In shopping centres and in some stand-alone properties of a retail nature it is quite common to see a landlord use percentage rents as part of the lease structure with a tenant. The strategy is useful when a tenant is new to a property or if the property is new to a location such as in a new property development. Either way it allows the tenant to build their business, sales, and their marketing efforts. Eventually a percentage rent would in most cases revert to a standard market rental paid on a monthly basis.
So perhaps this rental strategy is useful in your location? Here are some ideas to help your review of the strategy:
- Gross income – The rent itself has to be based on gross sales achieved by the tenant for a given period; most commonly the period is set for monthly or quarterly.
- Audited sales figures – It is wise to have the gross sales figures submitted in a timely way by the tenant at the end of a fixed agreed time (perhaps monthly), and then those figures should be audited for accuracy. It is common for some tenants to deliberately shift or reduce gross sales figures so the rent to be paid will be less. Be careful with the calculation and get those figures audited regularly by an independent financial expert.
- Extra charges – The rental is one thing to be based on a percentage of sales, however there are other charges to consider and raise for the tenant to pay; that is certainly the case in situations where the rent is a net rent. Other payments will be required such as a contribution towards outgoings based on occupied area of the building, payment of marketing funds, and consumable occupancy costs for services (such as electricity and water).
- Lease documentation – A lease between a landlord and a tenant using the ‘percentage rent’ method of rental should be carefully crafted by an experienced retail solicitor that understands shopping centres and the particular property in question. It is common for the percentage rental to revert to a standard rental after a period of time (perhaps 12 months or 18 months).
- Pay in advance – In some leases and properties of this type, tenants may prefer to pay rental in advance based on an assumed level of sales set every quarter. At the end of each quarter the audit of sales figures can occur and adjustments can be made at that point. In a busy retail property where many tenants are on a ‘start up’ rent of this type, the process of quarterly auditing works very well.
In closing on this point and the topic, it is worth noting that you would only put a tenant on this rental structure and lease type if they suited the landlord, the property, matched the customer profile, and were committed to the property for the long term. If all these strategies are correct for the landlord’s situation, then proceed.