Many commercial leases pass through to tenants a proportionate share of the landlord’s operating expenses and taxes for the property based on terms expressed in the lease. However, some landlords attempt to pass-through certain taxes that a tenant should not be expected to pay.
A recent lease negotiation on behalf of an industrial client was jeopardized because the landlord insisted that the tenant was obligated to pay a proportionate share of the landlord’s Texas franchise tax. A franchise tax is a general corporate tax often based on the entity’s income or assets. It has nothing to do with the benefits the tenant derives from the lease and leased space.

In short, a franchise tax is a landlord’s cost of doing business.

From the tenant’s perspective, a proportionate share of taxes should exclude taxes that are related to the landlord’s business that have nothing to do with the building or the benefit the tenant derives from the leased space. Justifiable exclusions from taxes should include franchise taxes, excise taxes, income tax, inheritance and gift taxes, and transfer taxes.

A tenant should pay close attention not only to the tenant’s proportionate share and how it is calculated, but also as to what expenses and taxes the landlord intends to pass-through. There may be savings realized by challenging expenses and taxes that the tenant is not obligated to pay.