Instant Pick Up Raises Instant Lease Questions

August 2017

Slashing prices at Whole Foods is not the only retail shakeup Amazon introduced this month—the “online” retailer announced last week that it was rolling out a new “instant pickup” service for its Prime members.  While Amazon had previously started to introduce a brick-and-mortar-based pickup service back in 2015, the new instant pickup program will allow Amazon customers to retrieve goods ordered online from designated brick-and-mortar locations within minutes of placing the order.  While the instant pickup program is initially being rolled out at five college campuses, it will likely be coming to city centers nationally as soon as Amazon can work out the logistical issues.  And, this is all in addition to Amazon’s locker program, which allows Amazon Prime members the option of picking-up and returning goods purchased online from unmanned locker kiosks that are now available in over 1,800 locations in over 50 cities.  Together with its physical stores, which Amazon also began testing in 2015, the pickup program and the lockers will offer Amazon customers more options for the delivery and receipt of goods as the retailer continues to blur the line between traditional retailing and e-commerce.  These expanded delivery options will allow Amazon to compete head to head with traditional brick-and-mortar retailers in that goods ordered online can now be retrieved immediately by the customer, or, at the customer’s option, at a later time and place.

For retailers and restaurants considering similar forays into alternative delivery programs for the fulfillment of online orders, the various options will not be without consequence to their existing and future real estate operations.  Notably, businesses should be mindful of the effect such delivery programs might have on their percentage rent obligations at their physical brick-and-mortar locations.  Should goods that are ordered online that are fulfilled from a brick-and-mortar store and delivered to a separate locker kiosk location still count towards the brick-and-mortar store’s gross sales and percentage rent?  Or what if the order is placed online, processed or filled at an offsite location, and merely retrieved by the customer at a locker kiosk located within a brick-and-mortar store?  For property owners, the answer is undoubtedly “yes, the order should count toward percentage rent” if (i) the goods are ordered at a brick-and-mortar store, (ii) the order is processed or filled in any way at the brick-and-mortar store, or (iii) the locker kiosk is located within the brick-and-mortar store.  But for retailers and restaurants, the answer is “no, the order should not count toward percentage rent” unless the order is placed at and filled through its brick-and-mortar location.

These conflicting perspectives will undoubtedly be the source of constant negotiation as businesses continue to find new ways to integrate their 21st century physical and online operations.  Regardless of the individual outcome, both property owners and tenants should be thoughtful about a retailer’s existing and planned online operations and the relationship to its brick-and-mortar stores when negotiating gross sales and percentage rent provisions so that the final product matches (and clearly articulates) both parties’ contractual expectations.