Tenant Must Pay Percentage Rent on Commissions Only

July 31, 2003

A “retail communications store” tenant offered a service where a customer could buy a cellular phone from the tenant and could also buy a service contract for cellular phone service. If the customer did so, the phone company would pay a commission to the tenant. The percentage rent clause in the tenant's lease defined “gross sales” to include “income derived from the sale of all services and all products.” In calculating its percentage rent, the tenant included only the commissions it got from the phone company—not what the customer paid for the service contract.

A “retail communications store” tenant offered a service where a customer could buy a cellular phone from the tenant and could also buy a service contract for cellular phone service. If the customer did so, the phone company would pay a commission to the tenant. The percentage rent clause in the tenant's lease defined “gross sales” to include “income derived from the sale of all services and all products.” In calculating its percentage rent, the tenant included only the commissions it got from the phone company—not what the customer paid for the service contract. So the owner sued the tenant for the additional percentage rent due.

A New York appeals court ruled that the gross sales included only the commissions the tenant was paid and no additional percentage rent was due. The court said that gross sales must be tied to income actually received by the tenant. Since the customer paid the phone company—not the tenant—for the service contract, the price of the service contract shouldn't be included in the gross sales [Bombay Realty Corp. v. Magna Carta, Inc.].

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