We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
13 August 2010
Value added tax (VAT) regulations allow landlords either to charge 20% VAT on commercial leases or treat them as VAT exempt. In the latter case, VAT on any costs related to this particular lease becomes non-deductible. Thus, VAT on, for example, repair work becomes a cost factor for the landlord.
In commercial leases the parties usually agree to charge VAT on rent, because the tenant is entitled to claim VAT input tax deductions so VAT on rent payments is merely a transit item. However, certain tenants, such as banks, insurers and doctors, are not entitled to claim input tax deductions. For those tenants, the rent effectively becomes 20% cheaper if the landlord chooses not to charge VAT on the rent.
In the case at hand, the tenant was not entitled to claim input tax deductions. The parties therefore agreed on a clever clause from which both should have benefited. The landlord agreed not to charge VAT on the rent, which effectively reduced the rent for the tenant. In turn, the tenant agreed to reimburse to the landlord any costs that the landlord encumbered, as VAT on costs related to the lease became non-deductible.
The lower courts held this clause not to be permissible, mainly because the loss of input tax depended on the repair work (and other costs) incurred by the landlord. Thus, the total cost for the tenant was not foreseeable and could have been influenced only by the landlord. Further, the clause may have violated rent thresholds, which is not permitted under the Rent Act.
The Supreme Court, on the other hand, allowed the clause, subject to certain restrictions. In particular, those costs that were to be reimbursed by the tenant should not have exceeded the total saving for the tenant resulting from the option not to charge VAT within a one-year observation period.
This decision is clearly a good sign for landlords and tenants. The lower courts refused to allow such a clause, arguing that, in effect, the tenant would end up paying part of the repair costs which, pursuant to the Rent Act, must be borne by the landlord. This is a good example of a case where too much tenant protection is detrimental to the tenant. As a consequence, no landlord would have been prepared to agree on such a clause, because the VAT on repair costs would then effectively become a cost factor for the landlord.
By contrast, the Supreme Court was prepared to look beyond this argument and recognised that such a clause can be to the benefit of the tenant if it is set in proper context. Nevertheless, the court did not declare such clauses are permissible in all cases.
When drafting such a clause, the contract should state in detail which costs (and their maximum amounts) can be attributed to the tenant.
For further information on this topic please contact Nikolaus Pitkowitz or Martin Foerster at Graf & Pitkowitz Rechtsanwälte GmbH by telephone (+43 1 401 17 0), fax (+43 1 401 17 40) or email (email@example.com or firstname.lastname@example.org). The Graf & Pitkowitz Rechtsanwälte GmbH website can be accessed at www.gmp.at.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.