Percentage Rent in Commercial Real Estate Leasing

Contact Neufeld Legal PC for commercial leasing legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Percentage rent is a rent payment in which a commercial tenant pays rent based on a percentage of their gross sales, either in addition to or instead of minimum base rent. The complexity associated with percentage rent demands an appropriate understanding from the outset of the commercial lease arrangement as to what the commercial landlord is seeking by way of percentage rent such that you, as the commercial tenant, can properly understand its financial implications and negotiate the commercial lease terms, including percentage rent, that works for your business.

As such, what are some essential aspects involving percentage rent that need to be addressed prior to entering into a commercial lease agreement.

Whether percentage rent is in addition to the basic rent; and whether it is payable only if certain thresholds are met. Percentage rent is typically viewed as the third form of rent calculation and payment, after basic or base rent and additional rent, although in some limited circumstances it may replace base rent or only come into effect after certain thresholds are realized by the business. As such, it is important to understand its interplay with other forms of rent and if there are scenarios where it isn’t payable, or if percentage rent is payable throughout the term of the lease arrangement. This in turn leads to commercial landlords looking to define the legal parameters of percentage rent, including that sums are paid as rent and not as a share of the commercial tenant’s profits, as well as the payment of percentage rent does not create a partnership or joint venture between the landlord and the tenant.
Understanding the methodology for calculating percentage rent under the commercial legal agreement, including:
1. Method, including whether the rate is fixed or graduated, and whether it applies only above a specified amount of gross sales, etc.
2. Clear definitions of factors and terms involved (e.g., “gross sales”).
3. Specified inclusions and exclusions for gross sales.
4. Whether or not minimum base payment is required (and other rent components, e.g., additional rent).
5. Method of payment (e.g., monthly, together with tenant’s monthly statement of “gross sales”).
6. Annual adjustments (e.g., specifying timing and whether audited).
Understanding what your obligations are as the commercial tenant with respect to percentage rent under the commercial lease agreement, including:
1. To operate the business continuously and to use the entire premises.
2. To operate during specified business hours; to be open for business when the building is open for business.
3. To keep adequate stock and staff to produce maximum revenues.
4. To use a specified trade name.
5. To maintain a specified ratio of selling area to floor space.
6. To keep records as specified (e.g., what type, where, for how long) and to allow the landlord to examine them.
7. To provide specified documentation (e.g., sales records) upon payment of rent or at specified intervals.
8. To honour credit cards.
9. To not operate a similar business within a given radius (otherwise gross sales of other business will be subject to payment of percentage rent). Consider whether this extends to related companies.
Whether the landlord is obliged to keep confidential the information that your business provides as part of its reporting obligations to determine percentage rent.
The commercial landlord’s audit rights and notice requirements as it relates to their ability to confirm the accuracy of the business’ revenues for purposes of determining the applicable percentage rent. This can include the commercial landlord’s right to an independent audit (for which the landlord will pay, unless statements are wrong by a specified amount - e.g., greater than 5%).
The commercial landlord’s remedies in the event of default, which would be effectuated, by among other things, failing to pay percentage rent or failing to correctly calculate and pay percentage rent, including:
1. Termination of the lease agreement.
2. Right to employ an auditor to review particulars for computing percentage rent.
3. Re-entering of the leased premises.
4. Payment of audit costs, interest, liquidated damages, etc.

The financial impact and legal intricacies of percentage rent are such that they must be seriously scrutinized prior to entering into a commercial lease agreement that requires the payment of percentage rent during the term of the lease .

For knowledgeable and experienced legal representation in negotiating, reviewing and drafting lease agreements, and protecting your business’ legal rights thereunder, contact lease lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

Percentage Rent in Commercial Leases

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