What is a 'percentage lease'?

A percentage lease is defined as a lease in which the rent is determined based on a percentage of the tenant's sales revenue. This type of lease arrangement is commonly utilized in retail environments where a tenant's business performance can vary significantly. By linking rent to sales, landlords and tenants can share the financial risks and benefits of the business. For example, during months of high sales, the tenant pays more in rent, while in slower periods, the rent decreases, providing some financial relief.

This lease structure incentivizes both parties; landlords benefit from a percentage of the tenant's success, while tenants may have lower base rent obligations during less profitable times, making it easier for them to manage cash flow. Overall, percentage leases are particularly effective in malls or shopping centers where sales performance can fluctuate greatly based on consumer traffic and seasonal trends.