Percentage leases combine base rent and a cut of gross sales. Learn breakpoints, natural vs artificial, gross sales definitions, and red flags.
A Percentage Lease requires the tenant to pay a base rent plus a percentage of gross sales above a specified breakpoint. The percentage rent component aligns landlord income with tenant performance, making it common in retail malls, outlet centers, and high-foot-traffic retail. Breakpoints can be "natural" (calculated based on base rent divided by percentage rate) or "artificial" (set by negotiation at a lower threshold).
Typical Industries
Typical Term Length
5–15 years
Pros
Cons
Pros
Cons
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A natural breakpoint is calculated by dividing the annual base rent by the percentage rate. For example, if base rent is $60,000 per year and the percentage rate is 6%, the natural breakpoint is $1,000,000. The tenant pays no percentage rent until gross sales exceed $1,000,000, meaning percentage rent only kicks in when the business is profitable enough to cover the rent at the contractual rate.
The lease definition of gross sales is critical. Typically it includes all revenue from the leased premises, but tenants should negotiate exclusions for sales taxes, returns and allowances, employee discounts, sales to employees at cost, catalog or internet sales not fulfilled from the premises, and gift card sales until redeemed. Without careful definition, tenants can be charged percentage rent on revenue that does not represent true operating income.
Lextract extracts the percentage rent rate, breakpoint amount, breakpoint type (natural vs. artificial), gross sales reporting frequency, audit rights provisions, and exclusions from gross sales. Red flag detection flags missing gross sales reporting requirements and absent audit rights, which are critical for protecting both parties.
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