Was a payment to a prior landlord for early termination of a tenant's old office lease subject to Florida sales tax as rent?

Subject

Lease Termination Payment

Plain-English summary

The payment to terminate the prior office lease was not taxable rent unless the prior landlord recorded it as rental income. A partnership had induced a tenant to sign a new 15-year lease by agreeing to cover rent under the tenant's old lease. It later paid the prior landlord to end that old lease about six years early.

The payment did not buy a right to use, enjoy, control, or occupy the old premises. Instead, it permanently ended the tenant's occupancy rights and removed the partnership's rent-cover obligation. The Department treated that kind of payment as liquidated damages rather than rent.

What this means for you

The source of the money did not control. Florida looked at what the payment purchased and at the recipient's accounting treatment.

Common questions

Q: Was the termination payment taxable rent? No, on the stated facts.

Q: Did anyone receive new occupancy rights in exchange? No.

Q: What accounting fact could change the result? The ruling said tax could apply if the prior landlord denominated the payment as rental income in its records.

Citations and references

• Fla. Stat. § 212.031(1)(a), (c) — commercial real-property rent
• Hutchison v. Tompkins, 259 So. 2d 129 (Fla. 1972)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-057

Original ruling text

Aug 20, 1993

RE: TAA 93A-057
Sales Tax
Lease Termination Payment
Section 212.031(1)(a), Florida Statutes

Dear :

This is in response to your letter of May 21, 1993,
requesting a Technical Assistance Advisement concerning the
taxability of a lease termination payment, on behalf of XXXXX
(hereinafter "Partnership").

Your letter provides the following information:

"[Partnership] is a Florida general partnership which is engaged
in the business of owning and leasing space in an office
building in XXXXX. During the summer of 1992 [Partnership] and
XXXX [Tenant'] engaged in extensive discussions and negotiations for [Tenant] to lease space in [Partnership's] office building. One factor which hampered these negotiations was the fact that [Tenant] was then occupying space in another building [Building'] under a lease with XXXXX [Prior Landlord'], as trustee [Prior Lease']. By its terms, the
[Prior Lease] does not expire until 1999.

"As a result of the aforementioned negotiations, [Tenant]
entered into a lease with [Partnership] in September, 1992 to
occupy space in [Partnership's] building for a term of 15 years.
As a part of its inducement to [Tenant] to have it enter into
the new lease, [Partnership] agreed to be responsible for
[Tenant's] lease payments for the [Prior Lease] for the balance
of the lease term. The lease itself was not assigned so that
[Tenant] continues to be obligated under the [Prior Lease] and
[Tenant] continues to have the right to use and occupy the
[Prior Lease] space. [Partnership] simply has a contractual
agreement with [Tenant] pursuant to which [Partnership] is

financially responsible for [Tenant's] rent obligation under the
[Prior Lease].

"A tenant has now been found who desires to lease the space in
[Building] which is presently subject to the [Prior Lease].
This tenant desires to occupy the space for a period in excess
of the present lease term and wishes to set the lease payment at
today's market rather than sublet the premises for the balance
of [Tenant's] lease and then negotiate with [Prior Landlord].
Accordingly, an agreement in principle has been reached whereby
[Partnership] will now pay [Prior Landlord] the sum of $XXX in
cash and notes in exchange for [Prior Landlord's] agreement to
terminate its lease with [Tenant] (`the lease termination
payment.') As a result of this transaction, [Tenant's] right to
the use and occupancy of the space in [Building] will be
permanently terminated approximately 6 years prior to the
expiration of the lease term and [Partnership] will no longer be
contractually obligated to [Tenant] for the rent under the
[Prior Lease]."

Department Response

Section 212.031(1)(a), F.S., with enumerated exemptions not
pertinent to the instant issue, imposes sales tax on the
privilege of renting, leasing, letting, or granting a license
for the use of any real property. Paragraph (1)(c) of the
statute establishes the rate of such tax and describes the levy
of the tax "....on the total rent...charged for such real
property by the person charging or collecting the rental...fee."

The total rent as specified in paragraph (1)(c) of s.
212.031, F.S., must be construed as including any consideration
paid for the privilege of leasing the subject premises. The
leasehold interest for which lease payments are given grants to
the lessee, among other rights, the exclusive occupancy against
the world. This right to use, enjoy, control, and occupy the
premises is that which is exchanged for the consideration
tendered to a lessor by a lessee.

It is the Department's position that a termination payment
of the nature you describe is not exchanged for the above

enumerated rights of the lessee ("Tenant") and is not part of
the total rent described in s. 212.031(1)(c), F.S. This payment
and any similar termination fee or charge, with respect to real
property, shall be considered by the Department as in the nature
of liquidated damages which, in general, means a sum of money
agreed upon by the parties to a contract, either before or after
the execution of the contract, wherein such a sum is equated to
the damages suffered from some breach. See, Hutchison v.
Tompkins, 259 So.2d 129 (Fla. 1972). Thus, unless the lessor
("Prior Landlord") denominates such termination payment as
rental income in its own accounting records, the termination
payment by "Partnership" does not come within the reach of s.
212.031, Florida Statutes. The imposition of the tax is not
determined by the source of a payment but whether such payment
is given in exchange for the right to use, enjoy, or occupy the
real property.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Bonnie Everton
Technical Assistant

/e
Cont. #8946