Owner Responsible for Property Taxes

Facts: An office building tenant asked the owner to pay the property taxes that it claimed the owner was responsible for under its lease terms. The tenant withheld its rent while the owner refused to pay the property taxes. The owner informed the tenant that by withholding its rent payments, it was in default of the lease. But because the owner still hadn't paid the taxes, the tenant exercised its right to terminate the lease and moved out of the space.

The owner sued the tenant for allegedly breaching the lease, and the tenant sued the owner for the return of its security deposit. Each asked the court for a judgment in its favor. A New York court ruled in favor of the owner, and the tenant appealed.

Decision: The appeals court reversed the decision of the lower court.

Reasoning: The appeals court noted that the plain language of the lease provided that the owner was responsible for paying all real estate taxes, assessments, and other governmental charges for the building during the lease term. The lease also provided that if the owner failed to comply with any provision of the lease, the tenant could withhold rent so long as the owner remained in default and didn't “cure—or fix—the problem within 30 days after the tenant notified it about the issue. Under the lease, the tenant was entitled to terminate the lease after the 30-day period expired.

The appeals court determined that because the owner hadn't remedied the default, the tenant was entitled to exercise its right to terminate the lease. It didn't agree with the lower court's opinion that the tax provision in the lease was merely a way for the tenant and owner “to confirm and identify who was responsible to pay the taxes,” and that, as such, the owner's undisputed failure to meet the obligation didn't provide the tenant with a reason to terminate the lease.

Rather, the provision requiring the owner to pay the taxes was located among many other provisions identifying its various responsibilities—such as keeping the premises in good order and repair, providing the tenant with access to the building, maintaining the elevators, and paying the electrical, gas, and water expenses—the breach of which would “undoubtedly give rise to the tenant's right to terminate the lease,” the appeals court stressed. “Although the parties could have specifically exempted the payment of taxes from the list of the owner's responsibilities, they did not do so; instead, the language clearly provides that the owner's breach of any provision of the lease would allow the tenant to terminate if the breach was not cured within 30 days,” said the appeals court.

Here, it was undisputed that the owner didn't pay the real property taxes and that it didn't remedy the situation in a timely manner upon being notified of this by the tenant. “The owner's failure to do so gave rise to the tenant's right under the contract to withhold rent and, ultimately, terminate the lease agreement,” the appeals court decided.

• Satra Realty, LLC v. Knovel Corp., March 2012