Make Kick-Out Right Dependent on Gross Sales Plus Online Sales
It’s common for retail tenants to negotiate a kick-out right—that is, the right to terminate the lease in the first few years if its gross sales fall below or don’t reach a certain threshold. This right is especially important for tenants that are considering expanding into a new location. That’s because a kick-out right allows the tenant to close its store quickly—and cheaply—if the location isn’t profitable or other factors make the location or market in that area undesirable.
A strong tenant or a tenant with a lot of leverage could force you to give it a kick-out right; if you must do this to lure a desirable tenant to your center, beware of a big loophole that many shopping center owners overlook: A kick-out right normally doesn’t require that the tenant’s Internet sales be included in its gross sales when calculating whether those gross sales fall below or don’t reach a certain threshold. This loophole lets a tenant manipulate its sales figures to so it can exercise the kick-out right.
A tenant that increases its online sales and reduces its in-store sales would be able to get out of its lease even if it isn’t struggling. Here’s how you can stop this manipulation.
Include Online Sales in ‘Gross Sales’ Definition
To stop a tenant from shifting sales of merchandise through its online presence so it can dry up its in-store sales, try to negotiate the inclusion of Internet sales in the definition of “gross sales” in the lease. Including the tenant’s Internet sales in the definition of “gross sales” for all purposes has an extra benefit—it gives you more percentage rent. But a savvy tenant will realize this and object to it.
A good compromise is to get your tenant to agree to include online sales in the definition of gross sales—but only to determine if its gross sales fall below or don’t reach the threshold that will trigger its kick-out right. If the tenant still balks at this, agree to an additional limitation: The gross sales definition covers only two types of online sales. The first type is online sales made through a website that originates from the tenant’s space, even if the merchandise is sent from an off-premises location. The second type is sales made from a website located off-premises but filled at the tenant’s space—for example, the customer pays for or picks up the merchandise at the space, or the tenant sends the merchandise from the space.
What to Say in Kick-Out Provision
You can take advantage of this compromise by adding language to your lease where it discusses your tenant’s kick-out right. Using this language in your leases should stop tenants from exercising their kick-out right, claiming that their stores’ gross sales fell below the set threshold, even though they were profiting from online sales. Ask your attorney before adapting the language for your leases.
Model Lease Language
Notwithstanding anything contained in this Lease to the contrary, for the limited purpose of determining whether Tenant shall have the right to terminate this Lease under Clause [insert number of clause granting tenant a kick-out right] hereof, Tenant agrees that the term “Gross Sales” shall include any and all Internet orders that are taken at or made from the Premises, whether or not filled at the Premises, and all other such Internet orders received or filled at the Premises.