Restrict Tenant's Use of Estimates to Calculate Gross Sales Exclusions/Deductions

Like most owners, you may sometimes have to give in to a tenant's demand that it have the right to exclude or deduct certain revenue or expenses from gross sales—for example, deductions for refunds and credit card fees. But if you do permit some exclusions and deductions and your lease is like many we've seen, the tenant may try to use estimates, instead of actual figures, to calculate the exclusions and deductions. But estimates could be much higher than actual figures, which could inflate exclusions and deductions, warns financial management consultant, Kenneth S. Lamy. That could mean lower gross sales for the tenant—and lower percentage rent for you, he warns.

More Tenants Rely on Estimates

Lamy has seen a continuing growth in tenants' use of estimates to calculate their gross sales exclusions and deductions. Typically, they use estimates if they haven't kept accurate or complete sales records, he explains. Relying on estimates is convenient and may be financially beneficial for the tenant, but it's unfair to you, he says. Just as your tenants demand that you pass through CAM costs based on actual figures, so you should require that they base all of their gross sales deductions and exclusions on actual figures, Lamy adds. That's the only way to be assured that you're getting the full percentage rent you're owed, he says.

Many owners are aware that although their leases require tenants to keep complete and accurate sales records, some tenants use estimates to calculate gross sales exclusions and deductions when they should have used actual figures, says Lamy.

Require ‘Best Efforts' Standard

It may be impractical to totally bar tenants from using estimates, notes Toronto attorney Harvey M. Haber. A tenant can't always collect the necessary information to report actual figures by the time it needs to claim exclusions and deductions, he says. So the tenant may sometimes need to resort to using estimates. But you don't want a tenant to go overboard and always use estimates, even when it doesn't need to do so, he adds. That's why Haber suggests making the tenant agree to use its “best efforts” to use actual figures to calculate exclusions and deductions. By requiring best efforts, you're essentially saying that the tenant must do everything in its power to use actual figures instead of estimates.

To do this, Haber recommends that you use the following language in the section of your lease where you list the conditions for taking gross sales exclusions and deductions:

Model Lease Language

Tenant covenants and agrees to use its best efforts to utilize actual figures (rather than estimates) in calculating Tenant's reportable Gross Sales exclusions and deductions for the month so taken.

CLLI Sources

Harvey M. Haber, QC, LSM: Partner, Goldman Sloan Nash & Haber LLP, Ste. 603, 250 Dundas St. W., Toronto, Ontario M5T 2Z5; (416) 597-3392.

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