Commercial Tenants’ Rights to File and Control Tax Appeals: Size Matters

Under New Jersey law, an “aggrieved taxpayer” has the right to file a real estate tax appeal in protest of a tax assessment. Tenants are eligible for this right in certain circumstances. As a general rule, a tenant under a triple net lease, one that requires the tenant to reimburse the landlord for real estate taxes, is an aggrieved taxpayer with the right to appeal.

Some leases prohibit smaller tenants from filing a tax appeal under contract law, but many leases are silent on whether a tenant must hold a threshold limit of leasable space in order to qualify. In such circumstances, the New Jersey Tax Court will generally utilize an “economic reality test” to determine not only if and when the tenant can file a tax appeal, but also who has the right to control and settle it.

In Village Supermarkets v. West Orange Township, the New Jersey Supreme Court adopted an economics reality test in order to determine whether a tenant may file a tax appeal. In adopting the test, the Court noted there is a difference between the single tenant under a long term net-lease of a free-standing store and the tenant in possession of an ice cream stand in a suburban mall. The issue is grounded in degree of interest in the assessment. In the former scenario, the landlord has almost no interest in the tax assessment because the leaseholder is responsible for the tax. In the latter, the small tenant pays very little tax, and therefore does not possess a sufficient interest to confer an independent right to appeal.

The Court considered and gave compelling weight to the following factors:

1. the provisions of the lease itself, its duration, the burden of the tax surcharge on the tenant, and the possibility that the issue will soon be resolved by renegotiation;
2. the tenant’s relationship to the property, whether it is the lead tenant in a shopping center or only a tenant slightly affected by the assessment;
3. whether the tenant will adequately represent the interests of the landlord and other tenants, or whether the tenant has interests adverse to either group;
4. the tenant’s ability to mount and prosecute an effective appeal; and,
5. the landlord’s overall relationship with the taxing authority and whether this is one of multiple properties on which the landlord may wish to exercise the right of appeal.

As mentioned, the economic reality test is also used to determine who can control the tax appeal once it is filed. An actual case will help understand the issue.

In 2009 and 2010, the owner of a retail center filed tax appeals challenging the assessment of the entire center (consisting of six leased stores). In the same years, Target Corporation, who leased 38% of that space, also filed a tax appeal on the entire center. The owner negotiated a reduction directly with the municipal assessor ($60,473,800 to $44,000,000 for 2009 and from $50,250,000 to $43,000,000 for 2010) and requested that Target dismiss its appeal. Target refused. The property owner filed a motion to 1) join the Target tax appeal (motion to intervene), which was granted by the New Jersey Tax Court; and 2) also asked the Tax Court to dismiss the Target tax appeal. The Tax Court was faced with the dilemma of who had the right to control the appeal and settle the case. (See Target v. Township of Toms River)

The New Jersey Tax Court relied upon the same economic reality test in determining who should have the right to control the tax appeal. In finding that the property owner’s interest “predominates” over that of Target, the Tax Court reviewed numerous factors, including the parties’ relative relationship to the property (Target only leased 38% of the center); and the property owner’s ability to adequately represent the interest of Target and mount an effective appeal (the property owner retained experienced tax counsel and obtained a sizable reduction). Ruling in favor of the property owner, the Tax Court found that the property owner had the right to control and settle the dispute. It therefore dismissed Target’s tax appeals.

This case demonstrates why it is important for landlords and tenants to review the language in tenant leases to make certain the issue of who can file an appeal and who has the right to control the litigation is clearly spelled out. If the lease is silent on these issues, the economic reality test will come into play. It is also prudent for landlords and tenants to have an open discussion on tax assessments and decide how to work together to get the tax assessment reduced. Had Target approached the property owner first, or vice versa, all court action might have been avoided.