In Pennsylvania, leases of 30 years or more are typically subject to a realty transfer tax. When calculating the lease term for tax purposes, renewal options are included if the rent for the renewal period is either fixed or determined by a set method (e.g., X dollars per square foot or a set percentage increase). See 72 P.S. § 8103-C.1.

However, if the rent during the renewal term is based on the fair market value at the time of renewal, the renewal period is not counted in determining the lease term for transfer tax purposes. This rule holds even if the lease includes a mechanism for determining how the fair market value will be set when the tenant exercises the renewal option. (See 61 Pa. Code § 91.193(b)(24)(i), (v); Saturday Fam. LP v. Commonwealth, 168 A.3d 400, 407 (Pa. Commw. Ct. 2017)).

If your lease includes options that could extend the term beyond 30 years, ensure the renewal options are based on fair market value at the time of renewal, with a clear procedure for determining that value. If the renewals are not based on fair market value, specify in the lease who will be responsible for paying the transfer tax, or how it will be divided between the landlord and tenant.

For more information, please contact Zachary W. Berger at 215.918.3691 or zberger@foxrothschild.com or any member of Fox Rothschild’s Real Estate Department.