Before You Sign: Seven Things Every Retailer Should Know About Leases and License Agreements
Whether you’re opening your first store, expanding your brand, or relocating your business, choosing the right location and negotiating the right deal terms are critical to long-term success. The right structure can set your business up for growth, while the wrong one can quietly drain profits and limit flexibility.
Before you sign on the dotted line, here are eight key things every retailer should understand to protect your investment and position your business for success.
1. Know the Difference Between a Lease and a License Agreement
Not every retail deal is structured as a lease. In some shopping centers, particularly for short-term or specialty leasing opportunities, retailers may sign a license agreement instead.
A lease typically grants the tenant exclusive possession of a defined space for a set period. In contrast, a license agreement provides permission to operate within the space but keeps more control in the landlord’s hands. Under a license, the landlord retains rights to relocate or terminate the agreement with notice and often provides a shorter-term commitment.
Because of these differences, rent under a license agreement is usually lower than under a traditional lease. For retailers testing a new market, launching a pop-up, or entering a mall environment for the first time, a license can be a flexible and cost-effective option — but it’s essential to understand the limits on your control and security of tenure.
Pro Retailer Tip: Confirm with the leasing representative you’re working with whether you want a lease or a license before negotiating. Each comes with very different obligations and rights for both parties. You should go into the negotiation understanding which structure best fits your goals, whether you want the flexibility of a license agreement or the security of a lease.
2. Understand the Full Cost — Not Just the Rent
Your rent structure depends on whether you’re signing a lease or a license agreement, and understanding the difference is key to knowing your true occupancy cost.
In a traditional lease, tenants typically pay base rent plus CAM (Common Area Maintenance) fees, property taxes, insurance, utilities, and sometimes marketing fund contributions. These costs can add up quickly, so it’s essential to know exactly what’s included before you commit.
In a license agreement, the structure works differently. Property owners generally charge a base rent plus percentage rent — meaning you pay a set minimum rent each month, plus a percentage of your gross sales over a certain amount. That threshold is called a breakpoint, and it can be either natural or unnatural.
A natural breakpoint is calculated by dividing your annual base rent by the stated percentage rate in your agreement. For example, if your monthly rent is $1,300 and your percentage rent is 8%, you calculate it this way:
$1,300 ÷ 0.08 = $16,250
In this example, $16,250 represents your natural breakpoint amount — the level of monthly sales you must exceed before percentage rent applies.
If your gross sales for the month are less than $16,250, you don’t owe any percentage rent. But if your sales are higher — say $20,000 — you’d pay 8% on the difference:
($20,000 – $16,250) × 0.08 = $300
That means you would owe $300 in percentage rent for that month.
An unnatural breakpoint, on the other hand, is a sales threshold that isn’t directly tied to your base rent. Landlords may use an unnatural breakpoint to increase their share of upside in strong-performing spaces — for example, by setting a higher breakpoint (like $20,000 instead of $16,250) in a high-traffic center. However, an unnatural breakpoint can also benefit the retailer. When working with a new or start-up retailer, a landlord might agree to a lower breakpoint or a reduced percentage rate as a way to ease the retailer’s early ramp-up period and support their success.
While CAM charges generally do not apply to license agreements, it’s still important to confirm how utilities are handled. Ask whether your space has its own meter. If not, you’ll likely pay a per-square-foot rate for utilities, based on your share of the overall property usage. Always ask the landlord to share that rate in advance.
Pro Retailer Tip: Ask your leasing representative to confirm whether your deal uses a natural or unnatural breakpoint, and request a detailed rent and expense breakdown before signing. Knowing your base rent, percentage rent rate, breakpoint type, and utility costs helps you understand your true monthly obligations and plan your pricing and sales goals accordingly.
3. Evaluate the Lease Term and Discuss Renewal Options
Your lease term impacts both flexibility and stability. A shorter term allows more agility if your business evolves, while a longer term provides predictability and security.
For license agreements, most property owners do not offer renewal options, since these deals are typically designed for short-term activations, seasonal pop-ups, or concept tests. Additionally, landlords are generally not open to negotiating license agreement language unless a retailer is pursuing a large-scale deal across multiple locations. As it pertains to renewals, if you want the ability to renew at the end of your term for a pre-negotiated percentage increase, you can ask the landlord if it’s possible to build in a set renewal rate, but it’s not standard and should be discussed early in the process.
In contrast, renewal terms are more common in traditional leases and can provide valuable continuity if your store performs well. Negotiating renewal options as part of a lease allows you to remain in a successful location without starting from scratch, and often gives you a chance to lock in rent adjustments ahead of time.
Pro Retailer Tip: For leases, consider a three- to five-year term with clearly defined renewal options that let you stay if business is strong or relocate if your needs change. For license agreements, ask about extension flexibility upfront, but expect shorter commitments and fewer negotiation opportunities.
4. Review the “Use Clause” and Exclusivity Rights
Your lease’s use clause defines exactly how you can operate, and it can be more limiting than you might expect. A narrow clause may prevent you from adding new products, hosting events, or evolving your concept over time. On the other hand, a clause that’s too broad can raise concerns for the landlord, who wants to maintain a balanced tenant mix.
Pro Retailer Tip: Negotiate a broad but balanced use clause that supports your business model today and allows room to evolve tomorrow. You can also request exclusivity rights to protect your brand by preventing direct competitors from leasing nearby spaces in the same property. Most property owners are not willing to grant exclusivity, especially for broad uses and when they do, they may charge higher rent to offset the restriction. Still, it doesn’t hurt to ask, particularly if your retail concept fills a niche category or brings a unique draw to the center.
5. Know the Condition of the Space and Who Pays for Improvements
Before signing any lease or license agreement, it’s essential to understand the condition of the space and who pays for improvements.
Some landlords are willing to fund tenant improvements if the lease term is long enough, if they especially want your use in the mall, or if you’re open to paying back the improvement costs over the term of your lease. Others may only provide basic repairs or upgrades, such as painting, flooring, or fixing a broken HVAC system. Even when a landlord doesn’t contribute directly to construction costs, they may offer free rent or step-up rent (gradually increasing rent over time) to help offset your upfront investment.
For license agreements, tenant improvement allowances are uncommon, but it’s typical to receive a short free rent period, if you ask for it — to help offset setup costs before opening.
No matter which type of deal you’re signing, it’s critical to confirm whether you’re receiving the space “as is” or if the landlord can work with you to fund improvements beforehand. Some landlords will reimburse you for certain improvements after you provide invoices and canceled checks as proof of payment. If you’re responsible for maintaining the HVAC system or other major building components, we always recommend hiring a reputable third-party contractor to inspect the unit before you sign. Identifying needed repairs upfront can prevent costly surprises and protect your investment.
Pro Retailer Tip: Get all construction responsibilities, timelines, and approvals in writing before signing. Clarify what improvements, if any, the landlord will cover — and whether you’ll receive free rent, reimbursement, or repayment options to help offset your build-out costs.
6. Work with a Real Estate Attorney
Even the most experienced retailers benefit from an extra layer of legal protection. A real estate attorney can identify clauses that may expose you to risk, flag ambiguous language, and ensure your rights are protected under state and local law.
Pro Retailer Tip: Choose an attorney who specializes in commercial retail real estate rather than general business law. Their insight can help you avoid costly mistakes and strengthen your negotiation position before you sign.
7. Build a Strong Relationship with Your Landlord
A successful retail deal isn’t just about the paperwork. It’s also about the relationship you build with your landlord. A positive, professional rapport can lead to faster approvals, flexible renewal terms, and even creative solutions during challenging times.
Pro Retailer Tip: Communicate openly, meet deadlines, and approach negotiations collaboratively. A landlord who views you as a responsible and proactive tenant is far more likely to support your success.
Turning Knowledge into Action
A retail lease or license agreement sets the framework for how your business operates and grows. Understanding the terms before you sign can prevent costly surprises and position your store for success.
Blue Butterfly helps retailers and property owners create win-win leasing structures. Learn more about our services for retailers: https://www.bluebutterflyllc.com/retailers/
Disclaimer: This blog post is not legal advice. It is intended for educational purposes only. Please consult a qualified real estate attorney before signing any license agreement or lease.
