A percentage rent lease is a commercial lease in which the tenant pays a fixed base rent plus an additional rent equal to a percentage of the tenant’s gross sales once sales exceed a predefined threshold (the breakpoint). It’s common in retail: the landlord shares in upside when the tenant does well, and the tenant benefits from a lower fixed cost when sales are low.
Also called a percentage rent, percentage lease, or base‑plus‑percentage lease. Variations include pure percentage leases (no base rent), hybrids with caps or sliding scales, and revenue‑share models used in nontraditional retail and food & beverage deals.
When gross sales exceed the breakpoint, the extra rent due = (Gross sales − Breakpoint) × Percentage rate. If gross sales are at or below the breakpoint, no percentage rent is due (tenant pays base rent only).
Example (monthly): Base rent = $5,000; Breakpoint = $100,000; Percentage rate = 5%. If gross sales for the month = $150,000: Percentage rent = (150,000 − 100,000) × 0.05 = $2,500. Total rent = $5,000 + $2,500 = $7,500.
A natural breakpoint is calculated so the landlord receives the base rent entirely from the percentage formula at the breakpoint level: Natural breakpoint = Annual base rent ÷ Percentage rate. Example: Annual base = $60,000, rate = 6% → natural breakpoint = $1,000,000. At that sales level, percentage rent would equal base rent.
An artificial (fixed) breakpoint is a negotiated sales threshold set independently of the base rent. Landlords use fixed breakpoints to simplify comparisons, lock in higher effective participation, or capture more upside sooner. For tenants, fixed breakpoints can be tougher because they may trigger percentage rent earlier than a natural breakpoint would.
Lower breakpoints (or fixed breakpoints below the natural level) shift more rent to percentage rent, benefiting landlords if sales are strong. Higher breakpoints (or using the natural breakpoint) favor tenants by delaying or reducing percentage rent. Parties trade breakpoint level against base rent, percent rate and other protections.
Gross sales usually include all receipts from goods and services sold at the leased premises: walk‑up retail sales, services, restaurant sales, concessions, and sometimes vending and gift-card redemptions — unless explicitly excluded in the lease.
Common exclusions: sales taxes collected, refunds/returns, wholesale sales (if separately tracked), inter‑company transfers between stores, and cash discounts. Precise exclusions must be spelled out; ambiguous language causes disputes.
Inclusion of e‑commerce and delivery is a major negotiation point. Landlords may try to capture online sales that originate from the leased territory (clicks from the store, local delivery) while tenants push to exclude web, catalog or marketplace sales that don’t rely on the physical premises. Defining “sales attributable to the premises” is critical.
Problematic: “Gross sales include all sales made by Tenant.” Why it’s bad: too broad, can be read to include unrelated web or wholesale sales. Tenant‑friendly edit: “Gross sales means receipts from sales made at or through the Premises, excluding (a) sales taxes, (b) wholesale sales, (c) internet orders not fulfilled from the Premises and not delivered to addresses within a 10‑mile radius, and (d) transfers to affiliates.”
Reporting is typically monthly or quarterly with an annual true‑up. Lease should state the reporting format, timing (e.g., within 20 days after month/quarter end), and required supporting schedules.
Landlords may require interim payments based on current period sales and an annual reconciliation to true up percentage rent owed. Some leases require estimated interim payments if reporting lags.
Late payments normally incur interest (often at a fixed rate or state statutory default rate) and may trigger penalties. Tenants should negotiate grace periods and reasonable cure rights for calculation disputes.
Audits commonly request POS reports, bank statements, deposit slips, tax returns, inventory reports, gift card records and credit‑card settlement files. Landlords often require tenant to maintain specified records for a set period (e.g., 3–5 years).
Standard practice: landlord pays for audits unless the audit uncovers underreporting above a threshold (e.g., 2–5%), in which case tenant pays the audit cost and penalties. Tenants should limit frequency (e.g., once per 12 months) and scope to records related to gross sales.
Remedies can include payment of underreported rent with interest, audit costs, liquidated damages, and, in severe cases, default rights. Many leases include informal meet‑and‑confer steps and an escalation path (accountant mediation or arbitration) before invoking breach remedies.
The most common structure: fixed base rent plus a percentage of sales above breakpoint. Balances landlord downside protection with upside participation.
In a pure percentage lease the landlord takes only a percent of sales (common for pop‑ups, kiosks, and some concessions). Revenue‑share models used in co‑working, food halls or marketplace deals can split gross profit or net revenue instead of gross sales.
Hybrids add mechanisms like caps on percentage rent, minimums/floors, escalating percentages above certain sales bands (sliding scale), or seasonal thresholds. These tools customize risk sharing.
Tenants face unpredictability and possible audits; landlords face revenue volatility and reliance on tenant performance. Both must forecast and underwrite more nuance than with fixed‑rent deals.
Tradeoffs: tenants accept limited recapture language or reporting cadence in exchange for protections like caps, higher breakpoints, narrower gross sales definitions, and confidentiality of audit results.
Red flags: undefined “gross sales,” catch‑all wording, or language that requires inclusion of any affiliate sales. Tenant‑friendly edit: “Gross sales means all receipts from transactions conducted at or from the Premises, excluding (i) sales taxes, (ii) wholesale transactions, (iii) returns actually refunded, (iv) internet orders fulfilled from non‑Premises locations and delivered outside a 10‑mile radius.”
Natural breakpoint sample: “The natural breakpoint shall be calculated annually as (Annual Base Rent) ÷ (Percentage Rate).” Fixed breakpoint sample: “The breakpoint shall be $[amount] per year.”
Audit sample: “Landlord may audit Tenant’s records no more than once per 12 months upon 10 days’ notice. Landlord pays audit costs unless underreporting exceeds 3% of alleged amounts, in which case Tenant pays reasonable audit costs and interest at [rate]. Audit materials are confidential and shall not be disclosed except as required by law.”
Percentage rent interacts with co‑tenancy/exclusivity clauses: if co‑tenancy breaks or an exclusive is violated, tenants may seek rent relief or recapture rights. Ensure triggers and remedies are clear to avoid conflicting obligations.
Run scenarios: conservative (downturn), base (plan), and upside (growth). Model monthly seasonality, apply breakpoint and percent, and calculate cashflow impact and EBITDA sensitivity. Sensitivity tables (sales ±10/20/30%) help assess risk.
Percentage rent is typically an operating expense for tenants and rental income for landlords; timing depends on reporting. VAT/sales taxes are usually excluded from gross sales; confirm local tax treatment with accountants.
Lenders/appraisers typically use base rent (stable income) in underwriting and treat percentage rent as variable upside—often discounted or stress‑tested. Long histories of percentage rent can improve valuations if sales are stable.
Typical patterns (general guidance): anchors often pay little or no percentage rent (or very low rates); inline retail frequently uses base + 3–7%; restaurants often 5–8%; kiosks and carts may see higher rates (8–12%) or pure percentage deals.
Urban prime locations and tourist markets can command lower percentages but higher base rents; secondary markets trade towards higher percentages. Expect wide ranges—negotiate with comparable local deals in mind.
Use sector benchmarks when justifying breakpoints, percent rates and base rent. A restaurant should push for restaurant‑market comparables; retailers should benchmark inline centers for fair terms.
Ambiguity over “gross sales” or what counts as a sale often triggers landlord audits and litigation. Vague cross‑references (e.g., “as defined in a separate policy”) create avoidable fights.
Disputes frequently center on e‑commerce. Courts and arbitrators look to contract language and evidence of whether the physical premises materially supported the online sale (local delivery, in‑store pickup, local marketing).
Call counsel for unclear definitions, large audit claims or when remedies (liquidated damages, lease termination) are at stake. Use a forensic accountant for complex revenue recognition, intercompany allocations, or suspected fraud.
Usually added to base rent: total rent = base rent + percentage rent (if sales exceed the breakpoint). Pure percentage leases are the exception.
No—percentage rent must be agreed in the lease. Landlords can propose it, but tenants negotiate acceptance or alternative structures.
Audits are contractually limited—common limits are once per 12 months with 2–3 years of documentary retention. Required records typically include POS reports, bank deposits, credit‑card settlements, and tax filings.
Returns and refunds are usually excluded if actually refunded. Discounts and promotions that reduce the transaction price typically reduce gross sales. Gift card issuance is generally not included; redemptions often are—define both clearly.
Lease terms: Base rent = $3,000/mo ($36,000/yr). Breakpoint = $200,000/yr. Percentage rate = 6% (0.06). Reporting: monthly, annual true‑up.
If year‑one sales are $380,000 and the landlord audits and finds an additional $20,000 of unreported sales, tenant must pay underreported percentage rent: (20,000 × 0.06) = $1,200 plus interest and possibly audit fees (if lease allows). For year‑two rent, tenant may ask to renegotiate breakpoint or percent if sales proved higher than projections; landlord may demand higher base or lower breakpoint in return.
Useful inputs: reporting period, base rent (period/annual), breakpoint (period/annual), percentage rate, actual sales per period, exclusions. Build a monthly tab with seasonality and an annual summary with true‑up.
Provide your counsel: (1) proposed gross sales definition, (2) breakpoint calculation, (3) audit language, (4) reporting template, and (5) confidentiality and remedies language. I can prepare a one‑page checklist and sample clauses on request.
Call your broker for market comparables and strategy, an attorney for drafting and disputes, and an accountant/forensic accountant for audit support or complex revenue allocations.
Percentage rent leases align landlord and tenant incentives by sharing retail upside while lowering tenant fixed costs. The most important negotiation items are the gross sales definition, breakpoint type/level, percentage rate, audit protections, and reporting cadence. Model scenarios before signing and build reporting systems that match lease definitions to avoid disputes. Use sector and local comparables to frame your negotiation and call counsel early for ambiguous or high‑exposure terms.
If you’d like, I can: (a) draft the short worked examples and three scenario calculations, (b) create the one‑page negotiation checklist with sample clause language, or (c) assemble typical market percentage rates by retail sector to include in the article. Which would you like me to prepare next?
