In commercial real estate, understanding your lease type is essential to making informed financial decisions-especially for retail tenants operating in malls, shopping centers, or mixed-use developments. One such lease structure is the percentage lease, a model that combines a base rent with a share of the tenant’s gross sales.

This guide breaks down what a percentage lease is, how it works, its benefits and challenges, and negotiation strategies to help tenants structure favorable terms. Whether you’re a small business owner or a larger retail tenant, grasping the mechanics of this rent model will help you optimize your real estate lease strategy and support long-term business success.

What is a Percentage Lease?

A percentage lease is a type of commercial lease agreement in which tenants pay both a minimum monthly rent-also referred to as fixed base rent-and a percentage of their gross sales revenue to the landlord. This leasing structure is particularly common in multi-tenant retail spaces like shopping centers, outlet malls, and airports, where a tenant’s income can vary month to month.

Unlike gross leases or fixed leases, where rent is predetermined and does not fluctuate, percentage leases tie rent payments directly to the performance of the tenant’s business. This model allows landlords to benefit from increased sales while providing tenants with a lower break-even point and more flexibility during slower months.

How Does a Percentage Lease Work?

Typically, the tenant pays a fixed monthly rent (a lower base amount than in other lease types) plus a flat percentage of gross sales over a certain sales threshold-often called a breakpoint. The lease agreement specifies the percentage rate, the gross sales calculation method, and whether there’s an artificial breakpoint or a natural breakpoint based on the base rent.

Let’s break it down with an example:

Say you own a retail store in a mall or shopping center and sign a percentage lease agreement with a landlord. The lease agreement states that you must pay a base rent of $2,000 per month plus 5% of your gross sales revenue. If your store generates $50,000 in sales for a given month, you would calculate your total rent payment as follows:

Base Rent: $2,000 Percentage Rent: $50,000 x 5% = $2,500
Total Rent Payment: $2,000 + $2,500 = $4,500

In this scenario, your total rent payment would be $4,500 for that month.

The Benefits of a Percentage Rent Lease

Alignment of Interests

One of the biggest advantages of a percentage lease is the alignment of incentives between the landlord and tenant. Since the landlord earns a portion of the tenant’s gross sales, they have a direct interest in seeing the business succeed. This often leads to better cooperation, shared marketing efforts, and a more collaborative retail environment-especially in multi-tenant retail spaces.

Lower Base Rent

Compared to traditional lease types, percentage leases typically offer a lower base rent or minimum rental cost. This can ease financial pressure for tenants during slow months or seasonal dips in revenue. The ability to pay more only when sales increase makes this structure particularly appealing to newer businesses or those with fluctuating income.

Landlord Incentive to Support Tenants

Because a landlord’s income depends in part on tenant performance, percentage leases create a built-in incentive to attract high-performing businesses. This can benefit tenants as landlords may invest more in property upkeep, marketing, or co-tenancy strategy-all of which can drive foot traffic and higher sales across the multi-tenant property.

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The Drawbacks of a Percentage Lease

While there are several benefits to a percentage lease, it’s important to consider the potential drawbacks as well:

Uncertainty for Tenants

While lower base rent provides flexibility, the variable rent structure tied to gross sales can make budgeting more difficult. Month-to-month rent expense may fluctuate significantly, creating financial unpredictability-especially for small business owners or during economic downturns.

Complex Rent Calculations

Percentage leases require tenants to track and report gross sales accurately, often down to the dollar amount. This administrative task can add to operating costs, particularly for tenants without dedicated accounting staff. Disputes may also arise if lease clauses around sales thresholds or breakpoint calculations are unclear.

Increased Risk for Landlords

Unlike fixed base rent leases, percentage leases shift some financial risk to the landlord. If tenant sales decline or fail to meet the sales threshold, the landlord’s rental income suffers. That’s why landlords tend to be selective-evaluating tenant viability, financial modeling, and long-term sales potential before finalizing agreements.

Strategies for Negotiating a Percentage Lease

Understand Your Sales Potential

Before entering into a percentage lease, it’s critical to evaluate your projected monthly sales and revenue patterns. Your expected gross sales will determine whether a flat percentage structure or higher minimum rent is sustainable. Thorough financial modeling allows you to assess how rent terms-such as natural vs. artificial breakpoints or overage percentage rates-will impact your bottom line.

Seek Expert Guidance

Commercial lease agreements are complex, especially when percentage rent is involved. Working with a commercial real estate broker or CPA can help you benchmark market norms, analyze the true cost of variable rent structures, and negotiate lease terms that align with your business goals. Experts can also help you compare lease types like triple net leases, gross leases, or double net leases to determine the best fit.

Clarify Lease Agreement Terms

Be sure the lease clearly defines what constitutes gross sales, how the rent calculations will work, and how often you’ll need to report sales. Clear lease clauses reduce the risk of future disputes and help both parties maintain transparency. For multi-tenant properties, this is especially important since each tenant may have different lease structures or reporting expectations.

Negotiate Breakpoints and Caps

Protect yourself from excessive rent increases by negotiating percentage rent caps or breakpoints. A natural breakpoint-based on the annual minimum base rent-is often more favorable to tenants. Avoid artificial breakpoints that could trigger higher rent based on arbitrary sales thresholds. Caps on overage percentage or flat percentage rent also help manage risk as sales grow.

Managing Your Percentage Lease with Confidence

Percentage leases offer a performance-based model that can benefit both landlords and tenants in the commercial leasing space. With a mix of fixed base rent and sales-based contributions, tenants gain flexibility while landlords gain upside from thriving businesses.

That said, this lease type introduces complexity and risk. The key to success is understanding your financial model, defining clear lease terms, and negotiating protections that align with your business growth.

For tenants navigating complex lease structures-especially across multiple locations-a lease management platform like Occupier can help track rent obligations, breakpoint triggers, and sales performance across all locations. With better data and collaboration tools, you can manage your commercial lease agreements with confidence.