What is a Percentage Lease?

A percentage lease, sometimes called turnover rent, is a type of commercial lease where rent is partly fixed and partly based on your sales performance.

A percentage lease is a popular commercial lease model that balances risk and reward between landlords and tenants. By connecting rent to sales performance, it offers flexibility and potential financial benefits, especially in retail environments.

Whether you're a tenant or landlord, understanding the ins and outs of percentage leases can help you make informed decisions and build a successful leasing relationship.

Navigating commercial lease agreements can be complex, which is why having expert advice from experienced commercial lease solicitors is essential. At Moeen & Co. Solicitors, we help protect your interests, ensuring lease terms are fair and clear.

For personalised legal guidance on percentage leases or any commercial lease matter, call Moeen & Co. Solicitors today on 0203 959 7755 or email info@moeenco.com.

Table of Contents

What is a Percentage Lease?

A percentage lease is a popular type of commercial lease where the tenant pays a set base rent plus an agreed percentage on sales above a set breakpoint.

This flexible rental model is commonly used in retail settings, such as shopping centres and malls, because it aligns the landlord's income with the tenant's business performance.

Unlike traditional commercial leases with a fixed rent, percentage leases include a sales-based component called percentage rent, which usually applies once sales surpass a certain breakpoint agreed upon in the lease.

What is a Percentage Lease Most Suitable For?

Percentage leases are especially well-suited for retail businesses, particularly those located in shopping centres, retail parks, or multi-tenant commercial spaces like malls.

This type of lease structure works best in settings where sales can fluctuate based on foot traffic, seasons, or promotions. That's why landlords often use percentage leases for:

• Retail shops
• Restaurants and cafés
• Boutiques and pop-up stores
• Franchises and chain outlets

By tying part of the rent to the tenant's sales performance, a percentage lease creates a more balanced relationship. Landlords benefit when the tenant does well, and tenants enjoy flexibility during slower months.

In short, a percentage lease is most suitable for high-traffic, sales-driven retail environments where both the tenant and landlord have a shared interest in business success.

How Does a Percentage Lease Work?

In a percentage lease agreement, the tenant pays a base rent plus a percentage of sales that exceed the breakpoint, a sales threshold outlined in the lease contract.

The structure of a percentage lease includes two components, base rent and percentage rent, tied to the tenant's sales performance.

1. Base Rent

This is the fixed monthly amount the tenant pays regardless of their sales. It offers the landlord stable, predictable income, especially helpful during quieter months.

2. Percentage Rent

Once the tenant's gross sales exceed a certain breakpoint (explained below), they pay the landlord an additional percentage of those sales on top of the base rent. The percentage rate is usually agreed in advance and often ranges from 1% to 15%, depending on the type of business and location.

What is an Example of a Percentage Lease?

For example, a retail store might agree to a percentage lease where the monthly breakpoint is set at £20,000, and 20% is charged on any sales above that figure.

• In Month 1, the shop makes £18,000 in sales, which is below the breakpoint, so they don't pay any extra rent.
• In Month 2, the shop earns £30,000 in sales. That's £10,000 over the breakpoint, so they pay 20% of the excess, which equals £2,000.

Total Rent = Base Rent + [(Gross Sales − Breakpoint) × Percentage Rate]

This example shows how a percentage lease allows rent to adjust based on sales performance, offering flexibility for tenants and potential upside for landlords.

What Are the Different Types of Percentage Lease?

When it comes to percentage leases, there's no one-size-fits-all. Understanding the different types can help you choose the lease structure that aligns best with your business goals and cash flow.

Here's a breakdown of the most common variations:

1. Base Rent Plus Percentage Lease

This is the most popular setup. The tenant pays a fixed base rent plus a percentage of gross sales that exceed a set breakpoint. It provides a balance of stability and flexibility, great for both landlords and growing businesses.

2. Pure Percentage Lease

In this model, there's no base rent. Instead, the tenant pays rent based solely on a percentage of their sales revenue. This structure is often used in very high-traffic retail locations where strong, consistent sales are expected.

3. Sliding Scale Lease

With a sliding scale lease, the percentage rent rate decreases as sales increase. For example, you might pay 10% on the first £100,000 of sales, then 8% on the next £100,000, and so on. This encourages tenants to push for higher revenue while still keeping rent manageable.

4. Fixed Minimum Rent Plus Percentage of Gross Sales (Whichever Is Higher)

In this type of lease, the tenant pays either the fixed base rent or the agreed percentage of gross sales, whichever amount is greater. It ensures the landlord receives a fair return during high sales periods while still guaranteeing minimum income during slower months.

5. Fixed Minimum Rent Plus Percentage with a Ceiling

Here, the lease includes a maximum cap on the percentage rent, providing tenants with cost certainty. It's ideal for budgeting purposes, especially for businesses with fluctuating sales patterns.

Each of these percentage lease types offers different advantages depending on your industry, sales volume, and financial strategy. Before entering into any agreement, it's wise to consult an expert in commercial lease law who can help you negotiate the best terms.

Need advice? Contact Moeen & Co. Solicitors on 0203 959 7755 for professional guidance tailored to your business.

Advantages of a Percentage Lease

A percentage lease can offer several unique benefits to both commercial landlords and retail tenants. Here's a list of the key advantages:

• Lower Base Rent: Ideal for startups, small businesses, or seasonal shops.
• Flexible Payments: Rent adjusts based on actual sales performance.
• Landlord Incentive: Landlords are motivated to support tenant success.
• Shared Risk & Reward: Tenants and landlords benefit together during high sales.
• Higher Potential Earnings for Landlords: More income during peak seasons.
• Suited for High-Footfall Retail Areas: Common in malls and busy shopping centres.
• Encourages Accurate Sales Tracking: Helps tenants monitor and grow their business.
• Access to Prime Locations: Enables entry into high-demand spaces with lower upfront costs.

Disadvantages of a Percentage Lease

While a percentage lease can be beneficial, it's not without its challenges. Here are a few potential downsides to consider:

• Unpredictable Rent Costs: Fluctuating rent based on sales can make budgeting difficult for tenants.
• Complex Administration: Tenants must track and report accurate sales figures regularly.
• Risk of Disputes: Disagreements may arise over sales reporting or the interpretation of “gross sales.”
• Potential for Higher Costs During Peak Seasons: Tenants may face significantly higher rent during strong sales periods.
• Privacy Concerns: Some tenants may be uncomfortable sharing detailed financial data with landlords.
• Landlord Revenue Uncertainty: If sales are low, landlords may earn less than with a fixed lease model.

What Should Tenants Consider When Negotiating a Percentage Lease?

When negotiating a percentage lease, tenants should pay close attention to how gross sales are defined and what sales deductions are permitted. It's also important to clarify the breakpoint calculation and the percentage rent rate. Additional clauses, such as rent abatement or exclusivity, can provide protections.

Tips for Negotiating a Percentage Lease

• Understand how gross sales are calculated and what deductions are allowed.
• Negotiate clear terms around the breakpoint and percentage rate.
• Consider including clauses like rent abatement, co-tenancy rights, or exclusivity to protect your interests.
• Consult a commercial lease solicitor to review lease terms and ensure fairness.

Consulting a commercial lease expert or solicitor ensures that the lease terms are fair and transparent, reducing the risk of disputes and helping tenants plan their finances more effectively.

Need Help with Percentage Lease Agreements?

Whether you're a tenant negotiating your first commercial property lease or a landlord drafting a new percentage lease agreement, professional advice can save you money and protect your long-term interests.

Call our commercial lease solicitors on 0203 959 7755 for personalised guidance on percentage leases, negotiations, and landlord-tenant responsibilities.