Gross Sales Reporting in a Retail Lease
In a retail lease, where the tenant is paying percentage rent, the gross sales reporting provision plays an important role. These provisions outline the tenant’s obligation to report their sales revenue to the landlord on a regular basis and it is this sales information that is typically used for calculating the percentage rent that is payable under the lease. Consequently, understanding and negotiating these provisions is important for both landlords and tenants to ensure a fair and transparent calculation of gross sales, and, in turn, percentage rent, to avoid potential disputes from arising in the future.
Key Considerations in Negotiating Gross Sales Reporting Provisions
Defining Gross Sales
Unsurprisingly, perhaps the most important aspect of negotiating a gross sales reporting provision is the defining the term “gross sales.” This term should be clearly defined in the lease to avoid ambiguity and potential disputes. Gross sales are often defined to include the entire amount of the actual sales price of all sales conducted in or from the premises, subject to certain, negotiated exclusions.
Common exclusions from gross sales often include:
– Sales or excise taxes collected from customers and paid to the government.
– The value of merchandise exchanged between the tenant’s other stores or locations.
– Refunds or returns made by customers.
– Proceeds from the sale of trade fixtures or equipment not made as a part of the tenant’s ordinary course of business.
By clearly defining gross sales and its exclusions, both landlord and tenant can avoid misunderstandings and ensure that the percentage rent calculation is based on an accurate and agreed-upon revenue figure.
Reporting Frequency and Format
Another important consideration in negotiating a gross rent reportion provision is how often the tenant must report their gross sales to the landlord. Landlords typically require monthly or quarterly reporting, often with an annual true-up. The format of these reports should also be specified—whether in a detailed written statement, electronic format, or another agreed-upon method. Clear reporting timelines and formats help maintain transparency and allow the landlord to monitor the tenant’s performance and calculate percentage rent accurately. Both sides should run potential lease terms by their internal accounting teams to make sure they are achievable and provide all required information as reports will need to be generated and exchanged continuously throughout the lease term
Audit Rights
To safeguard against potential underreporting or errors in the gross sales figures provided by the tenant, landlords often negotiate for the right to audit the tenant’s reports. These rights allow the landlord to review the tenant’s sales records to verify the accuracy of the reported figures. If discrepancies are discovered, the lease will provide for adjustments to the percentage rent, along with potential interest and penalties. Each lease is different, but often the performance of such an audit is at the landlord’s cost, unless significant discrepancies are discovered.
Confidentiality of Sales Information
Given the sensitive nature of sales data, tenants often seek to include confidentiality provisions in the lease to protect their financial information. While landlords need access to gross sales figures to calculate percentage rent, tenants may require assurances that their sales data will not be disclosed to third parties or used for purposes other than rent calculation. Landlords should be prepared to address these concerns and negotiate confidentiality terms that balance the tenant’s need for privacy with the landlord’s need to share the information with trusted advisors as well as existing and potential lenders, investors, and purchasers of the property.
Conclusion
Carefully negotiating a gross sales reporting provision allows both the landlord and tenant can ensure a fair and transparent rental arrangement that aligns with their respective interests and business objectives.
