Question 1

What is a percentage rent lease?

Accepted Answer

A percentage rent lease is a commercial lease structure where the tenant pays: base rent (a fixed monthly amount) plus percentage rent (a specified percentage of the tenant’s gross sales that exceed a breakpoint). This structure is standard in: enclosed shopping malls, open-air lifestyle centers, and outlet centers. The percentage rent provision: aligns landlord and tenant interests (both benefit from higher sales), provides the landlord with upside potential (the landlord shares in the tenant’s success), and protects the tenant with a base rent floor (the percentage rent is additional, not a substitute for base rent).

Question 2

What tenant protections exist in a percentage rent lease?

Accepted Answer

Tenant protections: co-tenancy clause (the tenant’s percentage rent obligation may be reduced or eliminated if: anchor tenants leave the shopping center, or the center’s occupancy falls below a specified level), radius restriction alternative (instead of a radius restriction preventing the tenant from opening nearby stores, the tenant may negotiate to include all nearby store sales in the gross sales calculation), sales cap (a maximum amount of percentage rent the tenant will pay, regardless of sales volume), and exclusive use clause (the landlord agrees not to lease space to competing tenants, protecting the tenant’s sales).

Question 3

What is a radius restriction in a percentage rent lease?

Accepted Answer

Radius restriction: a covenant preventing the tenant from operating a competing business within a specified geographic radius of the leased premises (typically 1-5 miles). Purpose: the landlord wants the tenant to maximize sales at the leased premises (not divert sales to a nearby location that does not generate percentage rent). The tenant should negotiate: a reasonable radius (too large restricts business growth), exceptions for existing locations, and a provision allowing the tenant to include sales from any nearby location in the gross sales calculation (eliminating the landlord’s concern about diverted sales).

Percentage Rent

Percentage Rent Leases

Structure

Tenant Protections

Radius Restriction

Related Terms

Barnes Walker Commercial Real Estate

Ready to Get Started?