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The real question here is: if you have a tenant who you think is not accurately reporting their sales, do you really want that tenant?
The percentage leases across my firm's portfolio are with large credit tenants which generally have real estate departments that at the end of their lease year for the given store, send us a report indicating annual sales and how much - or not at all - percentage rent they owe us. We take their report at face value, accept our check (or not), and move on.
If your situation is that you have a small tenant that has a percentage lease and you think may be under-reporting, the first question should be a financial analysis - does your suspected loss exceed the projected cost to hire an audit firm and then recover your due?
As to your actual question: The percentage leases with which I'm familiar have inspection/audit clauses that allow the landlord to inspect/audit within a prescribed period of time of the sales declaration by tenant. The protective measures a landlord can take before signing a lease is reasonable due diligence on your prospective tenant - which you should do anyway. Along with the actual lease agreement, that is your front-end protection.
There is a requirement in every lease that the tenant enters into the agreement in good faith and the landlord accepts with good faith that the tenant will pay the prescribed rent. If you're uncomfortable with the murkiness of a percentage lease, don't sign one.
Limoncello Buyout great answer. thank you
Got you fam
Why don't you post the actual percentage rent clause from the lease? As Limoncello Buyout mentioned, the lease usually dictates Landlord's right to audit, audited/unaudited condition of sales reporting, frequency, etc, and penalties for under reporting or not reporting.
Another way to protect your interests would be to simply install a POS system in the store which gives the landlord and the tenant access to the sales data. It's common sense when you think about it. Afaik, all mall developers in my country do this.
No need for the whole audit nonsense.
At least in the U.S., and/or at least in the markets where I play, landlord having direct access to sales and customer data via a POS system absolutely wouldn't fly for many reasons, but let me give you a couple from the perspective of the landlord:
1 Who's paying for it? I'm not. I am fully uninterested in bearing or sharing the cost of however much it might be to add/update POS systems in my tenant's store(s). This adds no value to my shopping center, only administrative complexity. Seems like a high cost to pay for unnecessary peace of mind - at present I don't feel the need to be big brother in this transaction. 2 I 100% do not want the liability of even tangentially having access to my tenant's customer data. I don't want to pay more than I already do for insurance policies. If my tenant gets hacked, does that mean I in some way share in my tenant's liability? I feel like I would have more-than-zero exposure. At a minimum my insurance company would be required to hire a lawyer to represent my interests in the subsequent lawsuits...for which I am certain I would have to kick in some cash. No thanks. Not worth it.If my tenant lies about its income to me, it probably also lying to IRS. If the IRS discovers tax fraud was committed, they'll audit my tenant for me. I'll gladly pay my lawyer to represent my interests in a case where I know there is a high degree of probability that A) tenant misquoted its revenues; and B) the tenant is big and deep-pocketed enough to pay both the IRS and me - and my lawyer - and anyone else. And then I'll happily sign them for a new 10 year lease as long as they're still paying rent.
But for the time being, I'll happily float along on the assumption that my tenant is reporting reasonably accurate sales figures - and instead of worrying about spending money to install equipment I don't care about to obtain figures that are probably correct anyway, I'll just go buy more properties and focus on delivering solid, steady returns for my investors.
If its a small tenant, who really cares? You're most likely a large firm and the $12-15,000 you collect off of the percentage rent will not hurt your returns. Leave it be and keep a happy tenant in place. When time to sell comes along, mention that you're not enforcing percentage rent... it's more meat on the bone for the next guy.
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