Tennessee Percentage Lease Agreement Overview
A percentage lease is a retail lease structure where the tenant pays a fixed base rent plus a percentage of gross sales above a defined threshold called the breakpoint. Tennessee has no specific statute governing percentage leases, so the contract language controls everything from how gross sales are defined to when percentage rent is due. Getting the definitions right from the start matters far more than most retail tenants expect.
Tennessee's major retail markets sit in Nashville, Memphis, Knoxville, and Chattanooga. Nashville has grown into one of the Southeast's strongest retail corridors, and percentage leases are standard in shopping centers and lifestyle centers throughout the metro. Tennessee imposes no state income tax on individuals and no commercial rent tax, but the combined state and local sales tax rate reaches as high as nine and a half percent in some counties. A well-drafted percentage lease must expressly exclude Tennessee sales taxes from the gross sales calculation, or tenants end up paying percentage rent on dollars they collected and remitted to the government.
None
State rent tax
Contract
Law governs
9.75%
Max sales tax rate
Nashville
Primary retail market
Tennessee Requirements
Tennessee percentage leases are entirely contract-driven. There is no state statute prescribing the format or required provisions, so the lease agreement must address all of the following elements in clear, unambiguous language. Gaps in the contract language often produce disputes over which sales are included in gross revenues or how percentage rent is calculated after a mid-year store remodel.
Tennessee Percentage Lease Note
Tennessee's combined state and local sales tax rate reaches 9.75% in some counties. Make sure the gross sales definition expressly excludes sales taxes collected on behalf of the government. Without this exclusion, tenants pay percentage rent on tax collections, not actual revenue. Also confirm whether online orders placed from or fulfilled from the Tennessee location are included in or excluded from gross sales.
Key Lease Provisions
- Gross Sales Definition: The lease must define what counts as gross sales, including typical exclusions for Tennessee sales tax, merchandise returns, employee discounts, gift card issuances, and catalog or e-commerce orders not fulfilled from the premises
- Breakpoint Type: Specify whether the breakpoint is natural (annual base rent divided by percentage rate) or artificial (negotiated dollar amount); Nashville landlords sometimes push for artificial breakpoints that trigger percentage rent at lower sales volumes
- Percentage Rate: State the applicable percentage rate by retail category; Tennessee retail rates typically range from two percent for large-format tenants to eight percent for food service
- Sales Reporting: Require monthly gross sales reports within a set number of days after month end and an annual certified statement, with CPA certification for high-volume Nashville retail tenants
- Audit Rights: Both parties should have the right to audit sales records once per year within a defined window; include a provision that the party whose records are materially inaccurate bears the audit cost
- Co-Tenancy Protection: In Nashville shopping centers and suburban Tennessee retail centers, co-tenancy clauses give tenants rent reduction or termination rights if anchor tenants vacate and traffic falls
How to File in Tennessee
Negotiating and finalizing a Tennessee percentage lease requires more upfront work than a standard fixed-rent lease. The economic outcome can vary significantly depending on how gross sales are defined and where the breakpoint lands. Take the time to understand each provision before signing.
Agree on the Gross Sales Definition
Work through the gross sales definition before anything else. Confirm that Tennessee sales tax collections are excluded, along with returns, exchanges, employee discounts, and gift card issuances. For Nashville retailers with e-commerce operations, clarify in writing whether online orders placed from or processed through the Tennessee location are included or excluded.
Negotiate the Breakpoint and Percentage Rate
Determine whether the lease uses a natural breakpoint or an artificial one. Model both scenarios using realistic sales projections for the Tennessee location. In Nashville suburban centers, landlords sometimes propose artificial breakpoints below the natural calculation, effectively capturing percentage rent at lower sales volumes than the natural formula would require. Negotiate the rate against comparable Tennessee retail leases in the same trade area.
Define Reporting, Audit Rights, and Co-Tenancy
Build in monthly sales reporting requirements with a firm due date after each month ends. Require an annual certified sales statement, with CPA certification if the lease is in a high-volume Nashville or Knoxville shopping center. Add mutual audit rights exercisable once per year, with cost-shifting if a material discrepancy is found. For any lease in a multi-tenant center, negotiate co-tenancy protections tied to named or percentage-of-center anchor tenants.
Execute the Lease and Distribute Copies
Both parties sign the finalized lease. Tennessee percentage leases do not require notarization as a condition of enforceability between the parties, though notarization is advisable if the lease will be recorded. Distribute executed originals to landlord and tenant. File the lease or a memorandum of lease with the appropriate county Register of Deeds if recordation is required by the lease terms or desired for public notice.
Set Up Sales Tracking and Reconciliation Systems
Configure your point-of-sale and accounting systems to track gross sales categories that match the lease definition. Tennessee's high combined sales tax rate means sales tax amounts must be broken out separately from net revenue in every report. Establish a calendar for monthly reports, annual certifications, and audit windows so that both parties operate from the same schedule throughout the lease term.
Tennessee Fees & Costs
A Tennessee percentage lease involves two distinct cost streams: the ongoing rent obligations under the lease structure and any one-time transaction costs at signing. Understanding both is necessary for accurate financial planning.
| Fee / Cost | Amount |
|---|---|
| Base Rent | Fixed monthly amount regardless of sales; all-in floor below which no percentage rent is triggered |
| Percentage Rent | Typically 2 to 8% of annual gross sales above the breakpoint; rate varies by retail category in Tennessee |
| Tennessee Sales Tax (excluded) | State rate 6% plus local option up to 2.75%; must be expressly excluded from gross sales definition |
| Notarization (if recorded) | $5 to $25 per signature; required if lease or memorandum of lease is filed with the county Register of Deeds |
| Attorney Review | $250 to $750 for lease review; strongly recommended for Nashville or Knoxville retail locations given the complexity of percentage rent provisions |
Sample Tennessee Percentage Lease Agreement
Below is a preview of our Tennessee-specific template. Your customized document will include all fields and provisions required for filing in any Tennessee county.
PERCENTAGE LEASE AGREEMENT
STATE OF TENNESSEE
Legal Document Template
LANDLORD
Name: [Full Legal Name / Entity]
Property: [Shopping Center Name]
Address: [Property Address]
TENANT
Name: [Business Entity Name]
Trade Name: [DBA / Store Name]
Address: [Current Address]
Tax ID: [EIN]
PREMISES
Suite: [Number]
GLA: [Gross Leasable Area SF]
Use: [Permitted Retail Use]
Exclusive: [Product Category]
FINANCIAL TERMS
Base Rent: $[Amount]/month
Percentage Rate: [%]
Breakpoint: $[Amount]/year
CAM: $[Amount]/SF
Deposit: $[Amount]
Tennessee Percentage Lease Agreement FAQ
Answers to common questions about filing a percentage lease agreement in Tennessee, including requirements, fees, and procedures.
Official Tennessee Resources
Use these official state resources to verify requirements, find your local filing office, and access government forms for Tennessee.
Related Tennessee Documents
Depending on your situation, you may need additional documents alongside your Tennessee percentage lease agreement.
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