The Law

Property Taxes Not Common by Ron Davis The fine print in an Indiana shopping center lease has doomed chances of a tenant to avoid a sizable increase in rent. The shopping center, Lowe’s Center, located in the Indiana suburban area of Louisville, KY, leased space to the tenant to operate a business that sells ice cream and other sweet treats. And the wording of the lease became an issue when ownership of the shopping center recently changed. The new owner was aware that the lease of the tenant requires a five-percent annual cap on additional rent increases. But a question arose as to whether that cap applies to real estate taxes that the center pays. The center’s new owner argued that the five-percent cap does not in fact pertain to real estate taxes that are paid each year. And when the tenant resisted when billed for such taxes that exceed the cap, the center’s owner sued. The controversy focused on whether the tenant accepted the extra rental charge when agreeing to the wording of a “letter of intent” that is a condition of the lease. That document states, “Exclusive of any increase in property taxes, landlord and tenant agree that additional CAM (common-area maintenance) increases shall be capped at 5% annually over the [first year of operation]…” The critical phrase of that requirement is, “…[e]xclusive of any increase in property taxes.” To the shopping center owner, that exclusion means that the tenant must pay taxes in a different amount than for other services. But the tenant argued that such language “cannot be harmonized” with the language of the letter of intent. The tenant added that a five-percent cap on rent increases violates the content of that letter of intent, that is, “The lease shall not negate any conditions and or terms included herein, and conditions normally found in a commercial lease.” Finally, the tenant contended that the current shopping center owner simply assumed the lease as an assignee when purchasing the shopping center and therefore has no authority to increase rent. An Indiana court disagreed with the tenant’s interpretation of the agreement between the two parties. Stated the judge, “With respect to the cap on additional rent during the first year of the lease, a section of the letter…plainly states, ‘…[C]ommon area maintenance, taxes and insurance charges for the base year shall not exceed $2.00 per square foot.’ But with respect to all subsequent years, the letter lists only common area maintenance, adding, ‘After the base year, additional rent increases shall be capped at 5% annually over the base year.” Concluded the judge, “Thus, taxes are clearly separate from common area maintenance, and only common area maintenance increases are capped at five percent. Based on the foregoing, we conclude that the trial court did not err in granting judgment in favor of [the shopping center owner].” (Pie Kitchen, LLC v. Merchant, LLC, 2013 WL 594282 [Inc.App.]) Decision: February 2013 Published: February 2013