Make Tenant Complete Monthly Sales Report Form to Ensure Full Percentage Rent
Percentage rent tenants are typically required to give landlords the monthly sales reports they use to calculate their percentage rent. All too often, though, the tenant provides only its gross sales figure—the amount on which percentage rent is calculated under the lease agreement. It omits sales from transactions that you’ve agreed to exclude from gross sales, such as discounts to sales provided to its employees. And that can cause problems. For one thing, tenants may inadvertently or deliberately omit transactions that probably should count as gross sales. But since they’re not listed, you can’t make an informed judgment about whether the exclusion from gross sales is justified.
An effective way to overcome this problem and ensure you get all the information you need is to require the tenant to give you a comprehensive monthly sales report that lists not only gross sales but also each of its purported exclusions. By compelling the tenant to account for how it arrived at its ultimate monthly sales, you enhance transparency and smoke out potential errors and circumventions that might reduce how much percentage rent you receive.
Tenant Reporting Omissions Are Common
Tenant exclusions of what should be reportable sales from their sales reports are far from uncommon, experts caution. Of course, deliberate deceit is always a possibility. These ploys tend to be subtle and hard to track. Thus, for example, a tenant may seek to manipulate the lack of specificity in its sales report form or program to conceal sales on which it must pay percentage rent.
But attorneys tell us that most of the time, exclusions are inadvertent. For example, a national chain tenant may incorrectly omit certain transactions from gross sales that it should report under your lease if its leases with other shopping centers do allow it to exclude those kinds of sales. A tenant may also make an accounting or bookkeeping error in computing its reportable sales and exclusions.
Require Tenant to List Exclusions in Monthly Sales Statement
As the old saying goes, trust but verify. Attorneys advise that you take the risk of circumvention and error off the table by requiring percentage rent tenants to list all of their exclusions in the sales report they give you each month. Best Practice: Give each percentage rent tenant a paper or electronic template monthly sales report form that includes blanks for all the information you want them to list. You can base your form on our Model Form: Have Percentage Rent Tenants Use Your Form to Report Monthly Sales. Spell out in the lease that the tenant is required to complete that particular template and attach a copy or screen shot of the form to your lease as an exhibit.
Model Lease Language
Monthly Sales Report Form: In carrying out its duty to report Gross Sales to Landlord each month in accordance with Section __ of this Lease, Tenant shall complete and submit to Landlord a copy of the Monthly Sales Report Form attached to this Lease as Exhibit X. [Optional addition:] Tenant may use an alternative form for such purposes, provided that: (i) such other form lists substantially the same information as that required in Exhibit X, including but not necessarily limited to an itemized breakdown of sales that Tenant has excluded from its monthly Gross Sales report; and (ii) Landlord provides prior written approval for Tenant to use said alternative form in lieu of the form contained in Exhibit X hereto.
As long as tenants complete the entire form, you’ll have a much clearer picture of which transactions they believe are included and excluded from gross sales on which their monthly percentage rent is based. As a result, you’ll be able to identify and correct ineligible exclusions before they add up and take a significant bite out of your percentage rent over time. You can also red-flag specific exclusions that might be problematic and worth investigating, such as those that have an unusually high dollar amount and/or that deviate significantly from previous reports. At a minimum, you should instruct your managers to contact the tenant, point out the issue, and get an explanation.
Compromise: Let Major Tenants Use an Alternative Approved Form
Don’t be surprised if major or anchor tenants push back about using your sales report template, attorneys warn. Such tenants typically use their own IT systems to calculate and report their monthly gross sales.
Negotiating Strategy: Do some due diligence. Ask the tenant to provide you with a copy of its monthly sales report forms while negotiating the lease to ensure it includes substantially all of the information you need—that is, an itemized breakdown of excluded transactions. If so, be prepared to accept the tenant’s form; if not, ask the tenant to either revise it or supplement by listing the excluded sales. And what if the tenant flatly refuses? Answer: It becomes a business decision to determine whether you’re comfortable with the information the tenant is willing to report on its monthly sales form.
Management Strategy: Don’t hesitate to ask current percentage rent tenants to use your monthly sales report form even if the lease doesn’t expressly require them to do so, attorneys advise. Just send them a supply of blank forms along with a request that they fill out and send you a copy of one of the forms each month.
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