Tenant Can Deduct Remodeling Costs from Percentage Rent

A tenant signed a 20-year lease in 1979 that gave it the option to renew for four successive five-year periods. The lease also gave the tenant the right to remodel the space at any time after the 15th year of the lease term, provided that at least 10 years of unexpired lease term and renewal options remained. The lease said that the tenant could deduct the remodeling costs from its percentage rent due. The tenant remodeled in 1997 and exercised its first renewal option in 1998 for a five-year term beginning in 1999. In 1999, the tenant realized that it hadn't deducted its remodeling costs from its percentage rent. When it tried to do so, the owner demanded that it pay the full percentage rent amount. The tenant refused, so the owner sued to evict it.

A Georgia appeals court ruled that the tenant could deduct the remodeling costs from its percentage rent. The court rejected the owner's argument that because only two years of the initial lease term remained in 1997 when the tenant remodeled, it had to exercise at least two renewal options (totaling 10 years) before it could deduct the remodeling costs from its percentage rent. The court said that the only reasonable interpretation of the lease was that there had to be at least two five-year renewal options left—whether or not those options had been exercised—before the tenant could get reimbursed for its remodeling costs [Eckerd Corp. v. Alterman Properties, Ltd.].