The Landlord can lawfully impose the tenant to pay the land taxes on commercial lease contracts, the Italian Supreme Court states by decision n. 6882/19 dated March 8th , 2019.
The Joint Chambers of the Italian Court of Cassation have recently been called to decide upon the validity of a clause contained in a commercial lease agreement which required the Tenant to pay to the Lessor, in addition to the rent, a sum equal to the amount of the tax on the property (formerly called ICI, now IMU).
The case involved an Italian company, represented by our firm, whose stakeholders are international investors, used as a vehicle company for a highly complex financial transaction: namely, this company bought, as regards Italy, four malls (in Turin, Ancona, Prato and Matera) from a leading French large-scale retail group, which then simultaneously rented them for a significantly long period (18 years) for carrying out its institutional activity (retail distribution). It is important to note (and this element has been stressed in the aforementioned ruling) that the offer from the buying group (which involved also ten other malls in other EU countries) expressly provided that each property tax should have been borne by the Tenant and that such offer was considered by the vendor as the most convenient and then incorporated in a framework agreement signed by the two parent companies. The parties subsequently executed these agreements by entering into – the buyer through a vehicle company and the vendor through its operating company – the relevant sale/purchase agreements and consequent lease for each of the four Italian sites.
After more than 10 years of proper performance of the contracts, the Tenant decided to call into question the validity of the clause contained in the lease contracts that provided for the Tenant to refund the Lessor each tax and fee related to the leased properties, on the ground that such clause was null and incompatible with Article 53 of the Italian Constitution and Articles 79 and 9 of the Italian Law 392/78 on commercial leases.
By four separate complaints (one for each site concerned), the Tenant brought the Lessor before the Courts of Ancona, Prato, Turin and Matera asking the judges to declare the invalidity of the clause in question.
More specifically, according to the Tenant, the clause in question would have been drawn up in order to ensure to the Lessor a continuing tax exemption, thus causing that the tax burden was unlawfully passed on to the Tenant in place of the Landlord.
According to the Tenant, a further element of invalidity is the fact that the tax refund obligation is not expressly mentioned in the exhaustive list of the charges assigned to the Tenant by Article 9 of the Italian Law 392/78 – hence the request of invalidity according to Article 79 of the said Law.
The Lessor appeared before the four Courts stating that the clause is only an integration element of the rental price, not expressly prohibited by the Law and therefore entirely valid.
The first ruling was issued by the Court of Ancona which recognized that the clause in question was an integration element of the rent and thus recognized the validity of such clause; in a short time, this ruling was followed by similar decisions of the Courts of Prato and Turin (the proceedings before the Court of Matera was– and it is still today – behind).
Against these adverse decisions, the Tenant decided to take recourse to the respective Courts of Appeal (Ancona, Florence and Turin), all of which confirmed the previous first instance decisions and rejected the Tenant’s demands; the Tenant decided then to refer to the Court of Cassation.
Since the importance of its legal and constitutional implications, the case was referred to the Joint Chambers of the Court of Cassation which recently rendered its decision (n. 6882/19) which:
- confirmed the lawfulness of the passing on of taxes (unless specifically prohibited by the Law);
- considered that, since the tax should be paid by the actual taxpayer (in the case of the Land Tax by the Lessor), the reimbursement of an amount equal to the tax itself is to be considered as having a neutral impact on him;
- confirmed that the Court of Appeal of Florence properly interpreted the contractual clause set out in Article 7.2 of the contract and considered it as “an addition item or element (whose sum corresponded to the sum of the tax payment) which constitutes an integration of the rent, thus contributing to determine the global amount of the rent due by the Tenant”;
- this also because such agreement originates from the negotiations carried out between the parties, whose common intention must be verified according to the entire contractual context (pages 24 and 25 of the judgement 6882/19) and thus
confirming the fairness of the Court of Appeal of Florence which, in the contested ruling, interpreted the relevant contractual clause in light of the practical reason of the agreement and of the contract, in accordance with the interests that the parties intended to protect through the contract, conventionally determining the rule aimed at regulating their negotiating relationship.
It is interesting to note that the Court of Cassation also, implicitly, reprimanded the behaviour of the Tenant (who contested, after 10 years of proper performance, the nullity of a specifically negotiated clause), pointing out the need for the contract to be interpreted according to good faith and fairness, “ resulting in not giving rise to false expectations and not to speculate on them as well as in not contesting reasonable expectations generated in the counterparty“).
Finally, the Court rejected the disputed violation of the prohibition under Article 79 of the Italian Law 392/78 since the rent (more precisely: the integration of the rent) had been originally agreed and did not, therefore, constitute an inadmissible increase in the rent originally agreed.
CONCLUSIONS
In light of the teaching of the Joint Chambers of the Italian Court of Cassation, we can conclude that in commercial lease agreements, the Lessor can legitimately require the Tenant to pay an amount equal to the value of the taxes on the leased property, provided that the following requirements are met:
- The contract shall provide that this amount is a component of the rent;
- Such integration shall be originally provided in the contract;
- The tax shall be paid to the Tax Authority directly by the Lessor and;
- The Lessor shall pay the tax on the higher income thus earned.
It is not difficult to foresee that, from now on, property owners will attempt to pass the economic impacts of property taxes on the tenants, an obligation that only tenants with the same or a higher bargaining power could escape.