When retail tenants enter into lease agreements that include percentage rent clauses, they find themselves navigating one of commercial real estate’s most contentious battlegrounds: the definition of “gross sales.” This seemingly straightforward term becomes the foundation upon which additional rent calculations rest, making its precise definition a matter of significant financial consequence for both parties.
Percentage rent negotiations typically unfold as a strategic dance between landlords seeking to maximize their income from successful tenants and retailers working to minimize their rental obligations. Landlords naturally gravitate toward expansive definitions that capture every possible revenue stream flowing through their properties. They envision “gross sales” encompassing all transactions, whether paid in cash, credit, or bartered goods, including orders taken on-site but fulfilled elsewhere, catalog sales, and even employee purchases. This broad approach reflects their desire to participate fully in their tenants’ success.
Retailers, however, tell a different story. The retailers argue for narrow definitions that reflect only the revenue they receive from legitimate retail operations at that location, leading to detailed negotiations over what should and shouldn’t count as “gross sales.”
They also exclude internal transfers between their various locations, customer returns and exchanges, and bad debts that may never be collected. Credit card processing fees, rather than revenue, usually make the exclusion list.
Modern retail’s digital transformation has added new complexity to these negotiations. Online sales, mobile app transactions, and omnichannel experiences blur the traditional boundaries of location-based revenue. Tenants and landlords must now grapple with questions about which digital interactions should count toward percentage rent, particularly when online orders involve some connection to the physical store location.
What are Gross Sales?
Gross sales calculations are crucial in lease negotiations. Landlords typically require monthly or quarterly reporting with statements certified by CPAs or tenants’ officers and point-of-sale (POS) reports. They frequently negotiate audit rights, allowing them to verify the accuracy of reported figures. Tenants seek reasonable reporting requirements they can fulfill and confidentiality protections for their sensitive financial data.
Savvy negotiators on both sides recognize that clarity prevents costly disputes down the road. They work together to create specific definitions to avoid ambiguity. Still, they are flexible enough to accommodate the evolving nature of the retail business. The most successful arrangements acknowledge that percentage rent should reward landlords for providing valuable retail space while not penalizing tenants for revenue streams that don’t truly benefit from that location.
Negotiating gross sales definitions reflects the broader relationship between landlord and tenant. When approached collaboratively, these discussions can establish a foundation of trust and mutual understanding that serves both parties throughout the lease term. The goal isn’t simply to win individual negotiating points but to create a framework that allows the property and the business to thrive together.