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Identify Percentage Rent Issues that May Impact the Assignment and Subleasing of Retail Space
Shopping center leases often contain percentage rent clauses that provide for the ability of the landlord to share in the sales of a tenant over a specific sales threshold while providing the tenant with a lower total rent when sales do not meet the sales threshold. A typical percentage rent provision obligates the tenant to pay a percentage (ie, the percentage rent rate) of the amount of gross sales generated by and from the tenant's business operated at the leased premises, that exceed the threshold amount, ie, a “sales” base or “breakpoint,” as additional rent.
The terms of the lease may require that the payments be made by the tenant to the landlord on a monthly or quarterly basis ' which may require estimated or escrow payments similar to common area maintenance payments based upon an estimate and reconciliation after the end of the applicable lease year ' or on a yearly basis. Although the specific terms of the percentage rent provision may vary, based on the bargaining position of the parties, this lease provision is usually tailored to the original tenant's initial use of the leased premises based upon the type of business to be conducted, the anticipated sales volume, the rent, and the term of the lease.
The term of shopping center leases may be long in duration, eg, the initial term of a movie theater, supermarket, or department store lease may be at least 20 years, plus a number of extension options, and the initial terms of leases of other types of big box tenants or national or regional retailers may be at least 10 years in duration plus options. During the term of a lease, many factors, including changing market conditions, change in the character of a shopping center (eg, from predominately retail to office), and/or declining sales, may contribute to a tenant's decision to evaluate its options at a particular retail outlet. These options may include a decision to shutter its space and pursue an assignment of its leasehold interest to a third party or sublease the premises to a third party, who will use the space for a different use. Shopping center leases contain various provisions that may impact a tenant's proposed assignment of its lease or subleasing of the premises to a third party for a different use. One of these provisions is the percentage rent clause. The percentage rent clause may limit the type of user that the tenant may pursue in connection with such an assignment or subletting, due to the economics contained within the percentage rent clause ' unless the landlord is required to amend the percentage rent provision to accommodate the new use.
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