Percentage Leases: When Your Rent Depends on Sales
What Is a Percentage Lease?
A percentage lease is a commercial lease — most common in retail — where the tenant pays a base rent plus a percentage of their gross sales above a specified threshold. The idea is that the landlord shares in the tenant's success: if the store does well, the landlord earns more; if sales are slow, the tenant's total rent stays lower.
This structure is standard in shopping malls, outlet centers, and retail plazas where foot traffic driven by the overall property benefits all tenants.
How the Breakpoint Works
The breakpoint (or "natural breakpoint") is the sales threshold above which the percentage rent kicks in. It is typically calculated as:
Breakpoint = Base Rent / Percentage Rate
For example, with $5,000 monthly base rent and a 6% rate, the breakpoint is $83,333. If you gross $100,000 in a month, you pay $5,000 base rent plus 6% of $16,667 (the excess over the breakpoint), which is $1,000 — totaling $6,000.
Key Terms to Negotiate
- Percentage rate: Rates vary by industry — typically 4-10% for retail, lower for grocery and high-volume businesses
- Gross sales definition: What counts as "gross sales"? Negotiate exclusions for returns, employee discounts, taxes collected, online sales fulfilled from a different location, and inter-store transfers
- Breakpoint type: Natural breakpoints (calculated from base rent) are more favorable than artificial breakpoints set at lower arbitrary thresholds
- Reporting requirements: Frequency and format of sales reports you must provide to the landlord
- Audit rights: Both parties should have the right to audit — the landlord to verify your sales figures, and you to verify the landlord's calculations
Red Flags
- An artificially low breakpoint that triggers percentage rent too easily
- Overly broad "gross sales" definition that includes revenue not generated at the location
- No cap on total percentage rent
- Co-tenancy issues — if anchor tenants leave and foot traffic drops, you still owe percentage rent on whatever sales you make
When to Consult a Lawyer
Percentage leases involve complex calculations with significant financial impact. Consider having a commercial real estate attorney review the breakpoint, exclusions, and reporting obligations before signing.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.