Tax refund case question of who paid the RE taxes.

From 1969, until June 30, 1996, Investment Properties Associates was the lessee of a large office building in Newark, New Jersey pursuant to a lease which required Investment Properties to pay all real estate taxes as part of the rent. On June 30, 1996, the lessee surrendered the lease after giving the required 60 days prior notice. During the term of the lease Investment Properties, as lessee, paid all of the real estate taxes up to the date of surrender, June 30, 1996.

During the first year of the lease, Investment Properties retained a New Jersey law firm to challenge the real estate tax assessment on the building. The law firm commenced certiorari proceedings and was successful in securing a reduction in the 1995 and 1996 real estate assessments for the building, which in turn resulted in substantial tax savings for 1995 and 1996. The savings however were not in the form of a refund but were a credit against future taxes. This assessment reduction and real estate tax savings did not occur however, until four months after Investment Properties surrendered its lease.

Investment Properties commenced a lawsuit against the owner of the building, Newark Building Associates in Supreme Court, New York County (Investment Property Associates v. Newark Building Associates (NYLJ September 29, 1999 pg. 27 col.2) to recover the tax savings for 1995 and to June 30, 1996. Investment properties sought summary judgement declaring that it is entitled to the refund on the grounds that: (a) the building owner would be unjustly enriched if it received the credit for the savings, and (b) that since the lease is silent as to the question of how the tax refund should be allocated, principals of equity and fairness dictate that the refund should go to Investment Properties, since it paid the taxes.

Defendant, Newark Building interposed a counterclaim for $600,000, alleging that the lessee breached the lease by failing to maintain the building in good condition as was required under the lease; and that the deteriorated building condition caused the tax assessment to be reduced. Thus, if the lessee was to secure the tax refund, it would profit from its own wrongdoing. Defendant further claimed that since the lease is silent as to the refund and since plaintiff surrendered the lease without reserving its right to the refund, plaintiff must be deemed to have waived its right to it.

Newark Building also claimed that the lessee's motion for summary judgement could not be granted because Newark Building needed to have pre-trial examinations of the plaintiff in order to determine the intention of the parties as to the refund disposition.

The case was referred to Justice Herman Cahn of the Supreme Court. He stated that the general rule is that the party who had made the actual tax payments is entitled to receive any refund of that tax. Therefore, it would appear that as a matter of equity, plaintiff, Investment Properties should received the benefits of the refund on the taxes it paid, unless other factors intervene.

The lessee claimed that it was entitled to the recovery of the tax refund since the owner would be unjustly enriched at lessee's expense if the owner received the refund. The plaintiff claimed that equity and good conscience demand that plaintiff, as the party who paid the taxes, is entitled to receive the tax refund.

The defendant owner stated that on the one hand, since the entire tax refund issue revolves around a written lease which is silent on the matter of the tax refund, the refund belongs to the owner. On the other hand, since the lease is silent, it means that the lease is ambiguous and therefore a trial must be held to determine the intention of the parties as to the tax refund.

Justice Calm dismissed the claims of Newark Building. In this case, there is no indication whatsoever that the issue of tax refund was ever considered by any party to the lease at any time. The failure of the lease to address the issue of tax refund allows the plaintiff to seek recovery of the refund on the theory of unjust enrichment. While under some circumstances, where a written lease is silent as to the parties intent, it may be instructive to permit evidence of that intent to be heard by the court. In this case however, the failure to deal with the tax refund does not evidence any ambiguity which requires evidence as to the intentions of the parties. It simply shows that the parties never considered this issue.

In addition, the defendant failed to indicate which person might offer testimony as to the intent of the parties to the lease regarding the tax refund. Defendant provided no evidence whatsoever which would show that the parties ever considered the matter at all, in any way, shape, or form, at the time the lease was entered into.

With respect to the defendant's claim that the lessee should be barred from securing the tax refund under the theory that if it did receive the refund, it would be unjustly enriched, because the refund was caused by the plaintiff's

failure to maintain the property as required under the lease. Defendant stated that the well established policy that a party may not seek equitable relief where that party has "unclean hands".

Justice Cahn stated that even if he would consider that the alleged breach of lease by plaintiff directly related to its right to recover the tax refund, it is not "unclean hands" that is involved. "Unclean hands" means conduct which is immoral or unconscionable. Even if defendant's allegations are correct, plaintiff's neglect in maintaining the building does not amount to immoral or unconscionable conduct which would bar plaintiff's claim for the tax refund.

With respect to the defendant's counterclaim for $600,000 for alleged deterioration of the building, the judge ruled that summary judgment will generally be denied where there is a counterclaim arising from the same underlying transaction as is involved in the main case. Here, the defendant interposed a counterclaim seeking damages exceeding the tax refund based upon a claim that plaintiff, as lessee, failed to properly maintain the building. Thus, the judge ruled that the counterclaim involves issues of property damage and contract obligations which are different from the issues raised by the plaintiff's claim for tax refunds. Therefore, this counterclaim does not relate to the same issue raised in the main case. The defendant always has a right to sue the plaintiff for any damage which the defendant claims to have sustained as a result of the failure to maintain the building properly.

Justice Cahn ruled that Investment Properties, the taxpayer is entitled to the refund; for to do otherwise, the defendant owner would be unjustly enriched if it were to be permitted to secure plaintiff's refund.

Accordingly, Justice Cahn granted plaintiff's motion for summary judgement and declared that the tax refund which is attributable to the period up to June 30, 1996 when plaintiff surrendered the lease, is to be paid to plaintiff.

Edward L. Schiff is a real estate partner in the Manhattan law firm of Hartman and Craven, LLP.