Tenant Doesn't Have to Pay Tax Increase on Improvements that Benefit Only Landlord

What Happened: A lease required the tenant that would occupy 45 percent of the space in a four-story building to pay 42.98 percent of the taxes on the property. The agreement contained a tax escalation clause requiring the tenant to pay the proportionate share of tax increases on the building. The landlord later added seven floors of new residential space, turning the premises into an 11-story mixed-use building carrying a much higher tax. The landlord demanded that the tenant pay 42.98 percent of taxes on the entire building, but the tenant insisted that it was responsible for only 42.98 percent of the taxes on the commercial space in the building since it derived no benefit from the improvements. Both sides moved for summary judgment—that is, a favorable ruling on the merits without a trial.

Ruling: The New York court granted the tenant’s summary judgment and rejected the landlord’s.

Reasoning: Tax escalation clauses aren’t enforceable against a tenant when the tax increase is the result of improvements that benefit only the landlord. If you’re not going to grant me summary judgment, at least give me the chance to go to trial and present evidence that the tenant did benefit from the improvements in this case, the landlord argued. But the court didn’t buy it.

According to the court, “the simple truism that additional residential units benefitted the landlord and not the [tenant] are not ‘allegations’. . . but. . . fact based upon [New York case law] and common sense.” The “fortuitous fact” that some of its customers may now be in the same building rather than next door or down the block wasn’t enough of a benefit to make it liable for paying a portion of the tax increase. Moreover, the actual escalation clause said the tenant had to pay base tax of $1.70 per square foot on the “demised premises,” which it defined as all the square footage on the basement and three stories of commercial space.  

• Marshalls of MA, Inc. v. CAC Atl., LLC, 2024 N.Y. Misc. LEXIS 1072, 2024 NY Slip Op 30723(U)