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Rents In The Internet Age

The current positive economic climate has caused some landlords to pay attention once more to a potential profit center in leases -- the percentage rent clause. Although variations occur, percentage rent generally is calculated on gross sales earned at the premises after a minimum level, or "break point," is achieved.

Percentage rents typically are payable on a monthly or quarterly basis, with an annual reconciliation when total gross sales for the year are known. As well-crafted and refined as many percentage rent clauses have become over the years, the vast majority of such provisions entirely overlook the impact of the newest retail marketing and sales tool -- Internet shopping.

In-store computer links Since minimum lease rents generally are calculated on a per square foot basis, cost savings for the tenant can be achieved by occupying smaller stores (which display merchandise but carry very little stock) and by encouraging shoppers to use both in-store and at-home computer Internet access to order goods directly from corporate Web sites. Additional savings in personnel and inventory also result.

Not only will the Internet Age likely affect landlord's bottom line receipt of base rents, but without carefully crafted percentage rent clauses, gross sales from this newest form of consumerism also will be lost. Internet sales originating from in-store computer links with corporate Web sites have been relatively minimal.

However, as more in-store orders are logged over the Internet and delivered directly to consumers' homes, the store's location is bypassed. Without a separate record of such orders, percentage rent from such sales are literally "lost in cyberspace."

New accounting procedures needed In order to account for such sales in this new computer age, lease clauses must be updated to address these issues. From a landlord's perspective, percentage rent clauses should address both the tenant's right to use (and permit its customers to use) in-store computers linked directly to corporate Web sites and the need for accounting procedures that track such orders as well as sales generated from an individual store's Web site.

Tenants should pay special attention to language in percentage rent clauses that subject all sales "generated" or "originating" at the premises to be subject to percentage rent. If an in-store computer can link customers to any other retail Web site, the tenant has opened itself up to a claim that such orders trigger percentage rent payments, notwithstanding the fact that the tenant may not have control over (and under current programs, would not necessarily even know of) orders placed from on-site computers.

Restaurateurs take note This is a particular concern for a new breed of computer entertainment-based retailers, such as restaurants that provide Internet access at dining tables. Customers can "log on" and purchase products, order theater tickets and pick videos from various retail Web sites while dining. None of these orders result directly in sales for the restaurateur. Yet, without care, these "virtual" sales placed with other retailers may unknowingly translate into "actual liability" for percentage rent based upon the broad language of many percentage rent provisions.

The Internet opens the world to retailers, crossing geographic barriers that previously constrained retail opportunities. While most retailers selling on the Internet do not have any reason to be concerned about where their customers are physically located when accessing corporate Web sites, the location of the consumer and the servicing store is the key to landlord's ability to change percentage rents.

First move for landlords One way for landlords to immediately tap into opportunities on the Internet is to create a closed system within individual shopping centers. This can be done by establishing a Web site that accesses all retailers of a particular center.

Customers can "shop" a particular mall merely by visiting a strategically located kiosk or accessing the mall's Web site from their home or office computers. Busy shoppers can place orders with their local mall retailers via the Internet and find their purchases packaged and ready for pick-up when they arrive at the mall. This is one way both the landlord and the retailer can benefit from Internet sales.

Debby R. Zurzolo is a partner with the Los Angeles-based law firm of Greenberg Glusker Fields Claman & Machtinger L.L.P.

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