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Should Internet Sales be Included as Percentage Rent?

For those not familiar with retail leases, a “percentage rents” clause or provision is one that is often included in a retail lease and provides for the payment of additional rent, depending upon the total sales of the tenant. WATCH THE VIDEO BELOW

Nearly 40 years ago, when I was tasked to review my first commercial lease, I noted this provision in the lease and objected advising the tenant that “the landlord wants to be your partner. That’s crazy, and you should never agree to it.” Little did I know at the time, that this type of provision was pretty standard. The deal fell through and the landlord never forgave me.

Years later, on behalf of landlords, I would often get involved in the audit and enforcement of these provisions and learned quite a lot about how tenants often tried to circumvent these obligations.

From about 2005 through 2014, I was little enforcement of a percentage rent provision, I think because many landlords were merely grateful if they were paid the minimum or base rent required by the lease. However, over the last few years, particularly in the major malls, I have begun to see a reemergence of percentage rent and the enforcement of its terms.

Now, with growing internet sales and retailers discovering creative ways to blend their internet with brick and mortar store sales, we have had to revisit percentage rent language and consider whether or not and to what extent it should include internet sales.

M. Rosie Rees and Ruth Schoenmeyer, both attorneys with the law firm of Pircher, Nichols & Meeks join me for a “Point/Counterpoint” setting forth some of the arguments and logic, both for and against including internet sales in a percentage rent provision. This is a good discussion. Whether you are a tenant or landlord or to what extent you agree or disagree with either viewpoint, you should conclude that additional focus and attention should be paid to this ever important provision.

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