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A Taxing Situation
by Ron Davis

A dispute over the tax debt owed the owners of a Pennsylvania shopping center by one of their tenants has ended with a decision favoring the center’s owners.

The shopping center, located in the Pittsburgh area, had leased space to the tenant for the operation of a T.J. Maxx store, and the dispute started when the two parties failed to agree on the tenant’s payment of real estate taxes.

The lease states that the tenant must annually pay a share of the taxes. That share is calculated by multiplying the total of the center’s taxes each year by a fraction. The fraction is determined in the following manner: the numerator is the floor area of the tenant’s premises and the denominator is the total square feet of all building space leased in the property owned by the center.

A problem arose because four department stores operate at the center, and each owns its building but leases the land its building sits on from the center’s owner. The question therefore arose as to whether the department stores’ building space should be excluded from the denominator in the tenant’s real estate tax formula.

Complicating matters is that the tenant’s lease provides that the total square feet of all building space leased at the center “shall be deemed to be not less than 95% of the total square feet of all building space leasable” in the center’s property.

The tenant contended that the department store space is leasable under the terms of the lease. The shopping center owners insisted that it is not.

The impasse needed a legal interpretation, and a magistrate found that the department stores do in fact own their buildings. He further found that the terms “leased” and “leasable” mean those areas leasable by the shopping center. Finally, he found that the department stores separately pay their proportionate share of the total real estate taxes assessed against the land and buildings at the center.

Therefore, the magistrate concluded that the building space owned by the department stores is not “building space leased” within the meaning of the lease. So he ruled that such space is properly excluded from the denominator for the calculation of the real estate taxes. Such a ruling meant that the tenant would pay a greater share of the real estate taxes owed by the shopping center.

The tenant appealed, and an Ohio appellate court, given jurisdiction in the case, agreed with the magistrate, ruling that the shopping center owner’s definition of “leasable” was correct and explaining, “The department stores’ space cannot be considered leasable because the center’s owners do not own the department stores and, therefore, cannot lease that space. (Century III Associates v. Marmaxx Operating Corp., 2005 WL 3610353 [Ohio App. 7 Dist.])

Decision: January 2006
Published: March 2006



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