Add Internet Sales to Gross Sales to See if Tenant Can Use Kick-Out Right

Many strong tenants considering an expansion into a new market or location are today demanding a kick-out right. A kick-out right lets the tenant terminate the lease in the first few years if its gross sales fall below or don't reach a certain threshold. This gives the tenant the security of being able to close its store quickly—and cheaply—if the new market or location turns out to be a flop.

If you're forced to agree to a kick-out right to lure a desirable tenant to your center, beware of a big loophole that many shopping center owners overlook: A kick-out right normally doesn't require that the tenant's Internet sales be included in its gross sales when calculating whether those gross sales fall below or don't reach a certain threshold. This loophole lets a tenant manipulate its sales figures—by increasing its Internet sales and reducing its in-store sales—so it can exercise the kick-out right.

Atlanta attorney Peter M. Hartman has seen retail tenants shift sales of merchandise to their Internet Web site so they could dry up their in-store sales. They then exercised their kick-out right, claiming that their store's gross sales fell below the set threshold, even though they were profiting from Internet sales.

Include Internet Sales for Limited Purpose

To stop this manipulation, you'll ideally want the lease to include the tenant's Internet sales in the definition of “gross sales” for all purposes, says Hartman. This solution has an extra benefit—it gives you more percentage rent.

But expect a savvy tenant to balk at including Internet sales in the definition of gross sales, at least for percentage rent purposes, warns Hartman. So try this compromise instead: Get your tenant to agree to include Internet sales in the definition of gross sales—but only to determine if its gross sales fall below or don't reach the threshold that will trigger its kick-out right, he says.

Hartman has gotten tenants to agree to this compromise, usually with an additional limitation. The gross sales definition covers only two types of Internet sales:

• Internet sales made through a Web site that originates from the tenant's space, even if the merchandise is sent from an off-premises location; and

• Sales made from a Web site located off-premises but filled at the tenant's space (for example, the customer pays for or picks up the merchandise at the space, or the tenant sends the merchandise from the space).

Add Lease Language

To take advantage of this compromise, add the following language to your lease where it discusses your tenant's kick-out right, says Hartman. CLLI0099

Model Lease Language

Notwithstanding anything contained in this Lease to the contrary, for the limited purpose of determining whether Tenant shall have the right to terminate this Lease under Clause [insert # of clause granting tenant a kick-out right] hereof, Tenant agrees that the term “Gross Sales” shall include any and all Internet orders that are taken at or made from the Premises, whether or not filled at the Premises, and all other such Internet orders received or filled at the Premises.

CLLI Source

Peter M. Hartman, Esq.: Partner, Hartman, Simons, Spielman & Wood, LLP, 6400 Powers Ferry Rd. NW, Ste. 400, Atlanta, GA 30339; (770) 955-3555; phartman@hssw.com.