NOTE 19—COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain property consisting of retail and outlet stores, corporate offices, distribution centers and equipment. A majority of the Company’s leases expire at various dates through fiscal 2035. The Company has a lease for one Gallery location that expires in fiscal 2058. The stores, distribution centers and corporate office leases generally provide that the Company assumes the maintenance and all or a portion of the property tax obligations on the leased property. Most store leases also provide for minimum annual rent payments, with provisions for additional rent based on a percentage of sales, after meeting certain sales thresholds, and for payment of certain expenses.

The aggregate future minimum rent payments under leases in effect as of February 3, 2018, are as follows (in thousands):

Lease agreements accounted for as:	Capital Leases ⁽¹⁾			Operating Leases		Build-to-Suit		Total
2018	$	1,424		$	89,304	$	37,080	$	127,808
2019		1,458			76,509		39,593		117,560
2020		1,382			66,961		42,237		110,580
2021		1,227			57,470		43,996		102,693
2022		1,267			51,473		44,977		97,717
Thereafter		7,893			328,574		580,100		916,567
Minimum lease commitments		14,651		$	670,291	$	787,983	$	1,472,925
Less—amount representing interest		(6,671	)
Present value of capital lease obligations		7,980
Less—current capital lease obligations		(471	)
Non-current capital lease obligations	$	7,509

(1)	The current and non-current capital lease obligations are included in other current liabilities and other non-current obligations, respectively, on the consolidated balance sheets.

Lease payments that depend on factors that are not measurable at the inception of the lease, such as future sales volume, represent contingent rent expense and are excluded from minimum lease payments and included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable. Future payments for insurance, real estate taxes and repair and maintenance to which the Company is obligated are excluded from minimum lease payments. Minimum rent payments and contingent rent expense under lease agreements accounted for as operating leases and as build-to-suit lease transactions are as follows (in thousands):

	Year Ended
	February 3,		January 28,		January 30,
	2018		2017		2016
Lease agreements accounted for as operating leases
Minimum rent	$	91,152	$	87,520	$	76,246
Contingent rent		8,063		7,140		10,209
Total operating leases	$	99,215	$	94,660	$	86,455
Lease agreements accounted for as build-to-suit lease transactions⁽¹⁾
Minimum rent	$	32,256	$	16,066	$	12,755
Contingent rent		833		726		442
Total build-to-suit lease transactions	$	33,089	$	16,792	$	13,197

(1)

As described in Note 3—Significant Accounting Policies, the cash payments made under leases accounted for as build-to-suit lease transactions get allocated to land rent expense and as debt service payments (a portion to interest expense and a portion to financing obligation). Minimum rent payments recognized as interest expense within the consolidated statements of income were $15.4 million, $12.1 million and $9.9 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Minimum rent payments allocated to the financing obligations under build-to-suit lease transactions within the consolidated balance sheets were $10.2 million and $0.4 million in fiscal 2017 and fiscal 2016, respectively. The remaining minimum rent payments of $6.7 million, $3.6 million and $2.9 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, represent land rent expense and were included in cost of goods sold on the consolidated statements of income. Contingent rent under build-to-suit lease transactions is recognized as interest expense within the consolidated statements of income.

In addition to the above, the non-cash rent benefit recognized within the consolidated statements of income was $1.0 million in fiscal 2017 and the non-cash rent expense recognized within the consolidated statements of income was $1.2 million and $2.9 million in fiscal 2016 and fiscal 2015, respectively. Non-cash rent represents the straight-line impact and amortization of tenant allowances under operating leases and land rent expense recorded for build-to-suit lease transactions prior to cash payments occurring under the leases.

Commitments

The Company had no material off balance sheet commitments as of February 3, 2018.

Contingencies

The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of its business. These disputes are increasing in number as the business expands and the Company grows larger. Litigation is inherently unpredictable. As a result, the outcome of matters in which the Company is involved could result in unexpected expenses and liability that could adversely affect the Company’s operations. In addition, any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.

The Company reviews the need for any loss contingency reserves and establishes reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. When and to the extent that the Company does establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what the Company accrues from time to time. The Company believes that the ultimate resolution of its current matters will not have a material adverse effect on its consolidated financial statements.

RH Modern Securities Class Action

On February 2, 2017, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust filed a class action complaint in the United States District Court, Northern District of California, against the Company, Gary Friedman, and Karen Boone. On March 16, 2017, Peter J. Errichiello, Jr. filed a similar class action complaint in the same forum and against the same parties. On April 26, 2017, the court consolidated the two actions. The consolidated action is captioned In re RH, Inc. Securities Litigation. The complaints allege, among other things, fraud in connection with alleged misstatements under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. Both complaints purport to make claims on behalf of a class of purchasers of Company common stock from March 26, 2015 to June 8, 2016. The alleged misstatements relate to forward looking statements regarding the roll out of the RH Modern product line. An amended consolidated complaint was filed in June 2017 and the Company and its officers have moved to dismiss the complaint. On February 26, 2018, the Court filed an order denying the Company’s motion to dismiss the complaint and the case will now move into a discovery phase. The claims are still at an early stage. While the outcome of litigation is inherently uncertain, the Company and its officers intend to vigorously defend the claims and believe the complaint lacks merit.