Owner Can't Reap 'Windfall' from Real Estate Tax Escalation

A lease's tax escalation clause required a tenant to pay 5.5 percent of any increase in a building's real estate taxes above a base year. When the owner calculated the tenant's share of the tax escalation, it added certain tax exemptions and abatements to the amount of real estate taxes assessed to the building that year. The tenant sued the owner, claiming that the owner should have calculated the real estate tax increase based solely on the actual real estate taxes owed.

A New York appeals court ruled that the owner had overcharged the tenant. The tax escalation clause clearly required the tenant to pay only 5.5 percent of the amount by which the real estate taxes on the building that year exceeded the real estate taxes in the base year. The escalation clause's definition of “real estate taxes” didn't include tax exemptions or abatements, noted the court. To let the owner “collect additional rent based on taxes forgiven by the taxing authorities” would have let the owner “reap a windfall” that the parties didn't intend, said the court [Ran First Assocs. v. 363 East 76th St. Corp.].