A percentage lease is a type of rental agreement that is most commonly executed between a landlord and tenant for the rental of retail property. There are many ways to negotiate a percentage lease. The most common practice of negotiating this type of lease obliges the retail tenant to pay a percentage of the gross sales income generated on the property. This total exceeds a predetermined minimum amount of sales in addition to the agreed-upon flat rate minimum monthly base rent. An example of a percentage lease negotiation that is less commonly used requires the tenant to pay a percentage of gross sales with no minimum base rent. Percentage payments are typically based on annual payments; payments may also be made monthly or quarterly. As an example, Lucy’s Luxuries executed a percentage lease agreement with an annual minimum guaranteed base rent of $6,000 plus five percent for any year that the gross sales are more than $120,000. If Lucy’s Luxuries’ annual gross sales for this year is less than $120,000, Lucy only pays $6,000 for rent this year. In the following year, Lucy’s Luxuries generates a sales volume of $220,000. Her total payment to the landlord this year would be $11,000, which includes her annual base rent of $6,000 plus overage (percentage) rent of $5,000 based on five percent of $220,000 sales volume ($220,000 x 0.05 = $11,000 – $6,000 = $5,000).
