Common in shopping centers and malls, percentage rent is a lease structure that ties part of a tenant’s rent obligation directly to how much revenue the business generates. For retail tenants, understanding this structure — and negotiating it carefully — can meaningfully affect profitability.
What Is Percentage Rent?
Percentage rent is additional rent, paid on top of a base rent amount, calculated as a percentage of the tenant’s gross sales above a certain threshold, called the “breakpoint.” The landlord benefits when the tenant’s business does well; the tenant benefits from a lower fixed base rent in exchange for sharing upside.
Natural Breakpoint vs. Artificial Breakpoint
- Natural breakpoint — calculated by dividing the base rent by the percentage rate. For example, a $60,000 base rent at a 6% percentage rate produces a natural breakpoint of $1,000,000 in sales.
- Artificial breakpoint — a negotiated, fixed dollar figure that may be higher or lower than the natural breakpoint, depending on leverage and market norms.
Tenants generally prefer the natural breakpoint, since an artificially low breakpoint means paying percentage rent sooner, and on a larger portion of sales.
What Counts as “Gross Sales”?
This is one of the most heavily negotiated definitions in a percentage rent lease. Tenants should push to exclude:
- Sales taxes collected on behalf of the government
- Returns and refunds
- Employee discounts
- Gift card sales at the time of purchase (counted instead when redeemed)
- Delivery or shipping charges passed through to customers
- E-commerce or online sales not fulfilled through the physical location, depending on the business model
A broad, undefined “gross sales” clause can significantly inflate what a tenant owes.
Reporting and Audit Rights
Percentage rent leases typically require tenants to report sales monthly or quarterly, with an annual reconciliation. Landlords commonly reserve the right to audit the tenant’s sales records. Tenants should:
- Understand exactly what documentation they’ll be required to produce
- Negotiate reasonable notice and scope for any audit
- Confirm who bears the cost of an audit, and under what circumstances (many leases shift audit costs to the tenant only if a material discrepancy is found)
Exclusivity and Percentage Rent Are Often Linked
Tenants paying percentage rent have a strong incentive to negotiate exclusive use clauses (preventing a competing business from opening in the same center) and co-tenancy protections, since both directly affect the foot traffic that drives the sales percentage rent is based on.
Is Percentage Rent Right for Your Business?
Percentage rent structures work best for businesses with predictable, trackable sales and healthy margins — retail and food service being the most common. For businesses without straightforward point-of-sale tracking, or with thin margins, a straight fixed-rent structure may ultimately be more favorable, even at a higher base rate.
Negotiating a retail lease with a percentage rent structure? Brent A. Levison, P.A. has over 25 years of experience representing retail tenants and landlords in lease negotiations across Florida, New York, New Jersey, and Ohio. Contact the firm today for a consultation.
The information in this article is provided for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified attorney.