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SPJ, Inc. v. W2005/Fargo Hotels (Pool C) Realty, L.P.

A-2965-09T3 (N.J. Super. App. Div. 2010) (Unpublished)

LEASES; TAXATION — If a ground tenant’s lease only permits a resetting of the tenant’s share of tax obligations for a larger property based upon a subdivision, then there are no grounds for a court to order resetting of the tenant’s proportionate share based upon appraisals or other formulas not set forth in the lease.

A commercial tenant entered into a twenty year ground lease with its landlord’s predecessor in title. The leased premises, approximately one acre, consisted of a portion of the predecessor’s land. The overall property once was comprised of three lots, but was billed, for real property tax purposes, as a single parcel to the owner. The property contained substantial improvements, including a hotel and an accessory parking lot with access to public streets. The ground lease contemplated leasing an unimproved area, upon which the tenant placed a restaurant, and in which the tenant had the right to use all common ways and areas of the overall property for parking, and vehicular and pedestrian ingress and egress. When the landlord purchased the entire parcel, it was assigned the ground lease.

The contracting parties expressly intended the lease to be “triple net,” where the tenant pays rent, a proportional share of the operating costs of the property, and the tenant’s proportional share of real estate taxes, which was to be 33% of the real property tax bill for the entire property. The ground lease provided an alternative procedure for the allocation of real property taxes. It granted an option to the tenant, on notice to the landlord, to seek a separate assessment for the leased premises. Upon building the restaurant, the cost of which was less than the allocated tax burden, the tenant asked the landlord to appeal the assessed taxes, at the tenant’s cost to have the taxes separately assessed. When the landlord failed to appeal, the tenant appealed for various tax years after the restaurant was completed, claiming the assessment was in excess of the true or accessible property. The appeals were withdrawn after the new landlord purchased the property and after it agreed to explore the separate assessment. The municipal tax collector meanwhile informed the tenant that a separate assessment of its property could only be accomplished by way of a subdivision.

The tenant hired an appraiser to opine as to an appropriate tax assessment. This was submitted to the landlord. The landlord responded that until the Tax Assessor separately assessed the premises for real estate tax purposes, the tenant was obligated under the lease to pay its proportionate share. The landlord also alleged that its predecessor had undercharged the tenant for its proportional share of property taxes. A year later, the tenant filed a declaratory judgment action, seeking judgment that it was no longer obligated to pay its share of property taxes based on the one-third fraction. The landlord sued for the alleged underpayment of taxes for prior years under the lease.

The lower court found for the tenant, ordering the landlord to accept the tenant’s appraisal for its property tax obligation until the property was subdivided or until there was a separate assessment for the leasehold. The court also held that no back taxes were due from tenant to landlord. The landlord appealed.

The Appellate Division reversed and remanded, finding that the unambiguous terms of the governing lease did not permit an assessment to be conducted by anyone other than pursuant to the local real property tax assessment system. It found that there was no evidence in the record that the tenant ever requested the landlord’s consent or assistance in applying for a subdivision, the only manner in which the property could be separately assessed by the municipality. The Court found that in the absence of a legally necessary first step by the tenant to fulfill a contractual option of securing a separate real property tax assessment, the lower court’s reformation of the ground lease was at least premature. Further, it held that reformation was in fact not available to vary the unambiguous terms of the ground lease’s real property tax allocation provision. The Court also found that the tenant was required to exhaust its contractual remedies by actually attempting to obtain a subdivision of the overall property prior to seeking relief in court, and the lower court also could have denied relief on this ground.


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