The owners of a parcel of real property at Broadway and Fifty-first street in the city of New York leased the property, in November, 1916, to the defendant for a term of twenty-one years. The tenant agreed to pay the "net yearly rent or sum of $51,000." The lease provided:
"Third. That the Tenant, its successors and assigns shall pay to the Landlords, their heirs, successors or assigns in each and every year during the said term as further rent, a sum or sums of money equal to all the income, excise and license taxes or duties * * * that shall be imposed, levied or assessed in any such year upon the rent reserved by this lease or the income secured hereby from the demised premises, by any present or future law of the United States of America, or of the State of New York, or of any other public or governmental body whatsoever, having authority to impose, levy or assess the same (as though the said rent reserved were the only income belonging to the Landlords, their heirs, successors and assigns who for the purposes of the computation of the amount of any such taxes or duties hereunder are to be considered as one person), without the benefit to the Tenant, its successors or assigns of any deductions or exemptions to which the Landlords, their heirs, successors or assigns may be entitled, with interest at the rate of six per cent per annum * * * and the said sum or sums of money shall be payable to the Landlords, their heirs, successors or assigns not later than five days after the first day the latter are required by law to pay the income, excise, license taxes or duties on the said rents or incomes for such year *Page 248 to the collector or receiving agent thereof; * * * but it is understood and agreed that in any event the full amount of the rent reserved hereby shall be paid to the Landlords, their heirs, successors or assigns over and above the sum or sums of money required to be paid by the Tenant, its successors and assigns as further rent as aforesaid."
At the time the lease was executed the owners of the property, described in the lease as "the landlords" were Rebecca A D Wendel Swope, Mary Eliza Astor Wendel, Georgiana G.R. Wendel, Ella V. von E. Wendel; and Rebecca A.D. Wendel Swope and Mary Eliza Astor Wendel as trustees, under a deed of trust made to them by John G. Wendel, deceased. Ella V. von Wendel died in March, 1931. All the other owners of the property, named in the lease as "landlords," had died before her and at the time of her death she was the sole owner. By her last will and testament she left her residuary estate to fourteen charitable corporations.
In 1936 the premises leased to the defendant were conveyed to the plaintiff, a charitable corporation, incorporated by a special act of the Legislature to manage and liquidate the properties which passed to the legatees named in the residuary clause of Miss Wendel's will. The plaintiff conveyed the premises in 1937 to Stonehurst Land Development Co., Inc, a New York corporation. From the date of Miss Wendel's death until the conveyance by the plaintiff in 1937, charitable corporations were entitled to receive the rent derived from the premises under the lease. Charitable corporations are not subject to an income tax under the "law of the United States of America, or of the State of New York or of any other public or governmental body whatsoever" and the defendant, for that reason, has refused to pay to the plaintiff, while it was the landlord, as "further rent," an amount measured, as it had been measured during the lifetime of Miss Wendel, in accordance with paragraph Third of the lease, by the amount of the income tax which would have been imposed upon the income derived from rents reserved under the *Page 249 lease "(as though the said rent reserved were the only income belonging to the Landlords, their heirs, successors and assigns who for the purposes of the computation of the amount of any such taxes or duties hereunder are to be considered as one person), without the benefit to the tenant, its successors or assigns of any deductions or exemptions to which the Landlords, their heirs, successors or assigns may be entitled." The plaintiff in this action seeks to recover such "further rent." The problem presented is whether the defendant's obligation to pay as "further rent" a sum equal to an income tax so computed is subject to a condition that some tax, though computed in other manner, shall actually be imposed upon and payable by the landlord upon income derived from rents reserved under the lease.
We read the lease as a whole to determine the meaning and purpose of each paragraph of the lease. The rental reserved is the "net yearly rent or sum of $51,000." The implied obligation of the tenant to pay charges, which the landlord would otherwise be compelled to bear, is supplemented by obligations expressly assumed by the tenant in other paragraphs of the lease. These supplemental obligations, it is argued, are intended merely to carry out the clear intent of the lease to provide a net rental to the landlords of $51,000 under any and all contingencies. In paragraph Two the tenant assumes expressly an obligation to pay, in addition to the rent, all taxes, duties, charges, assessments and payments that might be imposed upon the premises, or the estate or interest of the landlord therein or "upon the rentsreserved by the lease;" and the reason why the tenant assumes that obligation is stated: "* * * it being the intention of the parties hereto that the rent reserved hereby shall be received and enjoyed by the Landlords, their heirs, successors and assigns as a net sum, and that the Tenant, its successors and assigns, shall pay any and all taxes imposed thereon, or upon the payment or devolution thereof, or upon such rents after they shall have been received by the Landlords, their heirs, successors *Page 250 and assigns, and as long as they retain their legal identity asrent, in such manner that the Landlords, their heirs, successors and assigns shall be enabled to apply the same to their own use without any diminution thereof by payment of any duty or tax." (Italics are new.) We are told that the object of the provisions of both paragraphs Two and Three is solely to assure the landlords that the rent of $51,000 would be received by them as a net sum approximately tax free.
Undoubtedly that is the object of paragraph Second and it accomplishes that object. When the obligations assumed by the tenant in that paragraph were carried out, the landlords received the rents as a net sum and in such manner that they were "enabled to apply the same to their own use without any diminution thereof by payment of any duty or tax." The sums received as rent by the landlords then lost their identity and became part of the general income of the landlords. Those sums were then no longer taxable as rent. The income tax which the landlords might be compelled to pay might be increased because the rents received would increase the income and, therefore, might increase the tax payable on such income; but the tenant never agreed in paragraph Third or any other paragraph of the lease to pay such increase.
It is concededly impossible to give a literal effect to all the words of paragraph Third. The tenant, in terms, agreed that it shall pay "as further rent, a sum or sums of money equal to all the income, excise and license taxes or duties * * * that shall be imposed, levied or assessed * * * upon the rent reserved by this lease or the income secured hereby from the demised premises, by any present or future law of the United States of America, or the State of New York; * * * and the said sum or sums of money shall be payable * * * not later than five days after the first day the latter are required by law to pay the income, excise, license taxes or duties on the said rents or income." The provisions of the same paragraph, which amplify the obligation and define the manner in which *Page 251 the sum or sums shall be computed, which the tenant must pay as further rent, make clear, however, that, in truth, the sum or sums of money which the tenant agreed to pay are not equal to a tax on the rents or income which the landlord is actually required to pay but a sum equal to a tax computed on a theoretical and impersonal basis, which might be much less or much greater than the amount which any actual landlord would pay.
Rents received from real property by a landlord who is subject to income taxes under the laws of the United States and of the State of New York form a part of the base upon which the amount of such income tax is calculated. Nevertheless, no tax is imposed separately upon the income or profits derived from specific property; the tax is solely upon the aggregate of all the net income received by the taxpayer after deducting the amount of losses and expenses incurred by the taxpayer, and after making allowance for the exemptions to which he is entitled. The rate of any tax imposed upon the landlord is determined, not by the amount of rent received, but by the amount of the entire net income of the landlord, and where losses or expenses of the landlord incurred through ownership of other property or transactions in nowise connected with the ownership of the demised real property exceed all the income received, including rents from the demised property, no tax is payable by the landlord. The parties might have agreed that the tenant would pay the proportion of any income tax imposed upon the landlord which the amount of the rents received bears to the entire income of the landlord or that the tenant would pay the amount by which the landlord's income tax is increased through receipt of rentals from the demised property. They have not done so. The amount which the tenant agrees to pay in addition to the fixed annual rental bears no substantial relation to any actual income tax which the landlord might be compelled to pay. What the tenant has agreed to pay is an amount computed upon a theoretical basis which excludes the most important factors which would measure the amount of any tax which *Page 252 the landlord in fact would pay upon the income of which the rents would be a part. The real landlords were several persons; the fictitious landlord was one person. The real landlords might have great incomes outside of the rents of the demised premises; or, on the other hand, expenses incurred or losses suffered by the landlords in transactions not connected with ownership of the demised property, might exceed those rents, and the landlords might have no net income subject to tax. The fictitious landlord had no income other than the rents reserved in the lease. The real landlords would be entitled to deductions and exemptions, but such deductions and exemptions, the parties stipulated, must be disregarded in computing the amount which the tenant was to pay.
Though the amount which the tenant has agreed to pay as further rent is not the amount of the tax or of any fractional part of such tax which might be imposed in fact upon the landlord, but is merely an amount computed according to a formula defined in the lease, which incorporates by reference the provisions of the income tax laws, and though the definition of that formula expressly prescribes that the computation shall be made without allowing the "benefit to the tenant, its successors or assigns of any deductions or exemptions to which the landlords, their heirs, successors or assigns may be entitled," we are told that the obligation which the tenant assumed under the provision of paragraph Third of the agreement is conditioned upon the imposition of some income tax upon the landlord, and becomes payable only five days after the tax actually imposed upon the landlord becomes payable.
That construction would have the strange result that, though the parties indisputably agree that in computing the amount which the tenant must pay, the tenant should be without benefit from any exemption to which the landlord might be entitled inreduction of the tax to which the landlord is subject, yet where the landlord is entitled to complete immunity from any tax, the tenant obtains the full benefit of that immunity. If, reading the lease as a *Page 253 whole, it appeared plainly that the dominant purpose of paragraph Third was to provide for the landlords some indemnity or protection against the income taxes which the landlord will be required to pay, then to effectuate that purpose, a construction might be placed upon the language of paragraph Third which would otherwise seem strained. The fact, however, that the amount which the tenant undertook to pay in accordance with the agreed formula bears little, if any, relation to the income tax which the actual landlord must pay, and the fact that it was expressly agreed that the tenant should receive no benefit in such computation from any deduction or exemptions to which the landlord might be entitled, indicates that this was not the dominant, and certainly not the sole, purpose of the provision. In clearest terms, the parties agreed that the obligation of the tenant should be fixed regardless of the personality or the deductions and exemptions to which the landlord might be entitled.
The landlords exacted from the tenant an express promise to pay a net rent or sum of $51,000 and further rent measured by an income tax computed upon a purely impersonal basis. The tenant voluntarily agreed to assume that obligation, which, because computed on an impersonal basis, was concededly not intended to vary with change in the person of the landlord but which, it is said, might cease to exist by reason of such a change. Tax exempt securities are a much more desirable form of investment for an investor with a very large income than property which brings the same income where such income must be included in the base upon which an income tax is levied. The comparative value is measured by the rate of taxation. The disparity increases with every increase of tax and diminishes with diminution in the amount of a tax. Doubtless the landlords, in exacting a sum as "further rent" equal to an income tax computed upon an impersonal basis, had in mind such considerations and sought compensation for such disparity; but that does not mean that the parties intended that a landlord who was not subject to *Page 254 any income tax would not be entitled to the further rent which the tenant agreed to pay.
Such a construction would, I think, disregard those practical considerations which govern people in their business dealings. Because the original landlords were subject to an income tax, an investment in real property bringing in a rental of $51,000 would be much less valuable to them than an investment in tax exempt securities bringing in the same return; but tax exempt securities bringing in such return would probably also cost much more. The landlords might not be able to exact as further rent a sum equal to the additional tax which a landlord having other large income would pay but the landlords would and did exact as further rent a sum equal to the income tax which a landlord having no other income would pay. Real property on which a tenant will pay a net rent or sum of $51,000 and as further rent a sum equal to the income tax, computed as provided in the lease, will, it is plain, have more value than real property upon which only a net rent of $51,000 is paid; and the owner of the property should be able to transfer that value to any person to whom the property is transferred. Under the construction urged by the defendant, a transfer of the real property to a natural person would carry with it the right to further rent equal to the income tax imposed by the laws of the State of New York and of the United States, for the income of a natural person is subject to the tax imposed both by the State and by the United States. A transfer to a business corporation would not carry with it a right to further rent equal to the income tax imposed by the laws of the State of New York, for only natural persons are subject to the income tax imposed by the State of New York; and a transfer, as here, to a charitable corporation, exempt under the laws of the United States, would not carry with it a right to any further rent for such a corporation is not subject to any income tax imposed by either the United States or the State of New York. Thus the benefit and the burden of the lease would vary with the person of the *Page 255 landlord and no corporation which is not subject to an income tax could afford to buy or hold the property, for it would be much more valuable to a landlord subject to the tax than it would be to a landlord whose income is immune from taxation.
The judgment of Special Term and the Appellate Division should be reversed and the motion of the plaintiff to strike out the defenses and counterclaims should be denied, with costs in all courts.
LOUGHRAN, FINCH, LEWIS and CONWAY, JJ., concur with RIPPEY, J.; LEHMAN, Ch. J., dissents in opinion, in which SEARS, J., concurs.
Judgment affirmed. *Page 256