Taxes Paid by Tenant Clauses
(Commercial Lease)

Summary

These taxes paid by tenant clauses may be included in a commercial lease to shift the responsibility for the payment of certain taxes affecting the leased premises from the landlord to the tenant. These clauses include practical guidance and drafting notes. Many leases shift the burden of taxes to the tenant, even though they do not qualify as "net" leases. The primary reason for this is the refusal of a landlord to assume the risk of periodic tax increases while the rent to the tenant remains constant. Instead of passing on the entire obligation to the tenant, the agreement may require the tenant to pay only the excess over taxes levied during a specific base period. Where there several tenants occupy one taxable unit, the burden is allocated among them, usually based on relative rent payments or floor space occupancy. The usual tax clause encompasses the ad valorem property tax, and frequently, it also covers water and sewer charges as well as special assessments. Specifically excluded are income or franchise taxes of the landlord. Since the burden is shifted to the tenant many of these clauses permit the tenant to contest the tax assessment and to delay payment of the tax pending the outcome of the protest. Some form of additional security is often provided to protect the landlord while payment is being withheld. In some cases, even in the absence of a contest, the tenant is required to make advance periodic deposits to create a fund for the tax payment when it becomes due. The capitalized terms and section references used in these clauses should be conformed to those used in the relevant commercial lease. For more on drafting and negotiating commercial leases, see Office Lease Agreements, Retail Lease Agreements, and Restaurant Lease Agreements.