What defines a percentage lease?

A percentage lease is defined by the structure in which the tenant pays a base rent combined with a percentage of their sales or profits. This arrangement is particularly common in retail settings, where landlords want to benefit from the tenant's success. By incorporating a percentage of the profits, landlords ensure that as a tenant's business thrives and generates more income, their rent increases accordingly, aligning the interests of both parties.

This contrasts with other lease structures. For example, a fixed formula based on previous rents does not take into account the tenant's actual sales performance, and a fixed percentage increase does not directly relate to the tenant’s business success or revenues. Additionally, setting amounts for utilities addresses different financial responsibilities and does not define the rental agreement itself. Thus, the key feature of a percentage lease is the combination of a base amount and a variable component tied to the tenant's profitability.