Real Estate Property Taxes “Tenants Beware”

As a tenant in a commercial property, you undoubtedly, have a provision in your lease regarding real estate taxes. On a triple net lease or even a gross lease (where the Landlord pays the taxes), the taxes increase usually every year due to Proposition 13 whereby the tax increase is 2% per annum. In most cases these increases in taxes are passed on to the tenants unless there is a specific provision in the lease that prohibits it.

As a tenant, you may take it for granted that the taxes may only increase by 2% per year. The real zinger is when the property is sold. Many unsuspecting tenants may not think of the fact that the Landlord may sell the property and thereby a substantial increase in taxes may occur. The Landlord does not usually have to provide the tenant with any advance notice of the sale and one day a new Landlord may appear. If the past Landlord had held on to the property for several years, or even a few years, the real estate taxes could easily double and the tenant is in for a substantial increase in its monthly payments.

In the event that the Landlord elects to obtain a new loan on the property or decides to sell the premises, the Tenant may receive an “estoppel” certificate. This estoppel certificate is a document that needs to be signed by the Tenant and affirms his rights to the Leasehold. Once a tenant receives this certificate, he needs to review its lease. My recommendation is that the Tenant should talk to his or her attorney and have the attorney review the lease and estoppel certificate. The lawyer will review all of the terms of the lease with the client and should review the tax provisions in the event of a sale. If the tenant has no tax protection provision in the lease, he should try to negotiate some new terms. The Tenant may have some leverage with the Landlord at this time, since the lender or the new buyer will request the tenant’s affirmation of the Lease.

The most important words of the lease as it pertains to the real estate tax provisions are “in the event of a sale.” These words usually indicate that either the broker or the lawyer protected the Tenant from a substantial increase in real estate taxes. This protection is usually only available at the time that the lease is negotiated.

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Segal Commercial
2221 Barry Ave., Suite 200
Los Angeles, CA 90064