Securing a full or partial abatement or exemption on your property’s real estate taxes is a cause for celebration. But that champagne may taste far less sweet if you end up having to share those hard-won benefits with your tenants. 

This buzzkill can occur if the real estate tax escalation clause in your lease doesn’t specify the effects of subsequent abatements or exemptions on the calculation of how much the tenant owes as its share of taxes on the building. Solution: Ensure that the real estate tax escalation clause in your lease clearly requires tenants to pay tax escalations based on what the tax would be without the subsequent abatement or exception. 

Ambiguous Clause Becomes Tenant Tax Abatement Boomerang

Failure to include such clear language cost one New York landlord big bucks. The case began when the landlord won a tax abatement on a building in which a delicatessen tenant leased space. The lease contained a tax escalation clause requiring the tenant to pay “50 percent of any increase in the taxes assessed against the property of the demised premises are part, over and above the taxes assessed said property for 1986/1987 whether the increase in taxation results from a higher tax rate or an increase in the assessed value of the demised premises or both.”

The landlord calculated “taxes assessed” without taking the tax abatement into account. The tenant insisted that “taxes assessed” meant taxes as reduced by the abatement. The New York court agreed with the tenant’s interpretation, citing the general dictionary definitions of “assesses” and “assessment” to conclude that the phrase referred to taxes actually paid. At the end of the day, the ambiguity in the tax escalation clause cost the landlord about $10,000, plus the costs of an unsuccessful lawsuit [Dupont Associates, Inc. v. Abreu, N.Y. Civ. Ct., 1992].

Takeaway

Don’t let this happen to you. If you intend to challenge your real estate tax assessment, ensure that your lease ensures you the full value of any full or partial abatements or exemptions you win during the course of the lease term. Specifically state that the parties’ expectation and intention is that any such abatements and exemptions will benefit the landlord and only the landlord. A New York City attorney recommends adding the following language to tax escalation clause of the lease: 

Model Lease Language

In the event that the taxes assessed against the property of which the leased Premises are a part are reduced by, or credited with, any abatement or exemption issued by the taxing authority that is due to Landlord in reimbursement for compliance with the law, Tenant acknowledges that since all of the funds were expended in connection with such compliance expended by Landlord, Tenant does not have any right, title, or interest in the reimbursement and that Tenant’s share of the tax shall be based upon the amount assessed prior to the abatement or exemption.