Retail Commercial Lease Guide

1. Percentage rent and gross sales definition

Red flag: Percentage rate above industry norm, natural breakpoint, broad gross sales definition (including returns, taxes, gift card sales, online), no audit rights.

Negotiate: Percentage rate at industry norm or below. Unnatural (higher) breakpoint — typically 10–25% above natural. Exclude: returns, refunds, sales tax, employee meals, gift card sales at issuance, e-commerce fulfilled outside the store, third-party delivery commissions, bulk corporate orders. Tenant audit rights with 90-day notice and landlord must provide POS data on request.

2. Exclusive use protection

Red flag: No exclusive use protection; landlord can lease next door to direct competitor.

Negotiate: Exclusive on the primary product or service category, with carve-outs for incidental sales by other tenants. Define the geographic reach (typically the entire center, or 500–1,000 foot radius). Remedies for violation: rent reduction (50%), termination right, or specific performance/injunctive relief. See the exclusive use and radius guide for negotiation language.

3. Co-tenancy and anchor dependency

Red flag: No co-tenancy protection; landlord can lose anchor without rent relief for inline tenants.

Negotiate: Opening co-tenancy (named anchors must be open at tenant commencement, or tenant has reduced rent and delayed opening right). Ongoing co-tenancy (if any named anchor closes for 90+ days or center occupancy drops below 70–80%, tenant pays 50% rent until cured). Termination right if condition persists 12 months. See the co-tenancy clauses guide for landlord pushback responses.

4. Radius restriction

Red flag: Broad radius restriction (3–5 miles) covering all operations, including online sales and delivery.

Negotiate: Narrow radius (1 mile) covering only physical locations of the same brand. Exclude existing locations. Exclude online sales fulfilled from any location. Limit duration to 5 years rather than full lease term. Make landlord-only-remedy injunctive relief, not termination — radius violation should not give landlord a kick-out right.

5. Continuous operation and "go-dark" rights

Red flag: Lease requires continuous operation with no go-dark right; failure to operate triggers default and acceleration.

Negotiate: Right to go dark while continuing to pay base rent and CAM. For percentage rent leases, the landlord typically wants continuous operation because dark space doesn't generate percentage rent — concede this in exchange for higher TI or lower base rent. See the continuous operation and go-dark guide for the trade-off math.

6. Marketing and promotional fund contributions

Red flag: Mandatory marketing fund contributions with no cap, no reconciliation, and no tenant input on spend.

Negotiate: Cap marketing fund at $1–$2 per square foot annually with CPI escalation. Require annual reconciliation showing how funds were spent. Establish a tenant advisory board for fund allocation in larger centers. Exclude landlord administrative fees and capital improvements from the marketing fund.

7. Assignment and sublease

Red flag: Assignment prohibited or subject to landlord consent that may be withheld for any reason; landlord recapture rights on any proposed assignment.

Negotiate: Permitted assignment to same-use buyer with comparable financial standing without landlord consent. Permitted intra-family transfers and entity restructurings. Limit landlord recapture rights to use changes (not financially-comparable same-use assignments). See the assignment and sublease guide for tenant leverage points.

8. Demolition and relocation rights

Red flag: Landlord can demolish or relocate the tenant on short notice (typically 30–90 days) with no compensation or buyout.

Negotiate: Long notice period (12–18 months minimum), substantial buyout (unamortized TI plus 6–12 months of net profit), and tenant right of first refusal on the new space. See the demolition and redevelopment guide for landlord pushback responses.

What is percentage rent and how does the breakpoint work?

Percentage rent is additional rent calculated as a percentage of the tenant gross sales above a defined sales threshold called the natural breakpoint. The formula: tenant pays base rent up to the breakpoint, then pays a percentage (typically 6–10% for restaurants, 4–7% for apparel, 8–12% for jewelry) on every dollar above. Natural breakpoint equals annual base rent divided by the percentage rate. Example: $120,000 base rent at 8% percentage rate equals $1,500,000 natural breakpoint. The tenant pays $120,000 in base rent on $0–$1.5M of sales, and 8% of every dollar above $1.5M as additional rent. Negotiate an unnatural (higher) breakpoint to reduce percentage rent exposure, and define gross sales carefully to exclude returns, sales taxes, employee meals, and gift card sales.

What is an exclusive use clause and why does it matter?

An exclusive use clause prohibits the landlord from leasing other space in the same center to a competing business. For a coffee shop, that might mean no other coffee-focused operator in the center; for a bookstore, no other bookstore over 1,500 square feet. Exclusives protect the tenant primary revenue category from direct competition that the landlord could otherwise enable. Three negotiation levers: scope (specific products vs. broad category), geographic reach (the suite, the building, or the entire center), and remedies (rent reduction, termination right, or injunctive relief if violated). Most landlords resist broad exclusives in anchored centers but accept narrow product-level exclusives for inline tenants.

What is co-tenancy and what triggers a rent reduction?

Co-tenancy is a clause that reduces tenant rent (or grants a termination right) if certain anchor tenants close or if center occupancy falls below a defined threshold. Two types: opening co-tenancy (anchors must be open when the lease commences, or the tenant has reduced rent or right to delay opening) and ongoing co-tenancy (if anchors go dark or center occupancy drops below 70–80% during the term, the tenant pays reduced rent — typically 50% — until the condition is cured). Landlords push back hard on ongoing co-tenancy because it shifts vacancy risk from landlord to tenant — but it is the single most valuable protection in a multi-tenant retail center. See the co-tenancy clauses guide for negotiation language.

What is a radius restriction and should I sign one?

A radius restriction prohibits the tenant from operating a similar business within a defined distance of the leased premises — typically 1–3 miles. The landlord rationale: prevent the tenant from cannibalizing center traffic by opening a nearby location. The tenant problem: radius restrictions cap growth and can be enforced by the landlord even if the tenant expansion would generate net new revenue. Negotiation levers: shrink the radius (1 mile is reasonable; 5 miles is punitive), exclude existing locations from the restriction, exclude online sales and delivery-only operations, and cap the restriction at 5 years rather than the full lease term. If the lease has a percentage rent clause, radius restrictions are often used as anti-cannibalization protection — push to limit the restriction to physical locations of the same brand.

How is gross sales defined for percentage rent purposes?

The definition of gross sales is the most-litigated provision in percentage rent clauses. Landlord-friendly definitions include everything: sales of merchandise, services, gift cards (at sale), insurance proceeds, vending machine revenue, and even subleased space rent. Tenant-friendly definitions exclude: returns and exchanges, sales taxes, employee meals (for restaurants), gift card sales (counted on redemption instead), wholesale and e-commerce sales fulfilled from outside the store, third-party delivery commissions, and bulk corporate sales. Each excluded category can change percentage rent by 5–15%. Define gross sales line-by-line in the lease, and add tenant audit rights to challenge any landlord recalculations after the fact.

What TI allowance is typical for retail?

Retail TI allowances vary dramatically by use case. Inline storefronts in stable centers: $25–$50 per square foot. End-cap or visible street-front: $40–$80 per square foot (landlord pays more for high-visibility locations). Restaurant retail: $60–$150 per square foot (recognizing kitchen infrastructure cost). New-construction or shell-condition spaces: $50–$100 per square foot (covering more of the buildout because the space is delivered as bare shell). The buildout itself runs $50–$120 per square foot for inline soft goods and apparel, $100–$200 per square foot for restaurants, and $30–$80 per square foot for services (salons, fitness, financial). Negotiate TI as a per-square-foot allowance with documented cost reimbursement, not as a fixed lump sum that the tenant has to fight for at end of buildout.

What happens if the anchor tenant goes dark mid-lease?

Without a co-tenancy clause, nothing — the tenant continues paying full rent into a center with reduced foot traffic and potentially failing inline neighbors. With a co-tenancy clause, the tenant has rent relief (typically 50%) and possibly a termination right after a defined cure period (90–365 days). Anchor risk varies by center type: power centers and lifestyle centers with multiple anchors are lower risk; single-anchor strip centers and mall outparcels are higher risk. Inline tenants in single-anchor centers should consider anchor risk a primary deal term — the anchor closing is often the difference between a 20% same-store sales decline and a 50% decline that forces the tenant out of business. Negotiate co-tenancy aggressively in these centers, or walk.

How long should a retail lease be?

Retail leases typically run 5-to-10 years initial term with options to renew. Restaurants and tenants with high buildout invest typically need 10-year initial terms to amortize the capital cost. Soft-goods and services tenants with lower buildout investment can work with 5–7 year initial terms. The trade-off: longer terms give the tenant rent certainty and operational stability but lock in the location even if the center declines; shorter terms preserve flexibility but expose the tenant to rent increases at renewal. Negotiate renewal options at predefined rent (CPI-capped or fixed escalations) rather than fair market value to control renewal risk. For new businesses, a 5-year initial term with two 5-year renewal options is the standard balance.