Canada: MPAC Working Papers - Should They Be Used Or Not?

This posting is an excerpt from "Recent Developments in Property Leasing" previously published in the 2014 Canadian Legal Lexpert Directory.

In 1998, Ontario revamped its property tax assessment system and legislation eliminated the requirement to create separate tenant assessments on the assessment roll. Although the Municipal Property Assessment Corporation (MPAC) no longer prepares separate tax bills or assessments for each tenant of a commercial building, multi-tenant properties are valued by assessors using the Capitalization of Income approach. An assessor prepares a valuation summary that lists the tenancies at the property and then each tenancy is ascribed a market rent (not actual rent) that is capitalized. These valuation records are often referred to as the "assessor's records" or "working papers".

There have been many attempts by landlords and tenants to rely on the assessor's records as a basis for allocating taxes. In Orlando Corporation v. Zellers Inc., the Ontario Court of Appeal held that the assessor's records do not constitute separate assessments. In Sophisticated Investments Ltd. v. Trouncy Inc., the court held that the assessor's records do not constitute assessed values. In 658425 Ontario Inc. v. Loeb Inc., which affirmed Orlando Corporation v. Zellers Inc., the Court ruled that assessor's records do not constitute a separate value of the Tenant's premises for property tax purposes.

At issue in Indigo Books & Music Inc. v. Manufacturers Life Insurance Co., was the reliability of using MPAC working papers as a basis to determine a tenant's contribution to property taxes. The Court in Indigo Books noted that (i) the calculations in the working papers are informal and discretionary, (ii) they are not governed by legislation, and (iii) working papers are not intended to apply to individual premises; rather they demonstrate a value for the entire property. The Ontario Court of Appeal concluded that working papers could not be considered accurate or reliable on an individual basis. Based on the precise wording in that Lease (which provided that if the Landlord was unable to obtain "other information deemed sufficient by the Landlord to make the calculations of Additional Rent," then the Tenant's contribution would be determined on a proportionate share basis) and concluded that it was within the Landlord's discretion to deem the information in the working papers insufficient to complete the calculation of additional rent and allocate the Tenant's realty taxes on a proportionate share basis.

Given the recent trend of cases, a few recent decisions come as a surprise. In Terrace Manor Ltd. v. Sobeys Capital Inc., the Tenant (Sobeys) leased space to operate a grocery store. The Lease required Sobeys to pay its share of realty taxes according to the separate assessments issued by the taxing authority. Where no such assessments were available, the Lease required the parties to make reasonable efforts to obtain "sufficient official information" to determine what such an assessment would have been. If no such information was available, the Landlord was required to allocate taxes to Sobeys having regard to "the generally accepted method of assessment utilized by the assessment authority".

The Tenant argued that the working papers produced by MPAC provided sufficient information to determine what a separate assessment would have been for its store. As such, the Tenant argued that the Landlord was obligated to bill the Tenant's share of realty taxes based on the working papers. The Landlord's position was that the working papers were not "official information" as required by the Lease and maintained that the proper method of allocation was a proportionate share calculation.

The Court agreed with Sobeys and held that the working papers qualified as "sufficient official information", noting that municipalities are required by law to use MPAC's assessment data in levying taxes. Further, the Court found that the documents provided sufficient information on how to calculate the current value of each property and had, in fact, been used by the Landlord between 2004 and 2009 to determine the Tenant's share of realty taxes. In light of this, the Landlord could not then take the position that the MPAC records could not be used to determine the Tenant's share of taxes. The Court dismissed the Landlord's application and concluded that "MPAC's assessment for the plaza was created from assessment data, on a unit by unit basis, as shown on the evaluation records [and that] the information they contained was sufficient to determine what the taxes to the Tenant would have been if a separate assessment had been made." The Ontario Court of Appeal upheld the trial Court's decision and dismissed the Landlord's appeal. Oddly enough, the Indigo Books case was not specifically mentioned in the decision, but the Landlord's counsel did argue that working papers produced by MPAC were "not sufficiently reliable or created for the purpose of apportioning the tenant's share of property taxes".

Sobeys was also successful in a more recent case. In Sobeys Capital Inc., (c.o.b. Price Chopper) v. Bayview Summit Development Ltd., Sobeys leased space from the Landlord to operate a grocery store. The property tax clause of the Lease provides:

"The parties shall use their best efforts to obtain all necessary information from the municipality or other taxing authority, based on the assessor's working papers, notes and/or calculations to determine the manner in which such authority would have allocated the assessment for Taxes in respect of the Shopping Centre to the Leased Premises had an assessment...been prepared by such authority. The Landlord agrees to provide the Tenant on request, a letter of authorization to the appropriate assessing authority allowing the Tenant access to the assessor's working papers, notes and/or calculations...If such information is not available, the Tenant agrees to pay the Tenant's Proportionate Share of Taxes. If such information becomes available in the future, the Tenant's Proportionate Share of Taxes shall thenceforth be based upon such allocation, and shall not be adjusted retroactively . . ."

The Landlord calculated the Tenant's contribution to Taxes on a Proportionate Share basis and the Tenant brought an application to determine the proper method for calculating its share of Taxes. Not surprisingly, Sobeys argued that the Landlord ought to have calculated its share based on MPAC's working papers. Relying on the strict wording of the realty tax clause in the Lease, the Landlord maintained that MPAC was neither a "municipality" nor a "taxing authority". Relying on Indigo Books, the Landlord argued that the MPAC working papers cannot be considered accurate or reliable in individual circumstances.

The Court allowed Sobeys' application, noting that although assessing property value and levying property tax are two separate steps, "they are part and parcel of the overall process". The Court also noted that the parties had specifically referenced the "working papers" in the Lease (which both sides acknowledged refers to the MPAC valuation reports), and by taking the position that the MPAC is not a "taxing authority", the Landlord was "splitting hairs".

In Bayview Summit, the Court confirmed it is perfectly reasonable for parties to choose to rely on working papers produced by MPAC in allocating taxes among units of a building. In other words, it was immaterial whether the working papers were reliable since the Landlord and Tenant had both agreed in the Lease to base the allocation of realty taxes on those documents. The Court concluded that the working paper method was the parties' preferred method of allocating taxes and that the Proportionate Share method was an alternative to be used only in the event that such information was not available. How does one reconcile the decisions in Indigo Books with these recent Sobeys cases? It appears that the precise wording in the lease is key—if the realty tax clause contemplates using the working papers in certain circumstances, this may imply an acceptance by the landlord of that methodology, which in turn could prevent the landlord from relying on Indigo Books to support its position that working papers are not reliable.

Stephen Posen is a partner in the Commercial Leasing Group and is chair of the department. His practice focuses on commercial matters with an emphasis on complex commercial leasing and commercial real estate matters. He acts for many of Canada's largest and most well known developers, property and asset managers and retail chains. He has been retained as an arbitrator on numerous commercial leasing issues including: rent arbitrations, land value arbitrations, land value arbitrations and lease disputes.

Stephen Messinger is a partner in the Commercial Leasing Group where he focuses on leasing and commercial development. He acts for many of Canada's largest and most well-known developers, property and asset managers, retail chains, banks, trust companies and pension funds. He has appeared before provincial court judges to discuss lease trends and has appeared in court on several occasions as an expert witness on commercial leasing matters.

Christina Kobi is a partner in the Commercial Leasing Group specializing in all aspects of commercial leasing (including retail, office, and industrial) and related practice areas including development agreements for rooftop solar leases/ licenses, telecommunications license agreements and tenancy matters. She has expertise in sophisticated and volume leasing for major developers, and in managing and coordinating major lease-related projects, including due diligence lease reviews on behalf of purchasers and lenders and in sale/leaseback transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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