Negotiate Mutually Beneficial Confidentiality Promise

Audits can help you uncover any discrepancies in what you’re collecting in percentage or other types of additional rent, so it might seem as if they’re always positive. But conducting an audit in a way that harms a tenant can leave you open to claims. It’s not unusual for a tenant, especially large retailers or tenants with competitors, to ask you to promise to keep any sales or business information you uncover when auditing their gross sales private. Confidentiality can help avoid having this information fall into the hands of a competitor. Even tenants that are publicly held companies—that have a lot of their financial information on file with the federal Securities and Exchange Commission (SEC)—will try to make this information not too easily available. That’s where a confidentiality promise comes in. Here’s what you should keep in mind when negotiating this provision.

Avoid Blanket Promises

It’s hard to say no to a tenant’s request for confidentiality, but making an unfettered promise that you later might not be able to keep is dangerous for you. Negotiate a confidentiality of gross sales information clause, like our Model Lease Clause: Don't Let Confidentiality Promise Backfire, to carve out exceptions to such a promise.

It’s natural to feel as though you’re pulled in two directions. There may be times when failing to divulge gross sales information could hurt you. For example, if you’re selling your shopping center, the sale may fall through if you refuse to give the prospective buyer the tenant’s gross sales information. And if you refuse to comply with a demand from a government agency, like a tax authority, for this gross sales information, you may break the law. But you’ll violate the lease if you give the buyer or tax authority this information.

How can you protect yourself from this predicament? Make sure you can divulge the tenant’s financial information in situations where not doing so could hurt you.

Make 12 Exceptions in Lease

Negotiate with the tenant to include these 12 exceptions in the lease clause on confidentiality. Make sure you get the right to disclose information in the following situations:

Situation #1: To accountants and consultants. Have the right to share any information with your accountant or any other consultant you use—such as a consultant that assists you with billing or auditing [Clause, par. a].

Situation #2: In the course of business. It’s also a good idea to be able to disclose this information when necessary in connection with your business at the center. This would cover you on the rare chance you’d have to reveal this information when billing tenants for rent, administering leases, or taking care of other center business [Clause, par. b].

Situation #3: To existing and prospective partners. Be sure you can share the information with any current—or prospective—business partners [Clause, par. c]. Otherwise, you might create internal dissention in your business.

Situation #4: To prospective buyers. If you’re selling all or part of your center, the prospective buyer may want to see the gross sales information. Be sure you have the right to give the buyer (or any other transferee) this information. Otherwise, you’ll risk losing the sale [Clause, par. d].

Situation #5: To current or prospective lenders. Also, give yourself the right to show your lender—or prospective lender—this gross sales information [Clause, par. e]. If you can’t supply this information, a lender may refuse to finance your loan.

Situation #6: To current or prospective insurers. Your insurer, or a prospective insurer, may also want to see this information [Clause, par. f]. The situation is the same as with a lender. You could jeopardize your insurance if you can’t give the insurer all the information it needs.

Situation #7: To your attorney. A legal issue might arise that requires this information. So give yourself an open-ended right to give any gross sales audit information to your attorney [Clause, par. g].

Situation #8: In connection with a judicial or administrative proceeding. You’ll want to give yourself the right to disclose the information if it’s connected to any judicial or administrative proceeding [Clause, par. h]. You may be involved in a lawsuit where this information is important. For example, suppose you have an arrangement with your management company to pay it a fee based on gross rents—including percentage rents—and you wind up in court in a dispute over the fee. You may need to show gross sales information to verify the percentage rent you collected.

Situation #9: When subpoenaed or required by law. You may also need to produce this information if you’re subpoenaed—or simply required by law to do so [Clause, par. i]. Otherwise, you could be fined. For example, the tenant may pay its store manager based on a percentage of the store’s gross sales. If the tenant and store manager get into a legal dispute over the manager’s compensation, you may be subpoenaed to give gross sales information—even though you’re not a party to the lawsuit.

Situation #10: In connection with a lawsuit between you and the tenant. You may wind up in a lawsuit with the tenant fighting over the lease. Make sure you can use gross sales information if you need it to prove your case [Clause, par. j].

Situation #11: To a governmental or quasi-governmental agency. A governmental or quasi-governmental agency, such as a tax authority that’s auditing the tenant, may ask you for this gross sales information. Don’t risk a penalty for failing to comply [Clause, par. k].

Situation #12: In any reasonable situation. Try to list a catchall exception—such as, “as is otherwise reasonable.” If possible, you want to cover any other situation where you must give this information [Clause, par. l]. But expect the tenant to balk at this open-ended exception.

Practical Pointer: Say in the lease that you’ll only use “reasonable efforts” to keep the gross sales information confidential [Clause, Intro.]. Otherwise, you’d be responsible for any leak—no matter how careful you were to keep the information under wraps.

Prepare for Typical Tenant Pushback

Some tenants may want some modifications to these exceptions. For example:

Confidentiality agreement from third party. The tenant may say it’s willing to let you disclose the gross sales information to your lender, insurer, or other third party only if you first get the third party to sign a confidentiality agreement. You should reject this demand. It’s too hard to monitor. Five years after you’ve signed the lease, it’s very unlikely that your employees will remember to ask a lender or insurer to sign a confidentiality agreement. Also, what happens if your lender or insurer refuses to sign the agreement?

Proof of prospective purchase. A tenant might worry that you’ll abuse some of the exceptions. For example, you could give the information to any third party and simply claim that it’s a prospective buyer for the center. As a compromise, you can agree in the lease that before you release the information, you’ll “represent”—that is, promise—to the tenant that the prospect is bona fide. But don’t make this compromise, if possible.

Not for voluntary disclosure. Tenants may argue that some of the exceptions could give you a green light to voluntarily hand over gross sales information—even in situations where you wouldn’t be hurt by not doing so. For example, if you’re allowed to give the gross sales information to a governmental or quasi-governmental agency, there’s nothing to stop you from voluntarily giving an agency the information, even if there’d be no penalty for not turning it over. When faced with this argument, you can tighten these exceptions. For example, say that you can disclose the information if you’re required to do so by law or any governmental or quasi-governmental authority, or if the disclosure is necessary to resolve litigation with the tenant.