The storage industry, particularly in densely populated areas, often uses hybrid rental agreements that give rise to legal issues and can be very costly to an owner.
Ambiguous lease clauses can provide a predicate for a tenant’s overcharge claims, or defenses against an owner’s efforts to collect additional rent, or even base rent. The problem is exacerbated when a drafting ambiguity is repeated in numerous leases for the same property, and multiple tenants challenge the enforceability of the rental clause.
Such a situation arose in Citibank. N.A. v. 666 Fifth Avenue Limited Partnership, a New York case decided a few years ago. The main issue in Citibank was whether the escalation provisions allowed for a reduction in Citibank’s (the tenant’s) fixed rent when the real property taxes were reduced below the base-year amount.
Citibank entered into two leases for office space in New York City. The leases contained similar terms and included a paragraph stating the fixed rent would be adjusted to reflect fluctuations between annual real estate taxes and comparable taxes for the base year. The lease provided:
If the taxes payable for any tax year . . . shall represent an increase above or decrease below the base taxes, then the fixed rent for such tax year and continuing thereafter until a new tax statement is rendered to tenant shall be increased or decreased, as the case may be, by tenant’s share of such increase or decrease.
The tax-escalation adjustment formula was further addressed in the following paragraph:
[If ] as a result thereof a refund of taxes is actually received by or on behalf of landlord, then promptly after receipt of such refund, landlord shall send tenant a tax statement adjusting the taxes for such tax year and setting forth tenant’s share of such refund and tenant shall be entitled to receive such share by way of a credit against the fixed rent next becoming due after the sending of such tax statement; provided, however, that tenant’s share of such refund shall be limited to the amount, if any, which tenant had theretofore paid to landlord as increased fixed rent for such tax year.
Citibank cited the first paragraph, arguing that the parties specifically contemplated and intended an actual reduction in fixed rent when taxes fall below the base-year amount. The landlord countered that the first paragraph could not be read alone. When considered in context with the limiting clause in the second paragraph, Citibank could only be entitled to a credit against escalations it had previously paid, and the base rent was never intended to be decreased.