Increased Property Tax from Transferring Lease on Commercial Properties

Leases for commercial properties may have a clause that allows the tenant to transfer control of the lease to a different tenant with the landlord’s approval. The clauses can contain many details such as the type of business that the lease may be transferred to and the requirement the original tenant guarantee contract performance. In addition, a lease is subject to property taxes and the lease provisions determine if the landlord or tenant pays the property taxes. Taxes may go up at the time the lease is transferred if the property market value changes as a result of the transfer.

Re-Assessment of Property Value

Commercial property is periodically assessed for property tax purposes and either the landlord or the tenant will be responsible for their payment. The terms of the lease will indicate who pays the taxes and often it is the tenant. The types of leases requiring the tenant to pay taxes are as follows:

• Double net lease – the tenant is required to pay property taxes and insurance
• Triple net lease – the tenant is required to pay property taxes, insurance and maintenance
• Quadruple net lease – the tenant is required to pay property taxes, insurance, utilities and maintenance

When control of the property changes hands the law allows the local jurisdiction taxing authority to reassess the market value of the property. If the original tenant or landlord has improved the property or if property market values have increased, the reassessment may lead to higher property taxes.

Addressing the Tax Issue in the Lease Agreement

When a lease is being developed, it is important to specifically address lease transfers and the obligations of the new lease holder in terms of who pays property taxes, insurance, maintenance and utilities. The lease should also state the new tenant is responsible for all other original lease obligations.

There needs to be a provision for possible property tax increases. If the landlord is responsible for paying the property taxes and a lease changes control, the landlord may find higher taxes reduces the net profits earned on the lease.

Most leases require the tenant to pay property taxes. In that case, the new lease holder is responsible for the increased property taxes.

Consult an Attorney

It is important to consult an attorney as early as possible in lease negotiations. This is true for both the landlord and the tenant. An attorney can advise clients on the best way to protect their interests through the terms spelled out in the lease clauses.