Excluding 'Wholesale' Sales from Percentage Rent Can Cost More Than You Bargained For
Some types of percentage rent tenants, such as building supply and paint stores, are apt to insist on carving out “wholesale sales” since they make less profit on those sales. You may have little choice but to accept this demand, especially when the tenant is a retail giant like Home Depot or Lowe’s. But if you don’t take the right precautions, you could end up losing much more percentage rent than you expect.
The problem is that the word “wholesale” doesn’t have a set legal meaning. As a result, if you use the word in the percentage rent exclusion without providing a clear definition, you and the tenant may clash over which sales count as wholesale. If the dispute ends up in court or arbitration, the tenant’s interpretation may prevail. And that can cost you a lot of money.
Landlord Stands to Lose $254,000 in Percentage Rent
If you don’t believe, ask the Maine landlord who was involved in a $254,000 lawsuit over the meaning of “wholesale” sales in a percentage rent lease. The tenant agreed to pay rent equal to “6% of net retail sales.” The lease excluded “wholesale” sales but didn’t define “wholesale.”
The tenant had sold paint and other home improvement items in the space for 25 years. During that time, it never told the landlord which “wholesale” sales it excluded from its net percentage rent calculation. When the landlord discovered that the tenant had excluded sales to builders and contractors, it sued for lost percentage rent. The tenant contended that its sales to personal use and household customers counted as “retail” and that its sales to business and nonresidential customers were “wholesale.” The landlord was flabbergasted and insisted it never intended the “wholesale” lease carve-out to be so broad.
The landlord struck first blood when the court awarded it summary judgment. But the appeals court reversed, ruling that the terms “wholesale” and “retail” were “reasonably susceptible to different interpretations.” So, it ordered a new trial to take a closer look at what the parties’ intentions were in entering the lease, leaving the landlord to sweat out the $254,000 and pressuring it to reach a settlement [Tondreau v. The Sherwin-Williams Company, 638 A.2d 728 (1994)].
Solution: List Excluded ‘Wholesale’ Sales
To avoid disputes like this, specify which sales the “wholesale” percentage rent exclusion in the Gross Sales, Exclusions, section of your lease covers. The actual list of excluded sales will vary depending on the tenant’s business and negotiating leverage. Had the landlord in the Tondreau case taken this approach, it could have negotiated to include sales to contractors and builders as part of percentage rent or, at the very least, made a more accurate and reliable assessment of its expected earnings under the lease.