As U.S. landlords and tenants negotiate short-term rental agreements to make it through COVID-19, many landlords are angling for percentage rent lease terms, in which rental rates rise as tenants’ sales rise. Up for debate is whether to count click-and-collect sales, meaning online purchases that are fulfilled from the brick-and-mortar store, be they same-day delivery, in-store pickup or curbside pickup.

It's clear that COVID-19 safety concerns have spurred more click-and-collect purchases. On average, one-third of U.S. consumers made such purchases monthly in the first three quarters of 2020, up from 28 percent a year prior, according to ICSC’s ongoing Consumer Engagement Surveys. Many landlords say those sales should factor in to the calculations for gross sales in percentage rent leases. And yet, tenants long have been reluctant to reveal their sales to landlords.

Why, then, would a tenant be interested in a percentage rent lease, let alone allowing click-and-collect sales to count toward the gross sales on which percentage rent would be based? It’s a tradeoff. Renegotiating could allow tenants to restructure their current leases or get shorter leases, handy ways to reduce overhead and try to stay afloat during the COVID-19 economic damper. In many cases, landlords are consenting to short-term, restructured leases "but are asking in return for participation in omnichannel revenue that touches store sales," said Richard Rizika, partner and co-founder of Beta, a retail technology and marketing advisory.

Agreeing to terms

Tenants in JLL-managed centers in the U.S. are pushing back less on including click-and-collect sales in their percentage rent calculations, says JLL Americas Retail president and CEO Greg Maloney. Regional and local tenants tend to be more malleable on the matter than large, national chains, he says. "We still see some of that old-school adversarial mindset, though we always try to work through it."

Tenants willing to consider including click-and-collect sales in the calculation for gross sales also want to make sure online returns and exchanges factor in, Maloney says of negotiations for new or revised leases. For that to work for existing leases, says Eversheds Sutherland partner Ruth Schoenmeyer, the definition of gross sales must already include language that in-store returns can be deducted from those sales, "but only if they were included in gross sales in the first place."

In other ways, too, parties to existing leases generally are stuck with pre-pandemic definitions of gross sales, said Schoenmeyer. In her cases, most large, national tenants maintain that online sales "simply are not allocated to the specific store where the merchandise is picked up,” the attorney said. “I don’t know how to disprove this position without being given access to a tenant’s sales records at the dot-com level, and I haven’t encountered any tenants willing to provide that access." Perhaps it’s a moot point for existing leases anyway, considering the breakpoint, or threshold of gross sales at which many percentage rent leases require tenants to pay a portion of the excess sales, may be out of reach for now. "I imagine few tenants this year are in danger of exceeding the breakpoints they negotiated in happier times," she said.

Rappaport leasing and brokerage representative Thomas Bolen has seen gross sales come into play in negotiations not just in case they soar but if they drop. A national apparel retailer that this year opened a Mid-Atlantic store in a property Rappaport was leasing asked to include a lease-termination option should gross sales drop below a threshold after the second year. "We understood that ask during such times, but it was also important for us to understand how the tenant calculated gross sales," Bolen said. Ultimately, the request was granted.

There are other nuances to consider. At Rappaport-leased properties, recent restaurant deals that required significant landlord finish-out "included some form of percentage rent," Bolen said. Eateries have been adamant, however, that their gross restaurant sales not include the delivery fees imposed by DoorDash and similar services, as the tenants foot those bills, said Rizika.

And in the UK, retail landlords are considering a percentage rent model that goes a bit farther, factoring in a physical retailer's online sales that are made in a certain vicinity of its store. "This includes the increase to online sales within a particular radius of, say, five or 10 miles from the store once the store opens," said Schoenmeyer. A 2018 ICSC report called The Halo Effect: How Bricks Impact Clicks supports the idea that brick-and-mortar stores contribute to retailers’ online sales. It showed that brick-and-mortar openings in the U.S. bump up traffic from the local area to those retailers’ websites by 37 percent.

RELATED: The Halo Effect II: Quantifying the Impact of Omnichannel

Accurate accounting

In the past, landlords often skipped or glossed over audits of stores’ sales, says Ken Lamy, founder, president and CEO of management consultancy The Lamy Group. Now, however, lenders and investors are requesting that landlords deliver increasingly detailed information about tenants’ sales. Thus, in landlord dealings with tenants now, "it's trust-but-verify, and this applies from the individual center owner to the small-portfolio landlord to the major REIT," he said.

"Now is a good time to reintroduce good old-fashioned reporting metrics” for tenants, Lamy said. “You can't afford any surprises these days.” Conversely, landlords need to be more transparent with tenants about their own financial positions and obligations and continue to be flexible with them in lease terms during the pandemic, he says. Unusually intractable landlords who won't work with revenue-strapped retailers during COVID-19 “can create strained relationships and lose tenants these days,” Lamy said. That can lead to empty spaces and thus co-tenancy violations “that allow other tenants to pay less rent,” he warned. “Negotiations should be about stabilizing the property."

RELATED: Can co-tenancy haunt landlords during and after COVID-19?

Percentage rents are used to some degree in all retail categories, according to Lamy. "They are everywhere, and it's critical that retailers and landlords move toward the middle on such issues as click-and-collect because the partnership aspect of their relationships is becoming very real and very critical in the pandemic."