Collect Percentage Rent on Slotting or Placement Fees

If any of your retail tenants are collecting “slotting” or “placement” fees from any manufacturers, vendors, or suppliers, chances are they're not paying you percentage rent on those revenues, because your lease doesn't explicitly require them to. Slotting or placement fees are fees paid by manufacturers, vendors, or suppliers to a tenant to have their products slotted or placed in prominent locations in the tenant's store.

For example, the products may be slotted or placed on eye-level shelves, the end caps of aisles, or near cash registers. The fees typically take the form of a direct cash payment to the tenant or its corporate office or as a rebate or reduction on the price the tenant pays the manufacturer, vendor, or supplier of the products. A variety of retail tenants typically collect slotting or placement fees, including drug stores, grocery stores, discount department stores, home improvement stores, music stores, and book stores.

You may not be getting percentage rent on those fees because the “gross sales” definition in many leases says that only sales generated in, at, on, or from the space are to be included in the tenant's gross sales. This kind of language may allow a tenant to exclude slotting or placement fees from the revenue on which it calculates its percentage rent because slotting or placement fees aren't merchandise sales.

Even if the lease has broader language saying that any revenue generated in, at, on, or from the space must be included in the tenant's gross sales, a tenant might still try to exclude slotting or placement fees because the fees aren't specifically listed in the gross sales definition. In that case, you could challenge the tenant for excluding those fees—and probably win if the dispute wound up in court. But that could involve a big investment of time and money on your part.

Add Language to Cover Fees

You can easily avoid disputes with a tenant over whether slotting or placement fees are included in gross sales, while getting all of the percentage rent from slotting or placement fees that you're entitled to, says international financial management consultant Kenneth S. Lamy. Add language to your lease that says that any slotting or placement fees or similar revenue and rebates or reductions the tenant gets for products displayed or sold in its space must be included in the tenant's gross sales, says Lamy.

For example, add the following language to your lease's gross sales definition:

Model Lease Language

(x) All slotting or placement fees, revenues, and rebates or expense reductions realized by Tenant with respect to any products displayed or sold within the Premises.

CLLI Source

Kenneth S. Lamy: President, The Lamy Group, Ltd., Central Progressive Bank Plaza, 3916 Highway 22, Ste. 2, Mandeville, LA 70471; kslamy@thelamygroup.com.

Prevent Tenant from Evading Sublet Consent Requirement

Like most owners, you probably have leases that bar a tenant from subletting to a third party without your consent. But some leases we've looked at have a loophole that may let a smart tenant evade this requirement, warns New York City attorney Robert P. Reichman.

What's the Loophole?

The scheme tenants use is simple. Rather than sublet directly to the third party—and risk your rejection of the sublet—the tenant first creates an affiliate company. Then the tenant sublets the space to the affiliate without your prior consent. Leases typically let a tenant sublet to an affiliate without getting an owner's consent. The subtenant—that is, the affiliate—then transfers its ownership interests (such as stock in a corporation, interests in a partnership, or membership interests in a limited liability company) to a third party. That third party may or may not be an affiliate of the tenant. The third party moves into the space as the new subtenant and you're powerless to stop it.

How can the subtenant transfer its ownership interests—and with that its right to occupy the space—to a third party that may not be an affiliate of the tenant without your consent? A lease typically classifies a transfer of a majority of the tenant's ownership interests as an assignment, which requires your prior written consent. But many leases we looked at had this loophole: They don't say that a transfer of the subtenant's ownership interests is an assignment, too, Reichman explains.

Require Your Consent to Subtenant's Transfers

To keep your tenant from pulling off this scheme and to plug this loophole, add the following two requirements to your lease, suggests Reichman:

Require consent to transfer of subtenant's interests. Make it clear in the lease that a transfer of a majority of a subtenant's ownership interests is an assignment, requiring your consent, says Reichman. This applies to all types of subtenants—not only affiliates of the tenant, he adds.

To do this, add the following language to your lease's assignment clause:

Model Lease Language

A transfer of a majority of the ownership interests of Tenant or any subtenant shall be deemed an assignment of the Lease or Sublease, as the case may be, requiring Landlord's prior written consent.

Require consent if subtenant stops being affiliate. Clarify in the lease that your consent won't be required for the tenant to sublet to its affiliate—as long as the subtenant remains an affiliate for the duration of the sublease, says Reichman. Add that if the subtenant stops being an affiliate of the tenant during the sublet—because, for example, it transferred a majority of its ownership interests to a third party—your consent to the sublet is required, he says.

Add the following language to your lease where it discusses subletting to an affiliate. Also, make sure you define “Affiliate of Tenant” elsewhere in the lease:

Model Lease Language

Landlord's consent shall not be required for a sublet of all or any portion of the Premises to an Affiliate of Tenant; provided that such subtenant remains an Affiliate of Tenant throughout the term of the sublease. If at any time after the effective date of a subletting to an Affiliate of Tenant the subtenant ceases to be an Affiliate of Tenant, then Landlord's consent to such sublet pursuant to Clause [insert # of sublet consent clause] hereof shall be required as of the date such subtenant ceases to be an Affiliate of Tenant.

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Practical Pointer: What happens if you decide to withhold your consent to the sublet after the subtenant stops being an affiliate of the tenant? The tenant would be in default of the lease and would have to cure—that is, fix—the default by having the subtenant leave the space, says Reichman.

CLLI Source

Robert P. Reichman, Esq.: Partner, Siller Wilk LLP, 675 Third Ave., 9th Fl., New York, NY 10017-5704; (212) 981-2323; rreichman@sillerwilk.com.