Good News for Commercial Net Tenants in NY with Recent Property Tax Ruling
A net lease agreement is typically structured so the tenant pays all the taxes, maintenance costs, insurance fees, utilities, etc. These obligations allow the net lease tenant to act as the property owner in many ways, without holding legal title. A net lease includes obligations but also confers rights, which historically cover a net tenant’s right to grieve the commercial property tax. NY State law states that an “aggrieved party” can challenge a property tax assessment.
Since a net lease typically requires the lessee to pay the property tax, there has been a long-standing allowance that a net lessee can challenge a tax assessment. Property taxes in New York are among the highest in the country and can account for a significant portion of a business’s operating expenses. Real estate taxes can be challenged annually, so it makes sense that the current tenant should be the one to file and also to benefit from a grievance.
In 2012, a series of state appellate court decisions challenged the idea that net lessees could pursue a property tax grievance. These decisions interpreted the statutes to mean that the only entity with rights to challenge a tax assessment is the property owner. In 2019, an important decision by New York’s Court of Appeals in the Matter of Larchmont Pancake House v. Board of Assessors found that the aggrieved taxpayers, in this case the family that owned and operated the International House of Pancakes franchise, had no legal standing to grieve the property taxes. The ruling stated that ‘In this case, petitioner “never owned the subject property” and, consequently, the Court determined that petitioner was not authorized to file the grievance complaint’.
This created a precedent that had a serious and wide-reaching impact on a lessee’s ability to reduce and pay a fair price for their NY commercial property taxes, even though they were the entity responsible for paying those taxes. Lessees would be in a position of having to ask the legal owner to go through the challenge process. The owner has less incentive to do so since they are not the ones paying the property taxes. The lessee may have to chase the owner to ensure that they contract with an experienced property tax consulting company, who will then work to achieve a successful reduction.
The good news is that New York’s Court of Appeals has recently ruled in a case that a net lease tenant has the right to challenge a property tax assessment, even if the owner has not filed. The case, DCH Auto v. Mamaroneck, was decided on June 16, 2022. The Court of Appeals reversed the NY Supreme Court’s decision that dismissed DCH’s petitions and said that only an owner and not a net lessee may file the initial grievance complaints.
DCH had challenged eight tax assessments of the subject property, one of which was filed in the owner’s name, but all of the other challenges were filed in DCH’s name. At the time the grievances were filed, the Mamaroneck town website stated that “[a]ny person aggrieved by an assessment,” including a “tenant who is required to pay the real estate taxes pursuant to a lease” “may file a complaint.”
There was also at the time, and is still currently, instruction on the NYS Department of Taxation & Finance’s Office of Real Property Tax Services website that states “[a]ny person who pays property taxes” including “tenants who are required to pay property taxes pursuant to a lease or written agreement” may file an assessment challenge.
This ruling from New York State’s highest court solidifies the practice into law that the taxpayer has the right to challenge the assessment, whether they are the property owner, a net tenant, or any other entity with a similar financial interest. This ruling also overturns the previous precedent set by Larchmont Pancake House v Board of Assessors.
Given this ruling, it is more important than ever that all commercial taxpayers, whether owners or tenants, contract with an expert consultant in property tax grievance like Realty Tax Challenge. Taxpayers need to understand that it is financially strategic to grieve their taxes annually. When landlords and tenants begin their business relationship, they should discuss who will be filing the tax grievance and specify that in the lease, so there is no confusion.
If you have any questions about the rights of net lessees to challenge their property tax, or would like to begin working with us to obtain a property tax reduction, please contact us.