New York: Early Termination Payments Not Subject to Commercial Rent Tax

The New York City Department of Finance recently issued a letter ruling addressing whether amounts paid and received under an agreement to terminate a lease early were subject to New York City Commercial Rent Tax (CRT). The taxpayer at issue agreed to pay the landlord a termination fee, which was to be paid out in monthly installments over 48 months commencing on the first day of the first full month following the lease termination date. The taxpayer had also made a rental payment for a month prior to the lease termination agreement being approved, and this amount was later credited against the early termination fee for that month.

Under New York City law, the CRT is imposed on tenants who occupy or use a property in Manhattan south of 96^th Street for the use of a trade, business, profession or commercial activity and pay annual or annualized gross rent

of at least $250,000.00. The CRT is imposed at a rate 6 percent of the tenant’s base rent.  Rent is defined, in part, as consideration paid or required to be paid by a tenant for the use or occupancy of premises.” The Department concluded that amounts paid to the landlord for the early termination of the lease were not amounts paid for the right to occupy or use the premises and were not subject to the CRT. In contrast, the amount paid as “rent” that was later credited to the early termination fee was subject to CRT. The Department’s rationale for this conclusion was that at the time the payment was made the taxpayer still had possessory rights to the property, making the payment qualify as rent. The Department also ruled that the taxpayer could avail itself of the automatic protective refund claim that applies when an annual CRT return is filed and the rent on which CRT is paid includes real estate taxes that were previously paid as part of base rent, but that were subsequently refunded by the landlord. Please contact Judy Cheng at 212-872- 3530 with questions on Finance Letter Ruling 20-5003.