Terminate Lease for Tenant that Understates Gross Sales

If you’ve negotiated percentage rent provisions in your leases with several of your retail tenants at the shopping center you own, you’re probably relying on these tenants to give you correct gross sales figures so that you can get the percentage rent that you’re owed, and can gauge how well the tenants’ businesses are doing. But there have been scenarios where a dishonest tenant may try to undercut the owner’s percentage rent by lowering its gross sales figures. So to avoid having to continue to lease to a tenant that cheats like this, negotiate the right to end a lease with a tenant that understates its gross sales.

So how can you negotiate the right to end your lease with a tenant that’s sneaky with its gross sales reporting? If you catch the tenant in an audit, it may be able to correct the understatement without any serious repercussions—if you have a typical lease. Leases typically require the tenant to give you the correct gross sales figures and then pay the percentage rent deficiency plus your audit costs. If the tenant knows that it can understate its gross sales figures without being too severely penalized for doing so, it has no incentive to state its gross sales correctly in the first place.

A good way to cut the tenant’s incentive to understate its gross sales figures is to say in the lease that if you discover during your audit of the tenant’s books that it understated its gross sales you can terminate its lease, at your option. This termination right puts teeth in the requirement that the tenant give you correct gross sales figures. If the tenant knows that understating gross sales could lead to a lease termination, it will think twice before trying to slip incorrect gross sales figures by you. You shouldn’t have much trouble getting the tenant to accept your termination right. But there are some points that you may have to negotiate.

For ways to prepare for the three issues you’ll face when making this demand, and model lease language that will carve out your right to audit, see “Getting a Lease Termination Right for Tenant with Incorrect Gross Sales Report,” available to subscribers here.