairness of a pass-through, but rather to the lease—the language of the lease settles the question.

Determining a tenant’s obligation for taxes is no different from determining a tenant’s obligations for other charges under a lease—the first place to look is the written lease.

Typically, a retail lease will provide a formula for calculating taxes in a form similar to the following:

  1. Total taxes paid by landlord
  2. Square footage of tenant’s leased space, and
  3. Some measure of total square footage of the office or retail center

Wondering where to start? When determining if your tax obligations are calculated properly, a tenant should focus on three main issues. First, what types of taxes fall into “total taxes paid by landlord”? Taxes from the government can come in various forms of charges, fees, or licenses. A sound understanding of the language in your lease can be used to challenge the landlord’s attempt to use a broader definition.

Next, determine what parcel(s) are included in calculating the landlord’s total real estate taxes subject to allocation to the tenant. Since a landlord’s real estate taxes are generally tied to specific real estate, the pertinent question is what parcel(s) can the landlord include when calculating its total taxes that are subject to allocation to the tenant. Centers are sometimes developed on multiple tax parcels. Anchor stores may sit on their own tax parcels or be part of a larger parcel.

Furthermore, tax parcel lines may change over the period of a lease. Portions of a center may be on the same parcel as the tenant’s leased space when the lease is executed, but at some later point may become part of a different parcel. Thus, the question arises: Can the landlord include taxes paid on all parcels in the center in determining a tenant’s tax obligations? Or is the landlord limited to only the parcel on which the tenant’s office or store is located?

Once again, the answer to these questions is governed by the language of the lease.