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A Taxing Situation
by Ron Davis

Does the real-estate-tax burden that a California shopping center tenant shares with its landlord greatly exceed the amount the two parties agreed to in their lease contact?

The shopping center—Bella Terra of Huntington Beach—argues that the tax share the tenant pays is in accord with the terms of their lease. But the tenant—Burlington Coat Factory—maintains that the lease does not anticipate a tax hike based on more than three time the assessed amount of real-estate taxes.

When the shopping center owner bought the property in 2005, Burlington was paying $11,125 a month as its share of real-property taxes. After the current owner’s purchase of the center, the local tax assessor revalued the parcel upon which the premises are located.

The center’s owner appealed the increased assessment, but failed to inform Burlington of the adjustment. And although the reassessed taxes on the property totaled $378,362, the center’s owner charged Burlington $1,022,121 as its “share of real estate taxes.” Threatened with eviction, Burlington paid the increased taxes, but under protest, then sued the center’s owner for breach of lease.

At trial, Burlington contended that the lease states that the correct amount of the tax base is $42,552. Even after timely adjustments, Burlington added, it is entitled to a refund, with interest, of all taxes overpaid under the interpretation of the lease by the center’s owner. Burlington calculated that it overpaid some $800,000 because of the interpretation of the lease by the center’s owner.

The center’s owner replied that its duties to Burlington regarding tax assessments are spelled out in the lease. The center’s owner also contends that Burlington’s right to pursue its own tax appeal lies in Burlington’s own initiative.

A California court ruled in favor of the center’s owner, concluding that Burlington failed to show that any agreement with the previous or current owner of the center negated the adjustment in Burlington’s tax bill. The judge said that the lease that the center’s owner acquired was clear and “not reasonably susceptible to the meaning Burlington alleged.”

Burlington appealed that ruling.

A California appellate court agreed with Burlington, explaining, “Application of the interpretation of the center’s owner means that upon its acquisition of the center, Burlington’s share of real-estate taxes increased from $11,125 a month to approximately $85,176 per month, far outstripping Burlington’s monthly rent payment. Given that the center’s owner’s actual taxes on the parcel rose to only $31,530 per month, the center’s owner was making significantly more money on Burlington’s tax payments than it was from Burlington’s rent payments…. We may assume that Burlington would have asserted a mistake in the lease had the center’s owner brought the matter up before it purchased the center.” (Burlington Coat Factory of California v. Bella Terra Associates, 2008 WL 5058624 [Cal.App. 4 Dist.])

Decision: December 2008
Published: December 2008



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