Happy December everyone, and welcome to another episode of Saturday with Howard Kline and CRE Radio & TV. It’s Episode 9 to be exact. We’ve taken some time off, so in some ways it feels like Season 2, Episode 1. In today’s installment, Howard engages in a lively discussion with M. Rosie Rees and Ruth Schoenmeyer, who are both attorneys with the law firm, Pircher, Nichols & Meeks. The topic is whether internet sales should be included in the percentage rent as provided for in some retail leases.
Percentage rent has been an interesting issue in retail leases. Landlord’s sometime see the clause as a way of gaining additional rent if a store is extraordinarily successful. For them, it “right-sizes” the rent to keep it a consistent percentage of the store’s volume. This is also beneficial to the landlord in a environment in which there is inflation, without the need for a Consumer Price Index (CPI) adjustment clause in the lease. From a tenant’s perspective, percentage rent can be used as a negotiating tool to keep the negotiated rent and rent increases at a level where they feel they can be profitable.
The discussion of what is included and excluded in percentage rent clauses has always been a complex one, and national and regional tenants usually have the upper hand, except perhaps with the largest mall developers. Now, with internet sales becoming an increasingly important part of many retailers’ business, this negotiation has taken on an even greater complexity, with Tenants wanting to exclude internet sales and Landlord’s wanting them included. It seems as if it is a problem only King Solomon could solve, and there are interesting arguments to be made on both sides of the issue. Watch as this trio hashes out some of the complexities.