Michigan Court of Appeals Issues Opinion for Publication Allowing a Tenant to Appeal Property Tax Assessment for a Shopping Center
Spartan Stores, Inc. v Grand Rapids, 2014 Mich App LEXIS 2110 (2014), interpreted the meaning of a "party in interest" under MCL 205.735a(6), which is a part of the Tax Tribunal Act. Under the Act, only a "party in interest" with respect to a particular property may file a petition with the Michigan Tax Tribunal challenging the assessed value of such property. The Court held that a "party in interest" under the statute "includes persons or entities with a property interest in the property being assessed." Therefore, Family Fare, LLC, which leased space in a shopping center to operate a grocery store, was entitled to pursue its appeal. Spartan Stores, Inc., which was the ultimate parent entity for a series of wholly owned subsidiaries that owned Family Fare, was not authorized to pursue the appeal because it lacked a property interest. The Court rejected the City's argument that "only property owners or their agents, not leaseholders, may be considered a 'party in interest.'" The Court's rationale supporting its decision is that "(1) the plain meaning of the statute mandates this result; and (2) the stated purpose of MCL 205.735a is to remove procedural barriers in property-tax disputes involving specifically defined businesses, and defining the term 'party in interest' to mean 'persons or entities with a property interest in the property being assessed' effectuates this aim." While the holding only specifically addressed a tenant, its scope is wide and should include other classes of property interest including a mortgage, easement or life estate
Family Fare was motivated to pursue the tax appeal because it was "responsible for 78.71 percent of the shopping center's taxes." Thus, Family Fare's lease embodied the typical commercial provision treating property taxes as a pass-through expense.
Under the City's rejected argument, a lease or later agreement must affirmatively create an agency relationship to allow a tenant to appeal property taxes. Based on the Court's decision, a landlord must affirmatively prohibit a tenant from appealing the property taxes to prevent it. Thus, silence about the issue in a lease will allow tenants to pursue a property tax appeal.
While the ruling should induce both landlords and tenants to evaluate the property tax recapture provisions in their leases, this is likely the rare ruling that helps tenants while providing little or no detriment to landlords since everybody benefits from reduced property taxes. Tenants leasing entire properties or anchor tenants are the primary beneficiaries of this ruling since they likely have a greater motivation to appeal the taxes than the landlord. In many situations, a key negotiating point may focus on a tenant's demand that it receive some additional credit for the expense of successfully pursuing an appeal.
Stephon B. Bagne is a member based in Clark Hill's Detroit office. This decision represents an intersection of two of his primary practice areas, commercial lease enforcement and real estate valuation issues including property tax appeals and eminent domain.