There are many types of leases that can be structured for the leasing of real property.  The type of lease that is appropriate for any given transaction will depend on the parties’ objectives, financial strength, long term or short term intentions for the property and the management skills of the landlord.  One of the structures often used by landlord who do not have management capabilities or who desire to simplify and take the risk out of leasing is the triple net form of lease.

In triple net leases, generally, the tenant is required to pay for the utilities, taxes, insurance and maintenance.  This form of lease is often favored in sale-leaseback deals.  While it may be clear that the tenant has responsibility for payment of the real estate taxes, questions can arise as to rights and responsibilities of the parties related to disputes over taxes.

Let’s say that the real estate taxes assessed against the leased property are too high in the opinion of the landlord and/or tenant.  Both have a vested interest in keeping the taxes down.  By doing so the tenant saves money and the landlord prevents precedent for higher valuations in the future.

Many leases, however, fail to address the issues related to legal challenges made to a valuation deemed to be too high.  For example:  what rights does tenant have to challenge or appeal the assessment?  Is the tenant required to get the landlord’s approval to file an appeal or lawsuit disputing the taxes?  Does the landlord have the right to approve any settlement?  What if the landlord and tenant cannot agree on the terms of any settlement?  If there is a refund, who is entitled to the refund?

Leases can become long and laborious and many times the landlord and the tenant resist lengthy forms of leases.  Of course, its best to be cautious and not be overly verbose in lease drafting.  However, it is important to cover critical issues such as the rights and obligations of the parties related to real estate taxes imposed on the property subject to the lease.  As usual, while the tenant or landlord may not see the necessity of addressing such issues, they will surely thank their counsel when such an issue arises during the term of the lease.

– Rulon D. Munns, Esq., is a managing shareholder of Bogin, Munns, & Munns, P.A., a full service law firm with offices in Orlando, Clermont, Kissimmee, Deltona, Daytona Beach, Ocala, Melbourne, Gainesville, and Leesburg, Florida.  He welcomes questions and comments regarding the above and can be reached at rulon@boginmunns.com.

NO LEGAL ADVICE: This blog entry is not intended as legal advice nor should you consider it as such. It is intended only as general information.  You should not act upon this information without retaining professional legal counsel. Please keep in mind that merely subscribing to or reading this blog or otherwise contacting Bogin Munns & Munns, P.A. in the manner that you have will not establish an attorney-client relationship with our firm. Bogin Munns & Munns, P.A. cannot represent you until the firm knows there would not be a conflict of interest, and the firm determines that it is otherwise able to accept the engagement.

Q.         Are there any legal ramifications if my client is not a U.S. citizen and is selling his residential property located in Florida?

A.     Yes.  Your client may be subject to the Foreign Investor in Real Property Tax Act (FIRPTA).  FIRPTA requires that the buyer involved in your transaction withhold 10 percent of the “amount realized” by your client who is a “foreign person” in connection with the subject purchase and sale transaction.  The buyer or the agent is then required to remit the 10 percent withholding tax to the I.R.S. together with the required I.R.S. forms within 20 days of the closing.

Q.        My client is a non-U.S. citizen who is selling his residential property located in Florida.  He does not want 10 percent of his net sales proceeds withheld by the buyer.  Are there any exemptions to FIRPTA?

A.   Yes.  It is important that you discuss FIRPTA with your client early in the real estate transaction to enable your client to take advantage of some of the exemptions available to foreign persons under FIRPTA.  There are three common exemptions to the act.  First, if your client is not considered a “foreign person” under FIRPTA, he is exempted from compliance with its provisions.  Your client would have to furnish a non-foreign certificate stating that the he is not a foreign person as defined under FIRPTA because he is (1) a U.S. citizen, (2) a resident alien, or (3) a domestic corporation, partnership, trust or estate.  Second, your client would be exempt from FIRPTA if the buyer meets the residency requirement.  The withholding requirement is waived if the buyer is acquiring the property for use as a primary or secondary residence (not as an investment) and the amount realized is $300,000 or less.  The buyer will be required to sign a residency certificate at closing affirming the amount realized and that the buyer has definite plans to reside in the property for at least 50 percent of the number of days that the property is in use during the first two years from the closing date.  Third, although FIRPTA requires 10 percent to be withheld, the amount withheld cannot exceed your client’s maximum tax liability.  Accordingly, although not a complete exemption, your client may request the I.R.S. to determine his maximum tax liability with respect to the sale of his property.  Your client can accomplish this by filing an IRS Form 8828-B Withholding Certificate.   This form may be filed at any time prior to closing.  Please note, however, that your client will not be able to file for the withholding certificate without a Taxpayer Identification Number.  You should inform your client to immediately apply for a Taxpayer Identification Number in case he plans to utilize this exemption.

Q.        My client is the buyer in a Florida real estate purchase and sale transaction involving a foreign seller who is subject to FIRPTA.  I have reason to believe my buyer is falsifying a Residency Certificate in order help the seller avoid the withholding tax by stating that he is purchasing the Florida property as his primary residence when I know it is for investment purposes.  What should I do?

A.        Although it is the buyer’s primary responsibility to determine the foreign person’s status and withhold the tax, you may also be held liable for the tax under certain circumstances.  If you have knowledge that the Non-Foreign Certification or Residency Certificate is false, you must provide notice of this falsity to the other party and closing agent.  If the notice is not provided, you may be held liable for the tax that should have been withheld to the extent of your compensation from the purchase and sale transaction.    If a foreign seller is involved in a residential property purchase and sale transaction, it is recommended that both the buyer and seller consult with a real estate attorney to ensure that all parties are legally protected and fully comply with the provisions of FIRPTA.

– Henry M. Cooper, Esq., is a shareholder and handles the residential real estate practice of Bogin, Munns, & Munns, P.A., a full service law firm with offices in Orlando, Clermont, Kissimmee, Deltona, Daytona Beach, Ocala, Melbourne, Gainesville, and Leesburg, Florida.  He welcomes questions and comments regarding the above and can be reached at hcooper@boginmunns.com.

NO LEGAL ADVICE: This blog entry is not intended as legal advice nor should you consider it as such. It is intended only as general information.  You should not act upon this information without retaining professional legal counsel. Please keep in mind that merely subscribing to or reading this blog or otherwise contacting Bogin Munns & Munns, P.A. in the manner that you have will not establish an attorney-client relationship with our firm. Bogin Munns & Munns, P.A. cannot represent you until the firm knows there would not be a conflict of interest, and the firm determines that it is otherwise able to accept the engagement.