Since 1998 separate assessments have not been levied in respect of individual leased premises in multi‐tenanted properties in Ontario but rather properties have been assessed at their “current value” and an owner receives a bill for the entire property. In order to calculate a tenant’s share of such tax bill, landlords must review the realty tax provisions in their leases. Commercial leases that were entered into prior to 1998 were drafted under a regime where separate assessments were generally provided in respect of individual leased premises. Interpreting these leases has resulted in some disputes between landlords and tenants in determining the method of calculation of realty taxes.
One of the main issues relates to whether “working papers” or "valuation records" produced by the taxing authority should be considered in calculating realty tax obligations. Working papers were described in Indigo Books & Music Inc. v. The Manufacturer’s‐Life Insurance Company21 by Justice Lederer at paragraph 7 as follows:
Working papers are developed in the course of preparing the assessments. Although no reference is made to it in the applicable legislation, what was referred to as a “working paper system” has developed. The working papers are prepared in furtherance of the overall assessment of the building, but may take into account an understanding of the contribution of the space leased by a tenant. The working papers can be made available to those interested. They are not subject to any appeal.
The method for calculating realty taxes under a commercial lease can have significant financial consequences for both parties. A landlord wants to ensure that there are no shortfalls and that it can recover all of the realty taxes assessed against its property. A tenant will want to keep these costs as low as possible. Many sophisticated tenants have tax consultants that advise them on a site by site basis of the most financially advantageous method of calculating taxes.
The realty tax provisions in a commercial lease were recently considered by the Court in Terrace Manor v. Sobeys Capital Incorporated22. The Court agreed with the tenant, Sobey’s, that the working papers and valuation records prepared by the Municipal Property Assessment Corporation (“MPAC”) contained the information necessary to determine what a separate assessment would have been and accordingly, the landlord was not entitled to charge realty taxes on a proportionate share basis. The decision may be a little surprising to those familiar with the relevant case law which has generally found working papers to be unreliable.
Review of the Case Law
The decision of the Court in Orlando Corp. v. Zellers Inc.23 held that working papers were not separate assessments as contemplated by the lease.24 The lease provided that if realty taxes were assessed “en bloc” for the shopping centre or the tenant’s building was “not assessed and taxed as a separate and independent tax lot” (emphasis added), that the tenant would pay a proportionate share of realty taxes.25 The Court rejected the tenant’s argument that the working papers constituted a separate assessment.
Similarly, in Sophisticated Investments Limited v. Trouncy Incorporated26, the Court determined that working papers could not be used to determine the “assessed value” of the premises. The lease provided that if there were no separate assessments, then the tenant’s share of taxes “shall, at the option of the Landlord, be calculated by the Landlord on the basis of the assessed value of the Leased Premises” and if there were no separate assessments and the landlord could not “charge on the basis of assessed value”, then the tenant would pay a proportionate share of realty taxes (emphasis added).27 The Court rejected the landlord’s argument that the assessor’s working papers provided an “assessed value” of the premises.
In 658425 Ontario Inc. v. Loeb28, the Court held that working papers did not separately “value” leased premises for tax purposes. The lease required the tenant to pay realty taxes on a proportionate share basis “provided that if the Leased Premises are assessed or valued separately by the municipality for tax purposes, then the tenant’s share…shall be the sum equal to the assessed value” (emphasis added).29 Until 2003 the tenant paid on a ‘separate value’ basis. In 2003 the tenant demanded that realty taxes be calculated on a proportionate share basis. The Court agreed with the Tenant that the working papers did not create a "separate value".30
Concerns with Working Papers
Some of the concerns with relying on working papers noted in these decisions include:
- the calculations are informal and discretionary, and not dictated by statute or regulation;31
- disputes regarding the assessed value of a property are often resolved by negotiation and working papers are not always adjusted to reflect settlements;32 and
- the individual figures are used to determine a gross figure for the property and cannot be considered accurate or reliable on an individual basis.33
These cases reflect a general view that working papers are not reliable and were not intended to be separate assessments.
In the Indigo case referred to above, the Court found that a landlord was entitled to refuse to consider working papers in determining the method for calculating realty taxes owing under the lease. Section 3 of the lease stated:
… in the event that the Landlord is unable to obtain from the assessing authorities any separate allocation of the Landlord's Taxes or is unable to obtain from the taxing authorities any separate assessment or other information deemed sufficient by the Landlord to make the calculations of Additional Rent under this Lease, the Tenant's allocation of the Landlord's Taxes shall be the Tenant's Proportionate Share of the Landlord's Taxes.34
The landlord elected to charge realty taxes on a proportionate share basis. The tenant argued that the working papers constituted “other information” which should have been “deemed sufficient” as required by section 3 of the ease and accordingly taxes could not be charged on a proportionate share basis. The Court held that the word “deemed” gave the landlord discretion to determine whether or not the working papers were sufficient to calculate the tenant’s taxes and that it was reasonable for the landlord to determine that they were not.
The Court in Indigo did not need to decide whether the Landlord could have relied on working papers; it only needed to determine whether it was reasonable for the landlord to not consider them. The Court found that it was reasonable for the landlord to deem the working papers to not be sufficient information for the purposes of calculating the tenant’s taxes.
Working Papers Can be Used
Given this background, the holding in Terrace Manor may seem a little surprising. However, the result of the decision does appear to reflect the intentions of the parties as reflected in the language used in the lease and in their conduct. Section 5.2(a) of the lease states that if there were no separate assessments, then the parties would use “their reasonable and diligent efforts…to obtain sufficient official information to determine what such separate assessments would have been if they had been made…”.35 Section 5.2(c) of the lease provided that if there was no separate assessment then the Tenant’s share of realty taxes would be:
…determined by the Landlord reasonably and equitably allocating a portion of the Taxes levied, rated, charged or assessed against the Shopping Centre to the Premises having regard to the generally accepted method of assessment and applicable elements utilized by the lawful assessment authority in arriving at the assessment of similar developments if that method is known, provided however, in no event shall the Tenant be required to pay more than its Proportionate Share of all Taxes…assessed against the Shopping Centre (emphasis added).36
The landlord argued that the only method to be used for calculating realty taxes in accordance with the lease was the proportionate share method. This method had been used for the period 1998 to 2002. In 2003 the tenant advised the landlord it disagreed with the proportionate share method and argued an assessed value approach should be used. Although the landlord disagreed, it began charging taxes based on the assessed value found in the working papers. However, in 2010 the landlord sent supplemental invoices charging the tenant for amounts owing based on a proportionate share calculation for the period 2005 to 2009. The tenant refused to pay.
The Court stated that the particular language in the lease distinguished it from the other cases to which it was referred. The Court appeared to find the working papers to be a reliable source because the records contain all of the necessary information to determine how the current value was calculated for each unit and the individual assessments are used for other official purposes, such as vacancy and charity rebates.37
The Court held that the valuation records were “official” and provided "sufficient information to determine what a separate assessment would have been, had one been made".38 As the landlord had the information necessary to determine what a separate assessment would have been, the provisions of Section 5.2(a) of the lease applied.
It is interesting that the Court relied on Section 5.2(a) of the lease to find in favour of the tenant. By doing this, the Court had to determine that the working papers were “official” information that could determine what a separate assessment would have been. This appears contrary to the decisions in Zellers, Sophisticated Investments and Loeb. However, the result seems to be consistent with the provisions of Section 5.2(c) of the lease which specifically required the landlord, if there were no separate assessments, to act reasonably and equitably in determining the tenant’s share “having regard to the generally accepted method of assessment and applicable elements utilized by the lawful assessment authority”.39 This language appears broad enough to support the tenant’s position that an assessed value method should be used to calculate its share of taxes. In addition, this language would likely allow the landlord to make any necessary adjustments to the individual assessment if it was determined that they were not reliable or correct.
The Court was likely also influenced by the fact that the landlord had charged the tenant on an assessed value basis for a number of years before changing to a proportionate share calculation. Refusing to allow the landlord to change its method of calculation is consistent with the decision in OGT Holdings Ltd. v. Startek Canada Services Ltd.40 The lease in Startek required the tenant to pay a proportionate share of taxes but if there was “a separate assessment or apportionment and/or bill in respect of the Leased Premises” the Landlord could, at its option, use such separate assessment or apportionment.41
In that case, the landlord had been charging the tenant based on the assessed value provided by MPAC. Four years later, the landlord changed to a proportionate share calculation. The landlord argued it was mistaken in relying on the working papers and had “inadvertently acted (with the concordance of the Tenant) in a manner contrary to the Lease”.42 The Court rejected this argument and agreed with the tenant that the landlord had elected to use an assessed value method rather than proportionate share. The Court distinguished the lease from the prior cases because of the word "apportionment" and that the apportionment did not have to come from the taxing authority. The Court accepted that there was a separate apportionment available.43 Once the landlord elected to proceed with the assessed value approach, the Court held “that election was final” and the landlord could not “resile from that election”.44 This is similar to Terrace Manor where the landlord had charged based on the assessed value approach but later tried to change the calculation method to a proportionate share basis.
The Terrace Manor decision is a reminder that there are circumstances where a Court will allow a party to consider working papers in determining a tenant’s share of realty taxes even if the lease does not specifically refer to working papers. In addition, it is an example of the notion that once a landlord has chosen a method of calculation that it cannot change that method to obtain a unilateral benefit to the tenant’s detriment.