Use Lease to Motivate Tenant to Give You Annual Sales Report on Time

It's frustrating when a retail tenant doesn't submit its annual sales report on time. You need that report to help you determine whether the tenant owes additional percentage rent for the preceding year. Even if the tenant doesn't owe percentage rent, the report is crucial to the effective management of your shopping center.

How can you motivate the tenant to promptly submit an annual sales report? Make sure your lease gives you tough enforcement rights if it doesn't submit a report on time, say international financial management consultant Kenneth S. Lamy and Richard F. Muhlebach, senior managing director of Kennedy Wilson Properties. With Lamy's and Muhlebach's help, we'll give you three key rights to add to your lease.

Annual Sales Reports Aid Center Management

Many retail tenants, especially the small ones, “forget” to send in their annual sales reports, says Muhlebach. The small tenant may have unsophisticated recordkeeping methods—or just lack the manpower to compile the report. And if the tenant doesn't owe percentage rent, it may figure, “Why bother preparing an annual sales report if I don't owe percentage rent?”

But an annual sales report is important—whether or not the tenant is required to pay percentage rent. It helps you see how well the tenant is performing, notes Lamy. It can be an effective early warning sign that a tenant may go out of business, adds Muhlebach.

In larger shopping centers, annual sales reports also help managers evaluate each merchandise category to understand the strengths and weaknesses of the center's tenant mix and how the center's leasing plan should be developed, says Muhlebach. For example, if an annual sales report shows that the shoe store tenant's business is booming, there might be enough business for you to put another shoe store in the center.

Get Three Enforcement Rights

To motivate a tenant to submit its annual sales reports on time, say Lamy and Muhlebach, beef up the enforcement rights the lease gives you if the tenant doesn't submit a report on time. Make sure the lease says:

You can audit tenant's books. If you have an audit right and the tenant doesn't want to tell you what its gross sales are, you'll be able to find out by auditing its books and records, says Muhlebach.

Tenant must pay your audit costs. If you choose to audit the tenant's books and records, make the tenant pay all of the audit costs, says Lamy. Include those costs in the tenant's additional rent, he advises. If the tenant doesn't pay those costs as additional rent, it will trigger your nonpayment of rent remedies.

Tenant must also pay liquidated damages. Make the tenant pay a preset dollar amount—known as “liquidated damages”—for each day a report is overdue, regardless of whether you choose to audit its books and records. The liquidated damages should be as high as possible, but not so high that a court might refuse to enforce it, says Muhlebach. Discuss the right amount with your attorney.

Add Lease Language

To get those three enforcement rights, add the following language to your lease where it discusses the submission of annual sales reports: CLLI0115

Model Lease Language

If Tenant shall fail or refuse to submit the Annual Certified Report within [insert # agreed upon with tenant to reach statement due date] days after the end of each calendar year of the Lease Term, then Landlord shall have the right thereafter to employ its authorized representative to audit Tenant's books and records as may be necessary to certify the amount of Tenant's Gross Sales for such period(s) or Lease Year, and Tenant shall pay to Landlord:

a. The cost of such audit, as Additional Rent; and

b. $[insert amt., e.g, fifty dollars ($50.00)] per day for each day the Tenant fails to timely deliver its Annual Certified Report to Landlord (this payment is not to be construed as a penalty, but as Landlord's liquidated damages).

The three enforcement rights act as a club to get the tenant to submit the reports on time, say Lamy and Muhlebach. If the tenant is afraid of an audit and getting stuck paying the audit costs and liquidated damages, it may submit its annual sales reports on time, they say.

Consider Taking Other Steps to Encourage Prompt Reports

In addition to beefing up your lease, consider taking these steps to increase the likelihood that tenants will submit sales reports on time. They may help you get prompt submission of the reports without having to resort to your enforcement rights:

1) Give blank annual sales report form to tenant. Giving a tenant a blank report form to use means the tenant can easily fill in the appropriate information and return the report (certified by its accountant) to you, says Lamy. That should help the tenant prepare the report faster. Plus, every tenant's annual sales report will have the same format—making it easier for you to analyze and evaluate.

2) Use “soft touch” telephone call. If you're worried that threatening an audit and liquidated damages will sour your relationship with a tenant, first try a telephone call to “remind” the tenant to promptly submit an overdue report, suggests Muhlebach. Using this soft-touch approach should help you preserve good landlord-tenant relations.

3) Send reminder letter. If the tenant still doesn't submit its report, send the tenant a reminder letter that its annual sales report is due, Muhlebach suggests. In it, mention that the tenant's failure to submit the report is a lease violation.

If these three steps don't work, pull out the big guns and enforce your lease rights against the tenant, says Muhlebach.

CLLI Sources

Kenneth S. Lamy: President, The Lamy Group, Ltd., 650 Poydras St., Ste. 2245, New Orleans, LA 70130; (504) 525-9914; kslamy@thelamygroup.com.

Richard F. Muhlebach: Senior Managing Director, Kennedy Wilson Properties, 275 118th Ave., Ste. 105, Bellevue, WA 98005; (425) 453-2500; rmuhlebach@KennedyWilson.com.