Benjamin Franklin once wrote “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”
Those words apparently hold true today because we frequently field questions from clients relating to “death and taxes.” For example, on residential real estate Contracts of Sale we are often asked how a corporate merger or bankruptcy, or the death of an individual party can impact their rights and obligations under the Contract. In the commercial real estate sector we are often asked whether and to what extent the tenant is responsible for real estate taxes under the Lease. While this article is by no means exhaustive, it is designed to illustrate how issues concerning “death and taxes” arise in our daily practice.
The Death of a Party to a Residential Contract of Sale
In most Contracts of Sale there is a standard clause stating that the Contract is binding on “successors and assigns,” or their “legal representatives, heirs, executors, and administrators.” What is the practical import of this seemingly boilerplate language?
If the party to the Contract is a corporation and the corporation merges with another corporation then the Contract would often be binding on the successor corporation.
If the party to the Contract is an individual who becomes deceased then the Contract would often be binding on that individual’s estate or the heir who inherits the property pursuant to the decedent’s Last Will and Testament.
In some cases the standard “successors and assigns” clause is modified by the attorneys prior to signature. For example, in certain instances the purchaser may negotiate the option to cancel the contract, and perhaps pay a cancellation fee, in the event that the purchaser dies, the purchaser’s Estate notifies the Seller within a specified time period, and the purchaser is not otherwise in default.
Each situation is different and the Contract may be modified to reflect the intent of the parties.
The Commercial Tenant’s Obligation to Pay Taxes
Taxes are handled differently depending on the type of commercial lease involved. Each building is different. For example, in a “triple net” lease, the taxes, insurance and common area maintenance charges are passed through to the Tenant. In a “gross” lease (typical of many office buildings), these items are priced into the rent. In a “modified gross” lease some items may be included in the rent whereas other items (such as taxes) are passed through to the tenant as additional rent.
From a landlord’s perspective the building needs to turn a profit and the landlord has a “bottom line” that it must recover from the tenants in order to keep the building profitable. Landlords also may need protection in the event that the taxes increase over time.
From a tenant’s perspective tenants need to understand what their monthly payments will be so that they can budget and make sure they can afford the space before signing. On a long term lease especially, the tenant may also request some assurance that the owner will grieve the taxes and if not, allow the tenant to grieve the taxes.
Because the taxes can greatly impact the tenant’s monthly payments under the lease, the brokers typically disclose this information early in the process and in the Letter of Intent (LOI) and the attorneys’ goal is to ensure that the lease accurately reflects the parties’ agreement, as stated in the LOI.
Of course there are many other instances where issues arise concerning death and taxes. For example, we encounter these issues on a regular basis when counseling clients on estate planning, corporate organizational issues, commercial contracts, equestrian contracts and countless other areas.
For questions about death and taxes, or general information about our firm, please contact us at (914) 338-8050 or send an e-mail to firstname.lastname@example.org. We look forward to hearing from you.
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