Don't Let Tenant's Restocking Fee Deprive You of Percentage Rent

Nowadays, many more retail tenants are charging a “restocking” fee (also known as an “open box” fee) to customers returning opened merchandise for a refund. A restocking fee typically is set at 10 percent to 20 percent of the item's purchase price and doesn't apply to items that are returned or exchanged because of defects. But if you're not careful, a potential loophole in your lease may let the restocking fee unfairly cut into your percentage rent, warns national financial management consultant Kenneth S. Lamy.

Typically, you'll agree in the lease that if a customer returns merchandise to the tenant's store for a refund, the tenant can deduct the amount of the previously reported sale as a refund from its gross sales. But here's the loophole: Nothing in the lease explicitly stops the tenant from deducting the full value of the refunded item from gross sales, even though it's pocketing a portion of that amount as a restocking fee. In other words, suppose a customer returns a nondefective opened item of merchandise to the tenant. The tenant refunds the full value of the item to the customer minus a 15 percent restocking fee. So the customer gets a refund of only 85 percent of the value. The tenant could then deduct 100 percent—rather than 85 percent—of the value of the refunded item from its gross sales.

This loophole lets the tenant artificially lower its gross sales, Lamy warns. The result: The tenant pays less percentage rent.

How to Plug Percentage Rent Loophole

It's easy to plug this loophole, notes Lamy. Say in the lease that if the tenant has charged a restocking fee (or any other type of fee for processing a returned item), the tenant may deduct from gross sales only the full amount of the “net return” (that is, the value of the refunded item minus the restocking fee), says Lamy.

To do this, add the following language to the section of the lease's percentage rent clause where it discusses deductions and exclusions from gross sales: CLLI0073

Model Lease Language

If Tenant charges its customers a restocking fee or any other kind of fee, cost, or expense as part of processing a return of an item of merchandise, then Tenant shall deduct from Gross Sales the amount equal to the value of the refunded item minus the total of such fees, costs, or expenses.

If Tenant Defends Full Deduction

A savvy tenant may argue that it should deduct the full value of the refunded item from its gross sales because it isn't profiting from the restocking fee, Lamy notes. The tenant may try to convince you that the restocking fee is merely a way for it to cover its costs of processing the return and repackaging the nondefective merchandise, he says. Try not to give in to this argument, if you can, says Lamy; especially since most retail tenants still don't charge restocking fees.

Practical Pointer: Make sure the lease also says that the tenant can't take a deduction for any refunded items unless those items were originally included in its gross sales, notes Lamy. Otherwise, the tenant will still pay less percentage rent than it really owes, he warns.

CLLI Source

Kenneth S. Lamy: President, The Lamy Group, Ltd., 650 Poydras St., Ste. 2245, New Orleans, LA 70130; (504) 525-9914; kslamy@thelamygroup.com.