Condition Rent Break on Including Off-Site Sales in Percentage Rent Calculation

You might agree to give your retail tenant a rent concession—such as below-market minimum rent—to persuade it to sign your lease. And in return for the concession, you would expect the tenant to pay you a lot of percentage rent if its business takes off.

But if your lease is like many we've seen, it may include a loophole that lowers the amount of percentage rent you can collect. Here's the loophole: The lease doesn't require the tenant to include in its percentage rent calculation sales of merchandise and services from its space in your center and its nearby stores. The tenant could transfer its better quality and more profitable merchandise or services to nearby stores and keep less desirable merchandise or stop providing services at its store in your center to keep down gross sales and percentage rent.

Loophole Trips Up Mississippi Owner

A Mississippi owner discovered this loophole the hard way: Its lease required the tenant to use the space as a retail automobile dealership and pay “bonus rent” for new automobile sales exceeding 100 automobiles per month. The owner expected to collect the bonus rent as compensation for giving the tenant below-market minimum rent. The tenant later acquired land near its leased space and moved its new automobile sales to the other location. The owner said the tenant was required to pay bonus rent for new automobile sales occurring at the tenant's other location, but the tenant disagreed.

Mississippi's top court ruled that the tenant didn't owe the owner bonus rent for new automobile sales occurring at its other location. The lease required the tenant to pay bonus rent for new automobile sales occurring only at its space, the court noted. If the owner wanted to collect bonus rent from sales at the tenant's other location, it should have expressly said so in the lease, the court said [Facilities, Inc. v. Rogers-Usry Chevrolet, Inc., June 2005].

Add Sales Occurring Within Radius

If you want a tenant to compensate you for a rent concession by paying percentage rent, but don't want to end up like the Mississippi owner, do the following, advises New York attorney Craig Ingber: Say in your lease that “gross sales” includes sales or rentals of specified merchandise (for example, new automobiles) and/or services from any of the tenant's stores located within a certain radius of its store at your center. If the tenant operates stores under any other trade name within the radius, include sales from all of those stores in the gross sales definition, too.

You'll have to negotiate the size of the radius with the tenant. Consider whether the building or center is located in an urban, suburban, or rural area. For example, if you're in a densely populated urban area, a reasonable radius could be just a few square blocks, says Ingber. But in a more rural area, a reasonable radius could be several miles. Obviously, the more negotiating power the tenant has, the smaller the radius will be.

Add the following to your lease where it defines gross sales, says Ingber:

Model Lease Language

(x) All revenues realized by Tenant with respect to the sale or rental of [insert specified merchandise or services] from stores operated by Tenant within a [insert distance]-mile radius, as measured from any point on the perimeter of the Shopping Center (as outlined on Exhibit [insert #] hereto), including all stores within such radius operated by Tenant under the trade name(s) [insert trade name(s)] or additional trade names for related or similar merchandise.

Insider Source

Craig Ingber, Esq.: Member, Belkin Burden Wenig & Goldman, LLP, 270 Madison Ave., New York, NY 10016; (212) 867-4466; cingber@bbwg.com.

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