Itemized Exclusions and Deductions in Percentage Rent Leases

To cut down on mistakes made by tenants over gross sales exclusions and deductions, many percentage rent leases require the tenant to itemize these exclusions and deductions in its monthly and/or annual sales reports. And many leases require the tenant to keep back-up documents – such as sale slips, cash register tapes, invoices, receipts and records – that will verify these exclusions and deductions.

An itemization will alert the landlord if a tenant mistakenly makes an exclusionary deduction that is ineligible under the lease. The landlord also gets a chance to make the tenant correct the error before it adds up. And the back-up documentation will help the landlord determine what the tenant really owes.

But tenants often don’t follow these lease requirements and some tenants use estimates or ranges rather than specific numbers. Tenants may also accidently throw out critical pieces of back-up documentation that they are required to keep.

These practices make it difficult for the landlord to quantify mistakes on exclusions and deductions. Landlords often know that the tenant is improperly itemizing its exclusions and deductions but it is powerless to stop the tenant because the lease doesn’t give them a practical remedy. Most landlords would rather not treat itemization and back-up information mistakes as lease violations and sue the tenant for damages or try to evict it; they just want the percentage rent they are entitled to.

Condition Exclusion/Deduction on Lease Compliance

The landlord can create an incentive for the tenant to properly itemize these exclusions and deductions and keep the necessary back-up documents. In the lease, make the tenant’s right to deduct or exclude specific listed expenses or revenue conditional on proper itemization of exclusions or deductions and retention of back-up documents, as required by the lease. If the tenant doesn’t comply with either of these requirements, it can exclude or deduct a particular item from the gross sales figure for that month. This means higher gross sales for the tenant – and higher percentage rent for the landlord.

To use this strategy, provide in the lease that any exclusion or deduction will be conditional on the tenant’s prompt submission of its monthly and/or annual gross sales report and any back-up documents required by the lease. And provide that the gross sales report must give all the information required by the lease so that the landlord can verify the particular exclusion or deduction. Elsewhere in the lease spell out both the itemization requirement and the requirement that the tenant keep certain back-up documents.

The following language can be incorporated in the section of the lease that lists the gross sales exclusions and deductions:
The foregoing notwithstanding, any exclusion or deduction of revenue or expenses from Gross Sales pursuant to paragraph [insert paragraph number that lists exclusions/deductions] hereof shall be conditional on: a) Tenant’s prompt submission to Landlord of a monthly and annual report of Gross Sales that, in Landlord’s sole opinion, provides all information required, in compliance with paragraph [insert paragraph number that sets report requirements] hereof to verify the amount of such exclusion or deduction; and b) at Landlord’s request, Tenant’s prompt submission of any Tenant records that Tenant is required to retain pursuant to paragraph [insert paragraph number] hereof.

Provided as an educational service by John Raymond Dunham, III, Esq..

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.