What This Liability Means
Percentage rent requires tenants to pay a percentage of gross sales above a specified breakpoint in addition to base rent. While less common than in previous decades, percentage rent remains prevalent in retail leases — particularly in shopping centers.
Dollar Example: Retail tenant with $3,000/month base rent, 6% percentage rent above $600,000 annual breakpoint, sales of $700,000
Real Dollar Example
ScenarioRetail tenant with $3,000/month base rent, 6% percentage rent above $600,000 annual breakpoint, sales of $700,000
Exposure$6,000 in annual percentage rent
$700,000 - $600,000 = $100,000 above breakpoint. 6% × $100,000 = $6,000 additional annual rent. $500/month on top of base rent.
Worst Case Scenario
A high-performing retail tenant pays percentage rent every year, reducing the return on revenue investment. Good performance is penalized while the lease risk remains entirely with the tenant.
Warning Signs in Your Lease
- Natural breakpoint set below reasonable sales expectations for the space type and size
- Percentage applies to gross sales with minimal deduction for returns, taxes, or intercompany sales
How to Limit This Liability
- Negotiate percentage rent clause out of the lease entirely — it's not required
- If retention is unavoidable, negotiate a high natural breakpoint that you're unlikely to reach
Frequently Asked Questions
- What is a 'natural breakpoint' in percentage rent?
- The natural breakpoint is the sales level at which percentage rent naturally begins if base rent equals the percentage of sales. Calculated as: base rent divided by percentage rate. A $3,000/month base rent and 6% rate = $50,000/month natural breakpoint = $600,000/year.
- Can I negotiate the percentage rent provision out of a retail lease?
- Yes — push to remove it entirely. Landlords include percentage rent to capture upside from successful tenants. It's a negotiating chip, not a requirement. In competitive markets, landlords often drop it to attract quality tenants.
- What sales are excluded from the percentage rent calculation?
- Negotiate exclusions: sales tax collected, employee discounts, employee sales, returns and exchanges, gift card activations (not redemptions), and internet/catalog sales that aren't fulfilled from the premises. Every exclusion reduces percentage rent.
- How does the landlord verify my gross sales?
- Most percentage rent leases require annual reporting of gross sales with an audit right. The landlord can audit your sales records for 1-3 years back. Some leases require monthly reporting of sales figures.
- Is percentage rent common in all commercial lease types?
- Most common in retail and food service leases, particularly in shopping centers and malls. Rarely used in office or industrial leases. For retail, it's often a starting negotiating position that experienced tenants push back on.