## Facts

- A family-owned retail pharmacy tenant operated stores in Dubuque, Iowa, under leases with the landlord, who owned the store real estate.
- A lease for the Central Avenue store set a base monthly rent and provided for an increase to 2.75% of “gross sales.”
- The lease defined “gross sales” broadly as the aggregate of all retail sales and services made from the premises by the tenant or other occupants.
- After the lease began, the tenant operated a USPS substation selling postage and related services and received fixed compensation from USPS.
- The tenant also sold Iowa Lottery tickets and received commissions from the state.
- A dispute arose over whether “gross sales” for percentage rent included the full face value of stamp and lottery ticket sales or only the tenant’s compensation/commissions.
- The tenant sued for declaratory relief on maintenance issues; the landlord counterclaimed for additional percentage rent based on including total stamp and lottery sales.
- The district court held total stamp and lottery ticket sales must be included and awarded additional rent; the tenant appealed.

## Issues

1. Whether, under a percentage-rent lease defining “gross sales,” the rent base includes the total face value of lottery ticket and postage stamp sales conducted on the premises.
2. Whether such transactions are excluded as pass-through sales where the tenant functions as an agent and earns only a fee or commission.

## Decision

- The Supreme Court of Iowa reversed.
- It held that the lease excluded total lottery ticket sales and total postage stamp sales from “gross sales” used to compute percentage rent.
- The case was remanded for further proceedings consistent with that interpretation.

## Legal Principles

- Lease interpretation centers on the parties’ intent as shown by the text read in its commercial setting.
- Even a broad “gross sales” definition may exclude pass-through transactions where the tenant has no beneficial interest in the goods sold and acts mainly as an agent for another entity.
- Percentage-rent provisions are generally meant to track the tenant’s business performance and receipts from sales and services in which the tenant bears business risk and has a profit interest.
- Absent clear language to the contrary, interpreting “gross sales” to include the entire face value of government-controlled products (e.g., lottery tickets, postage) can be rejected where it would disconnect rent from the tenant’s actual earnings and produce commercially unreasonable results.

## Conclusion

The court held that a retail tenant’s percentage rent based on “gross sales” did not include the face value of lottery ticket and postage stamp sales where the tenant acted as a compensated agent, and it reversed the rent award and remanded.


Hartig Drug Co. v. Hartig, 602 N.W.2d 794 (Iowa 1999)