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Realty Tax Caps and Landlords' Recovery of Taxes

A recently reported May decision of the Ontario Court of Appeal - Omers Realty Corporation v. Sears Canada Inc. (2006) 80 O.R. 3rd 561 (the “Omers Case”), dealt with the 1998 realty tax amendments to the Municipal Act. Those amendments set “caps” for each tenant on the extent to which landlords could collect the new realty taxes, which had increased after the abolition of business taxes, notwithstanding the specific lease terms. Those “caps” often produced a “shortfall” for a landlord where the landlord could not collect all of the realty taxes it had paid on the property because of the old lease terms.

The Municipal Act said the landlord was allowed to recover its “shortfall”, despite the lease terms, from two groups of tenants. The first was tenants who had entered into their lease before January 1, 1998 and had not yet reached their cap (“Tenants Not At Cap”). The second was the small group of tenants who entered into their leases between January 1, 1998 and December 17, 1998 who were not subject to a cap at all (“Uncapped Shortfall Tenants”). Omers had decided to charge only the Tenants Not At Cap and not to charge the Uncapped Shortfall Tenants because if felt that the Uncapped Shortfall Tenants were already bearing their fair share of taxes.

I had been working for a client on a “cap” and “shortfall” opinion in the fall of last year after the lower court decision in the Omers Case but before the Court of Appeal decision. The lower court had held that Omers had exercised a “statutory power” in a “not unreasonable fashion” so that the Omers decision could not be challenged. I was curious as to how the Court of Appeal would respond.

The Court of Appeal decided on a different legal basis then the lower court, but reached the same result. It held that Omers, the landlord, was exercising a right to determine which group of tenants bore the “shortfall”, not exercising a statutory power, and the correct test was whether the determination was “arbitrary” rather than “patently unreasonable”. Thus the thrust of the decision was the same. The Municipal Act left it to the landlord to decide from which group of tenants it could recover the shortfall. The Municipal Act did not require the landlord to recover the shortfall from all of the eligible tenants as Sears had wanted and, as the landlord’s decision was not arbitrary, but was done on a logical basis, the Court of Appeal felt that Omers had the right to do so.

The change of the realty tax structure in Ontario was a one time event and it is unlikely that some similar kind of statutory amendment will use precisely the same words used in the Municipal Act. Accordingly, while the Court of Appeal decision will govern any existing disputes on “Caps” and “Shortfalls”, it is unlikely to have a broader application in the future. Nonetheless, because of the research I did last year, I was interested in reading the Ontario Court of Appeal’s response to the manner in which tenants were treated by Omers.

Bruce McKenna
 

October 18, 2006 in Leasing | Permalink

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Comments

Hi,
I have been running around in circles trying to find some answers regarding tax questions I have. It has been frustrating to say the least. I am currently reviewing the taxing legislation regarding capping and allocation of taxes by a landlord of commercial properties. I am wondering if anyone would be able to direct me to either the correct office or piece of legislation that addresses the following:

1) How does the capping legislation apply to leased premises who decreased in square footage after 1998 but their leases were signed before 1997?
2) How does the capping legislation apply to leased premises who increased in square footage after 1998 but their leases were signed before 1997?
3) How does the capping legislation apply to a business that relocates but the original lease was signed prior to 1997?

Help into this matter or suggested contacts would be greatly appreciated.

Thanks A Million!!!
Clarissa Fischer

Posted by: Clarissa Fischer | Jul 25, 2007 8:44:42 AM

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