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J. A09016/00
2000 PA Super 103
CHARLES D. STEIN REVOCABLE TRUST, :
IN THE SUPERIOR COURT OF
Appellant
:
PENNSYLVANIA
:
v.
::
GENERAL FELT INDUSTRIES, INC.,
:
Appellee
:
No. 2519 EDA 1999
Appeal from the Judgment entered July 14, 1999,
Court of Common Pleas, Philadelphia County,
Civil Division at No. 003311 August Term, 1998.
BEFORE: McEWEN, P.J., JOHNSON, and OLSZEWSKI, JJ.
OPINION BY JOHNSON, J.:
Filed: April 3, 2000
¶ 1 In this appeal we determine whether Philadelphia Business Privilege
Tax (BPT) and Net Profits Tax (NPT) imposed on the lessor of a commercial
leasehold are taxes arising by reason of the occupancy, use or possession of
that leasehold. We hold that BPT and NPT do not so arise because they do
not derive from "actual physical control" of the leasehold real estate by the
lessee. We conclude accordingly that a lessor may not compel its lessee to
pay either tax on the assertion of lease terms requiring the lessee's payment
of "taxes arising by reason of the occupancy, use or possession" of the
leasehold.
¶ 2
Charles D. Stein Revocable Trust (Landlord) appeals the trial court's
order granting summary judgment, terminating Landlord's contract claim
against General Felt Industries, Inc. (Tenant) to recover NPT and BPT

J. A09016/00
Landlord paid the City of Philadelphia. Landlord asserts that Tenant agreed
to pay these sums under the terms of a lease of real property. We conclude
that the lease does not obligate Tenant to pay the taxes in question.
Accordingly, we affirm the trial court's order.
¶ 3
Landlord and Tenant are assignees of a commercial lease under the
terms of which Tenant occupies a warehouse structure at 2121 Wheatsheaf
Lane in the City of Philadelphia. The parties' predecessors in interest
entered the lease on April 14, 1961. The current extension of the lease
expires on April 13, 2001. The provisions of the lease at issue in this appeal
allocate responsibility for the payment of certain taxes and have remained
unchanged throughout the duration of the leasehold. The lease does not
apportion or discuss specific responsibility for Philadelphia's NPT or BPT.
¶ 4
In November 1994, the City of Philadelphia apprised Landlord that its
NPT and BPT remained unpaid for the years 1986 through 1994. The
accrued amount of the taxes exceeded $360,000, for payment of which
Landlord made a demand on Tenant, relying on the broad language of
sections 302 and 307 of the parties' lease. Tenant refused payment,
asserting that the lease required the tenant to pay only taxes levied against
the leasehold premises. See Reproduced Record (R.R.) at 7a, § 302.
Tenant argued that the NPT and BPT were not taxes levied against the
leasehold premises, but were instead, taxes on Landlord's individual income.
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Consequently, Landlord commenced this action to enforce the purported
mandate of its lease.
¶ 5
This matter proceeded in the trial court before the Honorable Gene D.
Cohen on cross-motions for summary judgment. Judge Cohen granted
summary judgment in favor of Tenant, concluding that the NPT and BPT
were not levied against the leasehold premises and did not arise by reason
of the occupancy, use or possession of the premises. Trial Court Opinion,
9/15/99, at 3. Rather, the court reasoned that the NPT and BPT were taxes
based on Landlord's income and so, could not be subject to payment under
the lease absent a clear provision enumerating Tenant's responsibility for
those specific taxes. Id. at 3 (quoting Northern Liberties Gas Co. v.
United Gas Improvement Co., 35 A.2d 284 (Pa. 1944)). Consequently,
Landlord filed this appeal.
¶ 6
Landlord raises the following question for our review:
1. Whether the plain language of a commercial real property
lease that explicitly obligates the Tenant to pay "all taxes . . .
arising by reason of the occupancy, use or possession of the
premises," and which further specifies that the Landlord is to
receive all payments from the Tenant "absolutely net" of "all
taxes," obligates the Tenant to pay the Philadelphia Business
Privilege Taxes that are imposed solely because the Tenant
leases (i.e., occupies, uses and possesses) the real property
from the Landlord?
Replacement Brief for Appellant Charles D. Stein Revocable Trust (Brief for
Appellant) at 3.
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¶ 7
Our scope of review of an order granting summary judgment is
plenary. See Swartley v. Hoffner, 734 A.2d 915, 918 (Pa. Super. 1999),
appeal denied, 1999 WL 1146766 (Pa. Dec. 9, 1999). Accordingly, we apply
the same standard as the trial court, reviewing all of the evidence of record
to determine whether there exists a genuine issue of material fact. See id.
In the absence of a factual dispute, we must discern whether the moving
party is entitled to judgment as a matter of law. See id.
¶ 8
Neither party disputes the material facts of the case before us.
Accordingly, our determination is limited to interpretation of the parties'
contractual agreement. Interpretation of a contract, in this case a lease,
poses a question of law. See Halpin v. LaSalle Univ., 639 A.2d 37, 39
(Pa. Super. 1994). See also Clearfield Vol. Fire Dep't v. BP Oil, 602
A.2d 877, 879 (Pa. Super. 1992) ("A lease is a contract and is to be
interpreted according to contract principles."). "In construing a contract, the
intention of the parties is paramount and the court will adopt an
interpretation which under all circumstances ascribes the most reasonable,
probable, and natural conduct of the parties, bearing in mind the objects
manifestly to be accomplished." Village Beer & Bev. v. Vernon D. Cox &
Co., 475 A.2d 117, 121 (Pa. Super. 1984). If the language appearing in the
written agreement is clear and unambiguous, the parties' intent must be
discerned solely from the plain meaning of the words used. See Clearfield
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J. A09016/00
Vol. Fire Dep't, 602 A.2d at 879. Moreover, "[o]ne part of a contract
cannot be so interpreted as to annul another part[;] rather writings which
comprise an agreement must be interpreted as a whole." Village Beer, 475
A.2d at 121.
¶ 9
In this case, the parties agree that responsibility for payment of taxes
under their agreement is governed by Article 3 of the lease, entitled "RENT
TAXES INSURANCE." Consistent with the article's designation, its terms
require the tenant to insure the premises against fire, to insure the
structure's boiler and pressure vessels, and to pay all utility charges. R.R. at
8a-9a, §§ 303, 304, 306 (respectively). In addition, Article 3 directs the
tenant to insure the landlord against liability for personal injury and property
damage arising on the leased premises and on the adjacent public walkways.
Id. at 8a, § 305. The first of the provisions at issue here appears to reflect
the landlord's concern that the tenant assume responsibility for payment of
public assessments on the real property itself or payment for services
supplied to the property. Id. at 8a, § 302. Section 302 defines all such
amounts as "taxes":
Section 302. Taxes and Assessments
TENANT shall pay as additional rent, as they become due and
payable[,] . . . all taxes, charges, claims, assessments, water
and sewer rents, and other charges which may be assessed or
levied by any public authority against the premises, or arising by
reason of the occupancy, use or possession of the premises. All
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J. A09016/00
of the foregoing are hereinafter collectively referred to as
"taxes".
R.R. at 7a, § 302. Finally, section 307 characterizes the parties' agreement
as a "net return" lease:
Section 307. Rent on Net Return Basis
It is intended that the rent provided for in this Lease shall be an
absolutely net return to LANDLORD for the term of this Lease,
free of any expenses or charges with respect to the premises,
including all taxes and assessments now or hereafter imposed
upon or in respect of the premises.
R.R. at 9a, § 307. Landlord relies on sections 302 and 307, explicitly, to
establish Tenant's obligation to pay Landlord's NPT and BPT. Landlord
argues that because its lease of the premises is its only business activity and
source of income in the City of Philadelphia the NPT and BPT the city
imposes necessarily arise "by reason of the occupancy, use or possession of
the premises" as contemplated in section 302. Landlord argues that section
307 supports its interpretation of section 302, as it expresses the parties'
intention that the landlord should be relieved of all expenses with respect to
the premises, allowing an "absolutely net return" on the rent proceeds.
¶ 10 Upon review of sections 302 and 307, in context with the remainder of
Article 3, we conclude that the clear language of the lease establishes the
parties' intention to shift to the tenant primary responsibility for expenses
incurred to operate the leasehold premises as a commercial enterprise. See
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J. A09016/00
Village Beer, 475 A.2d at 121 ("the court will adopt an interpretation which
under all circumstances ascribes the most reasonable, probable, and natural
conduct of the parties, bearing in mind the objects manifestly to be
accomplished"). In so doing, the lease ensures the landlord the maximum
benefit of the income stream generated by the property, free and clear of
expenses to which the property would be subject by reason of the tenant's
use.
¶ 11 However, we find no indication that the parties intended, or even
contemplated, that the tenant's liability should exceed those expenses
integral to the tenant's business use of the real property. This conclusion is
supported both by the words and phrases of sections 302 and 307 and by
the nature of the concerns addressed in Article 3 generally. Sections 303
through 306 require the tenant to purchase insurance against liability and
property loss, and to pay charges for utility service. Such expenses are
predictable antecedents to the operation of real property used for
commercial purposes and might be reasonably assumed by a commercial
tenant as a cost of doing business.
¶ 12 Similarly, taxes levied or assessed "against the premises" prescribed
by section 302 are integral to the operation of commercial activity on those
premises. Unless such taxes are paid, the property is subject to lien and
eventual seizure by the taxing entity. Consequently, the tenant's
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J. A09016/00
assumption of such taxes is reasonably attributable to the cost of doing
business. Taxes "arising by reason of the occupancy, use or possession of
the premises" (but not assessed "against the premises"), also described by
section 302, are likewise attributable as a reasonable business expense
because they bear a direct nexus to the real property. This interpretation is
compelled by the plain meanings of "occupancy" and "possession," both of
which denote actual physical control of the geographic space of the
leasehold. See WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY, UNABRIDGED
1560 (1976) (defining "occupancy" as "1 a: the taking and holding
possession of real property under a lease or tenancy at will"). See also id.
at 1770 (defining "possession" as "1 b: actual physical control or occupancy
of property by one who holds for himself and not as a servant of another
without regard to his ownership and who has legal rights to assert interests
in the property against all others having no better right than himself").
Clearly, taxes arising from the tenant's "actual physical control" of the real
property as one who asserts legal rights in it reasonably might be
contemplated by the parties as an expense of the tenant's commercial
enterprise, to be borne by the tenant. Consequently, we interpret the
parties' lease to require the tenant to pay such taxes, and only such taxes,
as are levied or assessed against the real property or arise from the tenant's
actual physical control of the real property.
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J. A09016/00
¶ 13 Further direction under section 307 of the lease that rent "shall be an
absolutely net return to the LANDLORD," does not effect our conclusion, as
the language of this provision, when considered in context, does not operate
to expand the language of section 302. In point of fact, section 307 merely
summarizes the parties' intentions as detailed in the previous sections of
Article 3. Consistent with sections 303 through 306, section 307 concludes
that the rent shall be "free of any expenses or charges with respect to the
premises." Consistent with section 302, section 307 specifies the tenant's
responsibility for "all taxes and assessments now or hereafter imposed upon
or in respect of the premises." Consequently, we must discern, in
accordance with the terms of section 302, whether the NPT and BPT arise
from Tenant's "actual physical control" of the real property.
¶ 14 Both the NPT and BPT are prescribed by provisions of title 19 of the
Philadelphia City Code and Home Rule Charter. The NPT is imposed by
section 19-1502(1), subsections (c) and (d) of the Code and is applied by
the Code as follows:
The tax levied under §19-1502(1)(c) and (d) shall relate to and
be imposed on the net profits of any business, profession, or
enterprise carried on by any person as owner or proprietor,
either individually or in association with some other person or
persons.
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J. A09016/00
PHILADELPHIA, PA., CODE § 19-1502(3). Accordingly, the remittance required
of individual taxpayers is calculated as a percentage of net profits earned.
See id. at § 19-1502(1)(c), (d). The Code defines "net profits" as follows:
Net Profits. The net gain from the operation of a business,
profession or enterprise, after provision for all allowable costs
and expenses incurred in the conduct thereof, either paid or
accrued in accordance with the accounting system used, without
deduction of taxes based on income[.]
Id. § 19-1501(4).
¶ 15 Upon consideration of these sections, we cannot conclude that the NPT
arises from Tenant's "actual physical control" of the real property governed
by the parties' lease. Indeed, its nexus to the real property or Tenant's
control of the property is tenuous. The tax bears no necessary relation to
either and would be assessed on net gain from the operation of any business
in which Landlord chose to engage. The Code provides no indication that the
source of the gain is of any relevance to imposition of the NPT or to the rate
at which the NPT is assessed, so long as the gain occurs by reason of the
taxpayer's conduct of a "business, profession or enterprise." Accordingly,
the fact that Landlord's gain was realized in the rental of real property is of
no relevance to assessment of the tax and does not trigger Tenant's
obligations under the lease. Clearly, the NPT is not a tax on the property
and is not assessed by reason of Tenant's "actual physical control" of the
property. Rather the tax appears to be in the nature of a tax on income.
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J. A09016/00
Consequently, Tenant has no obligation under the lease before us to pay
NPT assessed on Landlord's gain or to reimburse Landlord for its own past
payments of the tax. Cf. Northern Liberties Gas Co. v. United Gas
Improvement Co., 35 A.2d 284 (Pa. 1944) ("A covenant by a lessee to pay
the income taxes of the lessor is not within the terms of the contracts unless
the obligation is clearly and directly specified.").
¶ 16 The BPT, also prescribed by title 19 of the Code, is assessed on the
individual's "active presence" for business in the City of Philadelphia. See
PHILADELPHIA, PA., CODE § 19-2603(3), 2604(1)(a). The Code imposes and
defines the nature of the tax as follows:
In accordance with the provisions of the Act known as the First
Class City Business Tax Reform Act, a tax is hereby imposed
upon every person engaging in any business in the City of
Philadelphia beginning with the tax year 1985, and annually
thereafter.
* * * *
Any person having an active presence in the City is subject to
the tax imposed by this Section. Any activity within the City by
a person, through one or more employees, agents or
independent contractors, that makes possible the creation,
realization or continuance of contractual relationships between
the person and customers located within the City, including but
not limited to, the solicitation within the City by a person,
through one or more employees, agents, or independent
contractors, is sufficient to constitute active presence in the City.
Physical presence (the maintenance of an office or property) in
the City is not required to establish active presence in the City.
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J. A09016/00
Id. § 19-2603(1), (3). The Code assesses the BPT as a percentage of the
"net income" the individual derives from his business contacts in
Philadelphia. See id. § 19-2604(1)(a). Significantly, the definition of "net
income" applicable under this section is virtually identical to the formulation
applied by the NPT to "net profits," but limits its reach to businesses.
Net Income. The net gain from the operation of a business, after
provision for all allowable costs and expenses actually incurred in
the conduct thereof, either paid or accrued in accordance with
the accounting system used, without deduction of taxes based
on income[.]
Id. § 19-2601(a)(1). Cf. § 19-1501(4) (including as "net profits" gain from
a "profession or enterprise"). Though application of the BPT is thus limited
to gain derived from the conduct of a "business," the Code demonstrates no
further indication that the source of the gain is relevant to imposition of the
tax.
¶ 17 Upon review of these provisions, we cannot conclude that a tax on
Landlord's active business presence in the City of Philadelphia derives from
Tenant's "actual physical control" of the leasehold real estate. The nexus of
the BPT to the leasehold realty is, as that of the NPT, tenuous. The BPT is a
tax on business opportunities realized in the City from which the taxpayer
derives net income. See id. § 19-2603(1), (3). The fact that a taxpayer
realizes net income only from a single activity or contract, as Landlord here
claims, does not change the BPT to a tax on that activity or contract.
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Rather, the BPT retains its fundamental character as an assessment for the
privilege the City has extended, in theory, to do business within its
boundaries and from which the taxpayer has profited. Thus, though the BPT
is not as starkly evident a tax on income as the NPT, it remains, clearly, an
income-based tax with no necessary relation to any specific business
activity. It is not a tax levied against the leasehold real estate in this case
and has no necessary relationship with "actual physical control" of the
leasehold premises by Tenant. Accordingly, we encounter no hesitation in
concluding that assessment of the tax to Landlord does not trigger Tenant's
obligations under the current lease. Consequently, we find no error in the
trial court's entry of summary judgment in favor of Tenant.
¶ 18 For all of the foregoing reasons, we affirm the trial court's order
granting summary judgment in favor of Tenant.
¶ 19 Judgment AFFIRMED.
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