Things are a bit messy these days in the world of tax certiorari. When we last visited the subject we reported on new legislation creating the so-called “Disputed Assessment Fund” in Nassau County that has had commercial property owners up in arms over increases in taxes and the potential windfall to the various taxing authorities created by the law. While we await the uncertain fate of that law, a recent judicial decision out of the Appellate Division, Second Department could have significant adverse consequences for commercial taxpayers in all the counties within its reach including Westchester and Suffolk County.
That case involves a claim by the Larchmont Pancake House against the town of Mamaroneck in which the petitioner restaurant filed administrative grievances with the town authorized by the owner of the restaurant. Importantly, the owner of the restaurant was not the owner of the property in question but did pay the real estate taxes for each of the years the taxes were being grieved. When the Town confirmed the assessments, the petitioner filed tax certiorari petitions for each of the tax years in question, again authorized by the restaurant owner and not the owner of the property.
Ultimately the town filed motions to dismiss the petition claiming that the authorizations were defective because they were not made by the owner. After a lower court ruling in favor of the petitioner, the appellate court ruled that an administrative review of the tax assessment could only be authorized by the owner, potentially overturning years of legal precedent and causing confusion among many tax certiorari practitioners as well as major tenant-taxpayers in the process.
A little background is in order. Briefly, a tax certiorari claim is governed by the real property law and arises out of an assertion by an “aggrieved party” that the real property in question has been over-assessed and, therefore, over-taxed. But the filing of a certiorari claim is really a two-step process. First, an administrative claim has to be filed with the local board of assessors, and second, the actual certiorari petition has to be filed in court. Completing the first administrative step is a prerequisite to filing the second, the actual tax certiorari action.
In the Larchmont Pancake House case, the court ruled that while the petitioner qualified as an “aggrieved party” for purposes of one part of the law (even though it was not the owner of the property), it could not complete the first administrative step because another part of the law required that only the actual owner of the property could do so. This seems like an anomalous result to many, especially considering the history of the law and the relationships between major tenants and landlord-owners of properties.
Take the typical negotiation between a landlord and a major tenant over a long-term lease. In that instance, the question of who has the right to file a challenge to the tax assessment is a significant issue. It is not surprising that landlords typically want the sole right to file. Landlords will argue, among other things, that they don’t want competing claims filed with respect to the same property by various tenants. But tenants have legitimate rights to complain, especially considering that in the typical triple net lease scenario, it is the tenant who actually pays the taxes on the property and the tenant, therefore, who has the most at stake. In the final analysis, a major tenant is likely to able to negotiate the right to challenge the assessment either in the first instance or in the event the landlord fails to do so within a set period prior to the filing deadline. But what if the tenant is unable to negotiate that right and the landlord fails or refuses to file the assessment challenge?
According to the brief filed on behalf of the petitioner in the Larchmont Pancake House case by the Melville firm Herman Katz Cangemi & Klyne, “Under the town’s proposed interpretation of the law, an owner who pays no real estate taxes on his property could block a taxpayer from obtaining judicial review of a property’s tax assessment simply by refusing to authorize an administrative grievance.”
The town of Mamaroneck has spoken, and the Second Department apparently concurs. It is just a matter of time before we see whether other taxing jurisdictions in the Second Department adopt the same position.
According to Richard Cronin, a partner in the tax certiorari firm of Cronin Cronin O’Brien and Harris located in Uniondale, “[T]he ruling in this case potentially causes a seismic shift in the tax grievance process in Westchester and Suffolk Counties...The ruling would entirely change the practice of landlords yielding to tenants and cause them to more actively participate in the tax grievance process on these properties involving net tenants.”
Unless the legislature modifies the law or the court clarifies its position limiting the Larchmont Pancake House case to its unique facts, tenants who have the responsibility to pay real estate taxes, and those representing them, should be looking for ways to obligate their landlords to file for administrative review of the assessments or risk losing the ability to file a claim challenging the over assessment of the taxes. This is no small matter, with hundreds of millions of dollars in tax refunds at stake.
Bernie Kennedy is a co-managing member (partner) at Bond, Schoeneck & King, Garden City, N.Y.