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The Sales Volume Termination Clause: Protecting the Landlord's Interests
As the popularity of lifestyle center developments continues to grow, the national and regional small-shop tenants forming the leasing backbone of these projects persist in their efforts to negotiate lease rights traditionally granted only to anchor tenants just a few years ago. One such right is the sales volume termination right. Generally, the sales volume termination clause allows a tenant to terminate its lease in the event sales from the tenant's premises do not exceed a predetermined sales volume during a specific period of time. The primary purpose of this clause is to provide a tenant with an exit strategy for an underperforming store. Although the cause of such underperformance may be attributable to a struggling shopping center, alternate causes include poor store management and misguided merchandising decisions, among others. Certainly, landlords would prefer to avoid granting tenants any termination rights; however, the relative bargaining position of the parties may require that the landlord concede to the tenant's insistence for a sales volume termination right. If a landlord finds itself providing a sales volume termination right, then the sales volume termination clause should be structured to address the tenant's specific concerns rather than serve as an open-ended termination right, and it should include a number of landlord protections.
Key Elements
The sales volume termination clause, when stripped bare, has two essential elements: the sales volume threshold and the measuring period. First, the parties must agree upon the sales volume threshold that will trigger the tenant's termination right. The tenant is motivated to set the threshold as high as possible in an effort to maximize its ability to utilize the termination right. If the sales volume threshold is set too high, the tenant will effectively guarantee itself the right to terminate the lease early, thereby reducing the value of the lease to prospective lenders and purchasers of the project. Accordingly, the landlord should negotiate as low of a threshold as possible to minimize the tenant's ability to utilize the termination right. To arrive at a meaningful sales volume threshold, the landlord and the tenant may establish the threshold as a percentage of the average sales volume at the tenant's other stores.
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