Terminate Retail Tenant Refund Deductions From Internet Sales
Many retail tenants sell their products over the Internet. This new sales method has been a success for many retailers. But for a landlord, it may cut into its percentage rent.
Here’s the loophole: landlord, like many owners, may agree in the lease to let percentage rent tenants deduct refunds from the gross sales on which their percentage rent is based. So if a customer returns merchandise, the tenant can deduct the refund from its gross sales. But if landlord’s lease, as is typical, says the tenant may deduct “sales of merchandise for which cash has been refunded,” landlord may be unintentionally giving the tenant a break in percentage rent. The tenant could deduct a sale that was generated over the Internet and never originally included in its gross sales calculation.
A gross sales deduction for refunds is fair only if the tenant originally included the price of the refunded item in its gross sales. But a sale to a customer who buys an item over the Internet generally won’t be included in the gross sales the tenant reports to the landlord. And the customer from the tenant’s Website may wind up returning the item to the tenant’s store and getting a refund from that store.
When the sale isn’t included in the tenant’s gross sales and landlord lets the tenant deduct a refund for it, the tenant’s gross sales are artificially lowered. The landlord is letting the tenant deduct something that was not included in the first place. Since the sales weren’t made at or filled from the retail space, they may never be included in the tenant’s original gross sales calculation, and because of the faulty lease language, there is nothing the landlord can do.
To avoid this problem, let the tenant deduct a refund only if it’s for a sale that was made in the leased space and included in its gross sales.
I suggest you describe the refund deduction in the following way in their list of deductions from gross sales:
Sales of merchandise for which cash has been refunded, but only to the extent of such refund, if the selling price of such merchandise has been previously included in Gross Sales.
If the tenant disagrees with this language, explain that if it also sells items over the Internet, it can choose to follow the policy of some catalogue retailers who require their customers to return items by mail only.
This lease language will also help the landlord avoid this same problem if your tenant sells merchandise via catalogue mail order, or if it has several stores. In either of these cases, a customer could return an item to the tenant’s store even though it was bought elsewhere via mail order or at another location - and wasn’t included in gross sales.
Provided as an educational service by John Raymond Dunham, III, Esq..
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