Include Off-Site Sales in Restaurant Lease's ‘Gross Sales' Definition

August 31, 2006

Like most owners, you'll want to collect as much percentage rent as possible from your tenants. But many restaurant leases we looked at have a big and costly loophole: Suppose a restaurant tenant makes money by filling orders for an off-site business it owns—say, a comedy club, a bar, or another restaurant. For example, the tenant prepares food in the restaurant's kitchen—located in your building or center—and then delivers this food to a nearby sports bar, which it also owns. Can you force the tenant to pay percentage rent on the proceeds from these sales or rentals?

Like most owners, you'll want to collect as much percentage rent as possible from your tenants. But many restaurant leases we looked at have a big and costly loophole: Suppose a restaurant tenant makes money by filling orders for an off-site business it owns—say, a comedy club, a bar, or another restaurant. For example, the tenant prepares food in the restaurant's kitchen—located in your building or center—and then delivers this food to a nearby sports bar, which it also owns. Can you force the tenant to pay percentage rent on the proceeds from these sales or rentals?

If your restaurant lease is like many we've seen, you may not be able to collect percentage rent on these proceeds. The typical gross sales definition doesn't include proceeds from sales and rentals of merchandise, food, beverages, or services by the tenant through its off-site businesses.

What to Say in Gross Sales Definition

To plug this loophole, New York City attorney A. Barry Levine and Chicago attorney Carole L. Pechi suggest broadening the gross sales definition to include orders for the sale or rental of merchandise, food, and beverages, which are filled at the restaurant in your building or center for off-site use or consumption. That is, Pechi explains, gross sales should include proceeds from:

  • The restaurant's deliveries, take-out, and catering services;

  • Merchandise, food, and beverage items prepared by the restaurant but sold at any of the tenant's (or its related entity's) other locations or at third-party locations.

  • Sales or rentals of related equipment or services—such as waiting and bartending services.

Add the following to your restaurant lease's gross sales definition, say Levine and Pechi:

Model Lease Language

a. “Gross Sales” shall also include, but are not limited to, requests for services to be performed or orders taken for sale or rental of merchandise, food, and beverages received or filled by Tenant in or at the Premises, but the performance or delivery thereof is made from or at any place other than the Premises.

b. The parties acknowledge that the foregoing is intended to include in “Gross Sales” the proceeds from:

(i) The sale or rental of merchandise, food, and beverages prepared or sold from the Premises for “off-premises” use or consumption, including, but not limited to, deliveries, take-out, catering, or for sale in any other location of Tenant, its affiliates, or any location of any third party; and

(ii) The sale or rental of all equipment and services provided by Tenant in connection with such sale or rental of merchandise, food, and beverages, including, but not limited to, waiters, bartenders, cleaning staff, dishes, glassware, linens, and silverware.

CLLI Sources

A. Barry Levine, Esq.: 320 E. 23 St., New York, NY 10010; (212) 477-5118; blevine2@nyc.rr.com.

Carole L. Pechi, Esq.: Member, Holland & Knight LLP, 131 S. Dearborn St., 30th Fl., Chicago, IL 60603; (312) 263-3600; carole.pechi@hklaw.com.

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