By: Clark, Campbell, Lancaster & Munson, P.A.
Q: When does a tenant become an owner for tax purposes?
A: I “own” a condominium on unit on the east side of Santa Rosa Island in the Florida Panhandle, but I do not actually hold a deed. Instead, because the island is county land leased to developers under 99-year master leases, I am the assignee of a lease to the unit. Similarly, Island Resorts Investments, Inc., was subject to a sublease under one of these lengthy master leases on the west side of the island. The developer brought a lawsuit against the county tax collector when the county started imposing property taxes on the tenant. The developer argued that it was a tenant not subject to real estate taxes. A trial court sided with the tax collector, but on appeal a panel of judges held that, primarily because the sublease agreement did not allow for the developer to either get automatic lease renewals or get a deed for a nominal price, the tenant did not have the sort of perpetual dominion rights typical of an owner.
The tax collector has vowed that the fight is not over, and a Florida Supreme Court ruling may be forthcoming, but the case raises questions of when a tenant can be a so-called “equitable owner.” To understand why this is even a question, it is important to know that lawyers and courts consider ownership as a “bundle of rights,” and someone can have all or some of those rights. You can have a right to exclusive dominion of a property, for example, but not the right to build on the land. Or you can have the right to build but must turn over all improvements to another owner once you stop using the property for a specified purpose, upon the expiration of a specified term, or even upon a specified person’s death. You may or may not have the right to sell or sublease the property you occupy. If you have the entire bundle of rights, you are obviously the “owner” in all senses. But if you have only some of the rights, the question arises as to what your responsibilities are, including as to real estate taxes.
In Florida, to be deemed an equitable owner for such tax purposes, a tenant must hold virtually all of the benefits and burdens of ownership, including the obligations to insure, maintain, and pay taxes (according to the lease). Although these obligations are common in commercial leases, the key piece that makes equitable ownership uncommon is that the lease must either be perpetual or allow for the tenant to purchase the land for nominal value. On the face of this rule, a lease with a purchase option could fall into this definition if the eventual purchase price is small enough. Generally speaking, however, if the tenant’s right to occupy the property can be taken away at the option of the landlord or other legal owner at any time or at a specified time, as is the case in virtually all residential leases and most commercial leases, the tenant will not be an equitable owner with responsibilities directly to the state for property taxes. Even if the tenant is not responsible to the government, however, the lease may require the tenant to pay the taxes, and the tenant must comply with his obligations under the lease.
Negotiating a lease and understanding your rights and responsibilities, including those not specifically set forth in the written agreement, should not be taken lightly. Legal counsel can assist in the event a tenant or landlord has concerns over a residential, commercial, or land agreement.
The June 30th edition of “The Law” will cover the new collaborative law procedures for Florida family law cases and how the same concepts can be applied in business disputes.
Questions can be submitted online to firstname.lastname@example.org
Latest posts by CCLM Law (see all)
- Choosing the Right Business Structure - September 19, 2019
- LLC’s Electing to be taxed as S Corporation - September 5, 2019
- Defect Disclosure Requirements for a Residential Sale - November 1, 2018