Daily Development for
Wednesday, January 15, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; PERCENTAGE RENT; LOTTERY TICKET SALES: Rent paid as a percentage of "gross sales" of a retail store applies only to commissions earned by lessee on sale of lottery tickets and not the on the lessee's gross receipts for such sales where lotteries were illegal at the time the lease was executed.

In re The Circle K Corp., 96 C.D.O.S. 7683 (9th Cir., 1996).

The parties executed a lease basing rents on percentage of gross sales at a time when lotteries were illegal under state law. The lessee contended that the computation of the rent based on sales should not take into account the lottery ticket sales proceeds, but only the lessee's commission on sales. The lessor contended that rent should be based on gross receipts from ticket sales.

The Board of Bankruptcy Appeals had found for the landlord.

On appeal: held: reversed. The three judge panel, with one dissenter, decided to follow what it characterized as the only two other cases on point, one in Maryland and one in Illinois, which had excluded gross lottery sales from a percentage rent computation when the lease was entered into prior to the legalization of lotteries. The court held that percentage rent was due only on the commissions the lessee received from lottery ticket sales, stating that state-sponsored lottery ticket sales are in a "class by themselves," unlike the general category of commercial operations set forth in the lease. Where state regulations require the lessee to pay over to the state its total proceeds from sales less commissions and prizes awarded, the lessee owes rent only on the commissions.

Comment 1: Note that this case carefully folds its decision in with precedent cases decided before lotteries in the relevant states were legalized. Nevertheless, its reasoning would appear to go further and justify the same interpretation of the "gross sales" language even if the lease were entered into "post legalization." The court cites one case, McComb v. McComb, 155 N.W. 2d 860 (Mich. App. 1967) which included sales of money orders as includable in gross sales, rather than just the seller's commission.

Comment 2: The dissent, noteworthy for its use of the word "pellucid" *twice* in one sentence, makes the point that the lessee drafted this lease, and that interpreting lottery ticket sales out of the meaning of "gross sales" involves convoluted reasoning to which the lessee is not entitled. As the court comments, "The most important public policy ought to gbe that cmopanies like Circle K abide by their lease agreements, not that gambling tickets be sold."

The editor concurs generally with the sentiment expressed by the dissent, but recognizes that it is unlikely that either party actually contemplated the type of huge gross/low net activity represented by lottery ticket sales, and would agree with the majority that this type of activity probably was outside of the reasonable contemplation of the parties.

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