“… the breakpoint shall likewise be abated…”
July 23, 2017
“… the breakpoint shall likewise be abated…”
This clause is almost a throwaway clause – one landlords and tenants give much consideration to – and it is the majority of retail leases.
So, what does it mean? If the tenant is struggling, and the landlord agrees to reduce minimum rent by 50%, then the 「breakpoint shall likewise be abated.」 To keep things simple, assume a tenant pays $100,000 per year in minimum rent and 10% of sales over a natural breakpoint ($100,000/10% = $1,000,000). If the landlord reduces minimum rent by 50% and 「the breakpoint is likewise abated,」 the tenant pays $50,000 in minimum rent and 10% of sales over $500,000. The intent is almost to ensure that the landlord doesn’t give too much.
But, its true impact is not always considered. Let’s consider a tenant with a lease commencing 10/1/17. They have the same $100,000 minimum rent and 10% of sales over the $1,000,000. They pay percentage rent on a 12/31 lease year end (including the true partial lease year*** ending 12/31/17). Now, let’s assume that in lieu of a tenant improvement allowance, the landlord gives a three month rent abatement. So, for October-December, 2017, the tenant pays no minimum rent. If that innocuous little statement (「the breakpoint shall likewise be abated」), the tenant is the required to pay 10% of sales over a 「likewise abated」 breakpoint, or $0. Therefore, the tenant pays 10% of all sales for 10/1-12/31/17.
The tenant was expecting essentially a $25,000 allowance as a three month rent abatement, but, it is possible, they actually got nothing because they end up paying the full amount in percentage rent.
This comes into play anytime there is a reduction is rent – a pure rent abatement, an abatement for a tenant improvement allowance, ant type of rent concession, alternate rent due to a cotenancy failure, alternate rent due to an exclusive violation and so on. Therefore, it is critical to understand this little bit of throwaway language and how it may impact a tenant’s percentage rent requirements.
*** – See a previous post on true partial lease years.