November 12th - 2010

LEGAL BEAT: Consider tax allocation for tenants

This case concerns the interpretation of a commercial lease. It asks how the contribution the tenant is to make in respect of property taxes is to be calculated.

This case concerns the interpretation of a commercial lease. It asks how the contribution the tenant is to make in respect of property taxes is to be calculated.

In the years leading up to the mid-1990's, Ontario’s Assessment Act allowed that each tenant of a commercial building would receive a separate assessment demonstrating the contribution it made to the overall tax assessment of the building.

In 1998, a new system was put in place. The changes eliminated the requirement for the relevant authorities to produce a separate assessment for the tenant. The new system introduced fair market assessment for all properties and put an end to the previous practice of separately assessing the space occupied by each commercial tenancy. While they were not prepared for the purpose, these separate assessments had been used as a convenient basis for allocating realty taxes under lease agreements. The end of separate assessments left it to landlords and the tenants, through their lease agreements, to determine the basis for any contribution a tenant would make to the payment of the tax.

Government officials involved in undertaking current assessments for realty tax do consider, or take into account, the businesses that operate in the buildings they are examining. Working papers are developed in the course of preparing the assessments. Although no reference is made to it in the applicable legislation, what was referred to as a "working paper system" has developed. The working papers are prepared in furtherance of the overall assessment of the building, but may take into account an understanding of the contribution of the space leased by a tenant. The working papers can be made available to those interested. They are not subject to any appeal. Their reliability is an issue in this case.

The court reviewed previous cases dealing with these working papers and their unreliability. On examining the lease provisions the landlord was able to decide not to deem the information found in those papers sufficient to calculate the additional rent under the lease. The tenant was obliged to pay its proportionate share of the landlord’s taxes as that phrase was defined in the lease.

Indigo Books v ManuLife 2009 CanLII 11432

MERV’S COMMENTS
It is important for landlords and tenants to carefully consider such allocations in negotiating their lease. If you were a real estate brokerage and the other tenant was a restaurant would you want to share the expense of taxes based on your respective areas and square footage? How about water and utilities?

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