Important Information for Commercial Landlords Regarding Passing Through LLC Taxes and Fees as Common Area Expenses
In Tin Tin Corporation v. Pacific Rim Park, LLC, the California Court of Appeal (6th District) held that a landlord could not pass through LLC Fees and Taxes (“Fees”) to tenants as “Common Area Maintenance Charges” under the definition of “Real Estate Taxes” since such Fees were not costs or fees related to the ownership and operation of the project or the shopping center, but rather were voluntary costs of doing business solely for the personal benefit and protection of the landlord.
In Tin Tin, twelve commercial tenants brought an action against the landlord alleging that the landlord was unfairly charging them the cost of taxes and fees paid by the LLC for the privilege of doing business in the state. The tenants argued that the Fees were voluntary costs of doing business solely for the personal benefit and protection of the landlord/owner to shield itself from liability. The tenants further argued that the Fees are not like common area maintenance expenses which are related solely to the repair, maintenance and operation of the land and improvements.
The landlord argued that the Fees were “costs relating to the ownership and operation of the shopping center” within the definition of Common Area Expenses as set forth in the tenant’s leases. The landlord further argued that such Fees fell into the category of real estate property taxes. The trial court agreed and issued a non-suit as to the tenant’s claims.
The Court of Appeal reversed. The Court found that the Fees paid by the landlord as an LLC, were not dependent on the nature of its function as a property owner, but on the fact that it chose to do business in this state and received revenue from that business. An LLC tax is imposed on an LLC for the privilege of doing business in the state. (Revenue and Tax Code § 17941, subd. (a).) The Court further held that the Fees were in essence the cost of conducting business in a particular legal form. The Court stated that an individual owner would not be subject to the Fees. As a result, the Court concluded that the Fees did not qualify as costs “relating to the ownership and operation” of the shopping center or project within the meaning of the term “Common Area Operating Expenses.” The Court of Appeal also found that the Fees were not “Real Estate Taxes” because the definition of “Real Estate Taxes” appears to refer to payments directly applicable to the property itself, not to the form in which the landlord has chosen to operate its business.
Landlords should review their leases to determine if the lease allows them to pass through Fees. Landlords may ran a risk that such Fees can be challenged by the tenants if the lease does not expressly reflect them as included in the pass through charges. A thorough review of any lease to determine the parameters of proper pass through charges is advisable. Hamburg, Karic, Edwards & Martin is happy to assist with any questions or comments that you may have.
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