Efros v. Russo

Citations: 171 A.2d 370; 68 N.J. Super. 110

Court: New Jersey Superior Court; May 26, 1961; New Jersey; State Appellate Court

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In the case of Arthur Efros and Julie Efros v. Mary Russo and Joseph Russo, the Superior Court of New Jersey addressed the interpretation of a lease covenant regarding tax responsibilities. The plaintiffs, who leased unimproved land from the defendants in 1956, sought clarification on whether a special assessment levied for a water system installation constituted a tax under the lease's provision requiring them to pay "all taxes." The lease had a term of 52 years, with an option for an additional 23 years, and stipulated that the lessees would also surrender the premises in good condition at the lease's end.

After constructing a building on the leased property and subleasing it to the Great Atlantic and Pacific Tea Company, the plaintiffs faced a special assessment of approximately $4,000 from the Township of Wall for the water system, which had a 40-year period of usefulness. The court elaborated on the distinction between taxes and assessments, noting that taxes are recurring governmental charges, while assessments are local charges for specific improvements that benefit the property directly.

The court cited legal precedents indicating that the term "taxes" typically does not encompass special assessments unless explicitly stated. Most jurisdictions support the view that lease agreements limited to the term "taxes" do not obligate lessees to cover special assessments, as these are tied to specific property benefits that increase its value and the potential rental income for the owner.

An expense related to property taxes should not be borne by a lessee who only has a temporary right to occupy the property. The applicability of a lessee's covenant to pay taxes, particularly regarding special assessments, varies based on the lease duration. Authorities differentiate between short and long-term leases, often holding that longer leases imply the lessee benefits more from property improvements, thus including special assessments in their obligations. In the case of President, etc. of Harvard College v. Board of Aldermen, it was emphasized that the interpretation of tax-related terms in a lease should reflect the parties' intent rather than strict legal definitions, especially in short-term leases. The presumption against imposing extraordinary assessments on tenants increases with shorter lease terms. Conversely, in long-term leases, such as in Chicago Great Western R. Co. v. Kansas City N.W.R. Co., the court ruled that the term "taxes" in the lease should encompass special assessments since the long duration of the lease suggests a permanent obligation. The ruling implies that it would be unreasonable for one party to bear the costs of improvements solely while both benefit from them, reinforcing that "taxes" should be interpreted broadly to include special assessments.

In Evans Theatre Corp. v. DeGive Investment Co., the court addressed the responsibility for repairs under a long-term lease. Typically, landlords bear the burden of repairs; however, when a tenant holds an estate for years that confers substantial control and benefits, the tenant may be required to make necessary repairs. This principle was further supported by Crewe Corp. v. Feiler, where it was determined that in a lease with a long duration and options, the lessor is not liable for taxes related to improvements solely benefiting the lessee.

In the case at hand, the lease spans 75 years, indicating a permanent condition rather than a temporary arrangement. The tenants are the primary beneficiaries of any improvements, which justifies requiring them to bear the associated costs. Given the lease's duration, it would be unjust for the landlord to incur expenses related to assessments for improvements that provide the tenant with long-term benefits. The court emphasized that lease terms should be interpreted reasonably to prevent unfair advantages. 

If special assessments are excluded from the definition of "taxes," the landlord could face unbounded financial liabilities over the lease term, significantly impacting rental income and property value. The landlord's inability to account for these potential costs in lease negotiations underscores the unfairness of shifting this financial burden onto them while the tenant enjoys the benefits, including reduced insurance costs.

The tenant has the ability to amortize costs of future improvements by adjusting expenditures and increasing rent for subtenants. The tenant is permitted to make improvements that could result in higher rental income. The only limitation on the use of the premises is to return them in the same condition as received, as stipulated in the lease agreement. Additionally, the tenant's agreement with subtenant A. P. includes a commitment to pay "all taxes, assessments and other charges" associated with the premises. This implies that the tenants felt obligated to cover these costs, suggesting that they believed the lessors were not responsible for such assessments. The term "taxes" is interpreted broadly to encompass special assessments; limiting it otherwise would unfairly benefit the tenant at the landlord's expense. Therefore, the interpretation includes both current and future assessments, obligating the tenants to pay these as well. Counsel is instructed to present a judgment reflecting this decision.