What is a percentage lease in retail?

A percentage lease is a commercial rental arrangement common in retail and mall leasing where the tenant pays a base rent plus an additional amount calculated as a percentage of their monthly or annual gross sales revenue. It aligns landlord income with the tenant's business performance.

How It Works

• Base rent: Fixed monthly amount (below market rate).
• Percentage rent: Applies when sales exceed a "natural breakpoint."
• Natural breakpoint = Base rent / Percentage rate. If sales exceed this, percentage rent kicks in.

Example

• Base rent: Rs 2,00,000/month.
• Percentage rate: 5% of gross sales above breakpoint.
• Breakpoint: Rs 2,00,000 / 5% = Rs 40,00,000/month.
• If monthly sales = Rs 50,00,000, percentage rent = 5% x Rs 10,00,000 = Rs 50,000.
• Total rent = Rs 2,00,000 + Rs 50,000 = Rs 2,50,000.

Percentage leases create a shared commercial interest between mall owners and retailers when the retailer succeeds, the landlord also benefits. For retailers, the base rent being set below market provides cost protection during slow periods; for landlords, the upside-sharing mechanism captures value during the tenant's high-performing phases.