Don't Automatically Agree to Termination for Low Gross Sales

It’s preferable to not give a tenant a “performance kickout right”—that is, a right to terminate the lease if its gross sales during a certain period fall below or don’t reach a certain dollar amount. That’s because terminated leases don’t generate rental income and may reduce the value of your center as far as lenders are concerned. Also, you may wind up with dark space for a while if you can’t find a tenant. And if the tenant terminates the lease under the performance kickout right, it could end up triggering other tenants’ cotenancy remedies—creating a bigger mess for you to clean up.

A retail tenant—especially one that’s entering a new market or location—will typically argue that it needs the performance kickout right to protect its interests. If it’s a desirable tenant, you may have to consider giving it this right so it has the security of knowing that it can close a store quickly if the new market or location doesn’t meet gross sales expectations and becomes a financial drain.

You can negotiate a kickout right that works for you and the tenant. Compromise with the tenant by agreeing that you’ll reduce rent until the gross sales goal is met, rather than allowing it to terminate its lease. To do this, say in the lease that the tenant gets this rent reduction right if its gross sales during whatever lease year or years you agree to—say, during the second or third lease year—are less than a set threshold. Also say that the tenant can reduce its minimum rent (but not its additional rent) to an amount equal to a percentage of the minimum rent or a percentage of its gross sales. And because a retail tenant’s sales may vary widely during the year, it’s reasonable to agree that the reduced minimum rent will remain in effect until the tenant’s gross sales meet or exceed the set threshold for an entire lease year.

For the tenant, terminating the lease may not make sense if it spent a lot of money building out and stocking its space. And the tenant won’t find its minimum rent obligation to be as much of a financial strain if that rent is more proportionate to its actual sales. You’ll benefit from this compromise because although you might get less minimum rent than you hoped for, you’re less likely to get left with a dark space or face cotenancy worries. Show this language to your attorney before using it.

            Model Lease Language

If Tenant’s Gross Sales during [insert time period, e.g., the second Lease Year] are less than the Minimum Sales Threshold, Tenant shall have the right to reduce the Minimum Rent payable hereunder to an amount equal to [insert %] of [choose one: the Minimum Rent otherwise payable during such period/Tenant’s Gross Sales during such period] until such time as Tenant’s Gross Sales have met or exceeded the Minimum Sales Threshold for an entire Lease Year.

Make sure you define “Minimum Sales Threshold” elsewhere in the lease. And specify that this rent break will terminate if the tenant defaults during the reduced minimum rent period. Put that in the lease wherever you include the Model Lease Language.