Don't Base Percentage Rent on Named Tenant's Gross Sales

If you want a tenant to include all sales and receipts generated from a space—including those generated by subtenants and occupants—don't define “gross sales” as the sales or receipts of the named tenant in and from the space, warns New York City attorney Kevin P. Groarke.

Consider what happened to a New York owner: Its lease required a supermarket tenant to pay, as additional rent during a renewal period, 1.25 percent of the “Gross Sales” exceeding the annual minimum rent for each lease year. The lease defined gross sales as “the gross receipts of Tenant in and from the Demised Premises.” The tenant sublet part of its space to an independently owned pharmacy. The tenant calculated additional rent based on its own gross receipts in the remainder of the premises, not on the subtenant's gross receipts from sales in the sublet space. The owner argued that the additional rent calculation should include a percentage of the subtenant's gross sales receipts, too.

A New York appeals court ruled that the lease didn't require the additional rent calculation to include a percentage of the subtenant's gross sales receipts. The term “Tenant,” as used and defined in the lease, referred specifically to the supermarket tenant by name, and not to any subtenants. Thus, the court reasoned that the language of the lease indicated that the parties intended to limit the additional rent to only the tenant's—not the subtenant's—receipts [45-02 Food Corp. v. 45-02 43rd Realty LLC].

Use Broader Gross Sales Definition

To avoid finding yourself in the same position as the New York owner, base the “gross sales” definition on sales and receipts of all business conducted at, on, or from any part of the space by “Tenant and Tenant's Occupants,” Groarke advises. For example:

Model Lease Language

“Gross Sales” shall mean the aggregate amount of the actual rental or sales price, whether wholly or partly for cash, credit, or otherwise, of all merchandise, tickets, food, beverages, and services sold, leased, licensed, or delivered whatsoever of all business conducted at, on, or from any part of the Premises by Tenant and Tenant's Occupants.

You will have to define “Tenant” and “Tenant's Occupants” elsewhere in the lease. To capture all of the gross sales, don't narrowly define “Tenant” as the name of the original tenant that signed the lease, warns Groarke. Instead, make sure “Tenant” includes not only the original tenant but also all successors and permitted assignees. And define “Tenant's Occupants” to include all concessionaires, licensees, subtenants, and anyone else holding rights to any part of the tenant's space, he adds.

By using these broader definitions of gross sales, tenant, and tenant's occupants, you have the legal right to require a tenant to pay percentage rent based on the tenant's, subtenant's, and all other occupants' gross sales and receipts generated at, on, or from the space, says Groarke.

• 45-02 Food Corp. v. 45-02 43rd Realty LLC: 830 N.Y.S.2d 304 (N.Y. Sup. Ct. App. Div. 2d Dept. 2007).

CLLI Source

Kevin P. Groarke, Esq.: Partner, Sonnenschein Nath & Rosenthal LLP, 1221 Ave. of the Americas, New York, NY 10020-1089; (212) 768-6917; kgroake@sonnenschein.com.