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Gross Rewards
by Ron Davis

The outcome of a dispute between owners of a Los Angeles shopping center and a tenant revolves around the interpretation each has of “gross sales.”

The shopping center is Midtown Shopping Center, and the tenant is Ralph’s Grocery Company, which has leased space at the center since 1993. That relationship seemed amicable until the center’s owners recently told the tenant’s owners that they owe $260,659 in back rent.

The center’s owners explained that because of a “Rewards” program offered to Ralphs’ customers, Ralphs was “underreporting” the amount of rent owed to the center. Ralphs had indeed created such a program to encourage repeat customers to shop often at the store and enjoy lower prices on certain items. That program has in fact served its purpose of stimulating sales at the store. Records show that rewards customers account for 97 percent of total transactions at Ralphs.

As required by the center’s owners, Ralphs provided Midtown with a yearly statement. That statement reflected “gross sales” and calculated the total using the amount that Rewards customers actually paid for merchandise rather than the amount they would have paid for the same items had they not participated in the Rewards program.

But Ralphs was not consistent in the way it labeled its “gross sales” figures in its yearly statements. Sometimes it used the term “Adjusted Sales” and at other times it used “Net Register Sales.” Ralph’s also made no effort to verify that the figures it provided to the shopping center met the definition of “gross sales.”

The shopping center owners accused Ralphs of under-reporting gross sales by not using what Rewards customers could have been charged for certain items. Ralphs countered with a lawsuit of its own. The case went to trial, and the court ruled in favor of the shopping center.

The judge explained that “gross sales” figures were based on the sales price Rewards customers would have paid if they had not received Rewards discounts. The judge added that “the only ordinary and popular understanding of [“gross sales”] must start with the prices Ralphs’ products are listed for sale for all of its customers before any discounts are applied, including the club discounts.”

The court also found that the Rewards program did not fit within any of the lease’s exclusions or deductions from “gross sales.” The court also ruled that Ralphs further breached its lease by not providing the center with a “detailed statement of deductions and exclusions. The court imposed judgment and awarded Midtown costs and attorneys’ fees totaling $305,000.

On appeal of that ruling, however, a California appellate court reversed the lower court and ordered that the award of costs and litigation expenses be paid by the shopping center’s owners. Explained the court, “We conclude that the tern “gross sales” within the lease does not include amounts Ralphs never charged its Rewards customers and…, Ralphs owes (the shopping center) no additional rent.”

(Ralphs Grocery Company vs. Midtown Shopping Center, Not officially Published)

Decision: June 2015
Published: July 2015



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