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Understanding percentage leases

On Behalf of | Apr 14, 2022 | Real Estate Law |

If you’re looking for commercial space for your retail business, you may find that some landlords have what are known as “percentage leases.” These types of leases are most common in shopping centers and outlet malls.

The way this type of lease works is that the tenant pays a base rent amount every month. In addition to that, when their gross sales reach a specified threshold, the business pays their landlord a certain percentage of that amount. The percentage owed the landlord can vary, but it is typically not more than 7%.

When do you start paying percentage rent?

The percentage rent will kick in once the business reaches its “breakpoint” in sales. That’s the base rent divided by the agreed percentage. Say your base rent is $5,000 per month and your percentage rent is 7%. Since $5,000 divided by 7% is $71,429, that’s your breakpoint. You’ll pay an additional 7% in rent for every dollar in gross sales you make in any given month over that amount.

Some months, you may not owe any percentage rent, but a landlord will count on getting it as often as possible. That’s why they will likely want information about your business, including your minimum annual sales, before they determine what base and percentage rent to seek.

Don’t be afraid to negotiate

Remember that many elements of a commercial lease are negotiable. In this case, that includes the base and percentage rent as well as the breakpoint. You likely want to hold off paying your landlord a portion of your sales revenue as long as possible while still having good sales numbers.

It’s crucial to be particularly cautious when negotiating this type of lease and to fully understand the terms. That’s why it’s wise to have experienced legal guidance.