A while back, we had addressed the “percentage rent unicorn” – that landlord dream within a dream (Hopefully, you are thinking The Princess Bride right now) – where landlords can bill percentage rent over a monthly breakpoint with no annual reconciliation. It is not something we see often, but when we do, it often leads to significant additional percentage rent.
However, the inverse of this clause happens frequently, especially with cotenancy provisions. “The tenant will pay, on a monthly basis, the lesser of minimum rent or x% of sales.” Typically, leases do not provide for an annual reconciliation when a tenant is on any sort of alternative rent. Can it be material? The lease I was just reviewing has the tenant pay the lesser of 2% of sales or minimum rent during the reduced rent period. Minimum rent runs $27k per month. In most months, alternative rent runs $20-$23k per month, which the tenant pays. However, in December, 2% of sales runs around $40k, but the tenant is only required to pay the “lesser of.”
Therefore, the fact that the tenant is not required to reconcile the 2% calculation on an annual basis causes the rent reduction to be $13k greater than it would be with an annual comparison, as reflected below:
So, while there are unicorns for landlords, the tenants have unicorns too.