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The Law
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Rent or Illegal Tax
by Michael Blahy Can the terms of a lease be interpreted as an “illegal tax”? The California Appellate court was faced with deciding the answer. The Ventura Port District, an independent special district, owns and operates the Ventura Harbor. Ventura Harbor Restaurant Associates, Inc. (the appellant) is a sublessee of commercial property in the harbor, operating a restaurant and bar. The sublease, which incorporates the terms of the master lease, requires the tenant to pay both a minimum monthly rent and a percentage of gross sales—including sales of food and alcoholic beverages. Since 2016, Ventura Harbor Restaurant Associates paid 3% of its gross sales as percentage rent, amounting to $33,421.09 for food and $14,072.20 for alcohol in the most recent year. The appellant sued, arguing that the percentage rent clause was an unconstitutional tax and unlawfully regulated alcohol sales. The appeal focused on two constitutional provisions:
The appellate court’s opinion focused first on whether the percentage rent clause was a “tax” under Article XIII C. The court noted that while the definition of “tax” is broad, Article XIII C specifically excludes charges for the “purchase, rental, or lease of local government property.” The court found the percentage rent clause clearly fell within this exception, as it was a charge for leasing public property. The opinion emphasized that percentage rent is a standard commercial leasing practice, providing both landlord and tenant with a way to share business risks and rewards. The court rejected the restaurant’s argument that the rent must be “reasonable” or tied to the government’s costs, noting that such a requirement appears in other exceptions but not in the one for property leases. The court also distinguished this case from Zolly v. City of Oakland, which involved franchise fees rather than rent. The justices concluded that the percentage rent was not a disguised tax and did not require voter approval. As for the claim that the rent clause violated Article XX, section 22, by unlawfully regulating alcohol sales, the court held that the clause was not intended to regulate alcohol, but simply to provide additional revenue to the landlord based on overall business performance. Citing precedent, the court explained that the state’s exclusive authority over alcohol regulation is not infringed when a lease provision applies to all sales, not just alcohol. The Port District, as the prevailing party, was awarded $137,400 in attorney’s fees under the lease’s prevailing party clause and California Civil Code section 1717. The appellant’s arguments against the fee award were rejected for lack of legal support. The appellate court affirmed the trial court’s judgment and the award of attorney’s fees to the Port District. This decision confirms that:
(Ventura Harbor Restaurant Associates, Inc. v. Ventura Port District (Court of Appeal of the State of California Second Appellate District Division, Docket No: B344145))
Decided: June 2026
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