Tenant's Real Estate Taxes Not Capped Like CAM Costs

Facts: A tenant rented space in a shopping center to run its bakery. It executed a letter of intent (LOI) with the center’s owner and signed a lease. The LOI set forth terms, including terms pertaining to CAM cost increases and taxes, which were later incorporated into the lease. Six months after the lease was signed, the owner sold the shopping center to a new owner and assigned to it the tenants’ leases.

     Under the lease, there was a 5 percent annual cap on rent increases. The new owner and the tenant argued as to whether the cap also applied to the tenant’s pro rata share of real estate taxes on the shopping center. Claiming that, according to the LOI terms, the taxes were subject to the 5 percent cap, the tenant paid the taxes commensurate with the cap. Claiming that, according to the lease—despite the fact that the LOI terms had been incorporated into it—the cap didn’t include real estate taxes, the new owner sued the tenant for unpaid rent for the amount by which the taxes exceeded the cap. The tenant and the owner each asked the trial court for a judgment in its favor without a trial.

     The trial court interpreted the lease as excluding the taxes from the 5 percent cap. It ruled in favor of the new owner and ordered the tenant to pay it over $48,000 in damages and interest. The tenant appealed.

Decision: An Indiana appeals court upheld the trial court’s decision.

Reasoning: On appeal, the tenant claimed that the trial court erroneously construed the lease and LOI as excluding the real estate taxes from the 5 percent cap. The tenant asserted that the lease language can’t be “harmonized with the language of the LOI pertaining to the five-percent cap on rent increases” and that the owner violated the term of the LOI that stated, “The lease shall not negate any conditions and or terms included herein, and conditions normally found in a commercial lease.”

     The appeals court disagreed, determining that the lease and the LOI indisputably excluded the taxes from the cap. The appeals court noted that the lease stated that, “Exclusive of any increase in property taxes, Landlord and Tenant agree that additional CAM increases shall be capped at 5% annually over the ‘Base Year.’” With respect to the cap on “Additional Rent” during the first year of the lease, the section of the LOI titled “Taxes, Insurance and CAM” plainly stated, “Common Area Maintenance, taxes and insurance charges for the ‘Base Year’ shall not exceed $2.00 per square foot,” the appeals court pointed out.

     With respect to all subsequent years, the LOI listed only common area maintenance, stating, “After the ‘Base Year’, additional Rent (CAM) increases shall be capped at 5% annually over the ‘Base Year.’” The court determined that, in this case, taxes were clearly separate from CAM, and only CAM increases were capped at 5 percent. Because of that, the lease did not negate the terms of the LOI by excluding property taxes from the 5 percent cap.

• Pie Kitchen, LLC v. Merchant, LLC, February 2013