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Lien on Me
by Ron Davis

Must a shopping center owner pay property taxes on building construction that a tenant initiates during his lease term?

In answer to that question, a Texas appellate court has responded with a most assertive yes. So long as the tenantís leased premises belong to the shopping center, that courtís judges ruled, the centerís owner must pay any taxes resulting from the enhanced value of the property.

In the case that produced that ruling, a Houston shopping center owner had leased a portion of the property to a tenant for construction of a restaurant. The tenant agreed in that lease to pay not only a monthly rent and a percentage of gross sales, but also a substantial portion of the property taxes owed annually by the shopping center owner.

Eventually, the restaurant owner encountered financial difficulties and could no longer pay either his rent or the portion of his tax obligation. In fact, he had failed to pay those taxes for several years prior to his breach of lease.

At the lease termination, the shopping center owner gained total control of the tenantís restaurant building and improvements. But that meant that the city and county would turn to the centerís owner for payment of the back taxes, which, including penalties and interest, totaled $161,514. And when the centerís owner did not pay that assessed amount, the city and county put a lien on the property.

The centerís owner protested, arguing that the tax laws allow for separate taxation of improvements and land, so that a lien on one cannot be imposed on the other.

But the appellate court pointed out that the question in this case is not whether the shopping center owner is ultimately responsible for paying delinquent taxes on improvements he did not make. "Instead," the judges stated, "the issue is whether the shopping center owner is responsible for the delinquent taxes in light of the fact he assumed ownership of the improvements that were situated on land he already owned.

"Regardless of whether a lien on improvements could have attached to the underlying real property anyway," the judges explained, "we hold that the shopping center owner is responsible for the delinquent taxes assessed on the improvements on his land because the two entities involved merged. One who acquires property does so subject to any delinquent taxes." Franz v. Katy Independent School Dist., 35 S.W.3d 749 [Tex.App.--Houston 1st Dist. 2000])

Decision: December 2000
Published: April 2001



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